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Education is Key: 3 Financial Lessons for Retirees Nearing Retirement

When it comes to retirement planning, educating yourself can keep you
from making big mistakes. Here are three key lessons that everyone
preparing for their golden years should know.

Do you feel like you know enough about money to get by? A newly
released survey by the TIAA Institute shows that people of all ages
and experience levels could answer only 50% of financial literacy
questions correctly! Your level of knowledge in the financial world
can have big ripple effects, especially when preparing for retirement.

As financial professionals, we advise clients from a wide range of
financial levels. So, we’re sharing our top retirement planning tips
for retirees nearing their golden years.

‘Plan ahead to maintain your standard of living in retirement.’

As you begin to consider retirement, take a thorough review of your
monthly expense needs. When many people retire, they want to maintain
the same standard of living or even increase it! This is why retirees
need a plan.

A retirement plan is a written income plan that includes income and
tax planning, Social Security strategies, and long-term care and
estate plans. Start saving early to ensure you have enough money in
your accounts to sustain your lifestyle in retirement. The U.S.
Department of Labor reports if you save $6,000 each year and earn a 7%
return on your investment, you will have $150,774 after just 15 years.
If you add an additional 10 years of savings, that number jumps up to
$379,494, proving why starting early can set you up for success.

You should also plan for shifts in the market and inflation to avoid
getting caught off guard. Since March, inflation has hit a couple of
40-year highs. While many are feeling it at the gas pump and grocery
store, retirees are concerned about the implications on their nest
eggs. For years, many retirement planners have suggested retirees add
a 3% annual inflation rate to their plan, but it might not hurt to
raise that rate. Talk with your financial planner about adjusting your
plan, so you don’t run out of money when it’s time to leave the

‘You’re still going to be paying income taxes, maybe more than you think.’

One of the most common mistakes that some people make is assuming they
will be in a lower tax bracket in retirement, but some retirees find
themselves in a higher tax bracket. Distributions from retirement
accounts like traditional IRAs or 401(k)s are considered taxable
income. Depending on how much you plan to withdraw, you could be
bumped into a higher bracket.

Another reason for a potential increase in your tax liability is
having fewer deductions. You won’t be able to claim your children as
dependents, and if your home is paid off, you won’t be able to deduct
the interest from your mortgage.

There are tax strategies that will minimize taxes in retirement. One
way is to consider a Roth conversion. This method will shift money
from a traditional retirement account to a Roth IRA, which allows your
money to grow tax-free. The one drawback is that you will need to pay
the taxes on that money at the time of the conversion.

‘Your Social Security benefits might be taxed.’

Social Security is a steady source of income for many retirees in
their golden years. These benefits can replace 40% of pre-retirement
income on average for retirees who qualify– but many people don’t
realize that those benefits are subject to income taxes.

If you are planning to work in retirement or your income is above
certain income thresholds, some Social Security beneficiaries could
pay federal taxes on up to 50% or 85% of their benefits. Twelve states
also take additional state taxes out of your benefits, including
Minnesota, Colorado, and New Mexico.

You can avoid larger taxation on your benefits by keeping your income
under the tax thresholds the IRS lays out. An effective way to do this
is by using a Roth IRA or Roth 401(k). This retirement account isn’t
subject to taxes because the funds were taxed when you contributed. As
long as you wait to take distributions until you are at least 59 ½
years old, these payments won’t affect your taxable income.

Education is key to preparing for life outside of the workforce and
reaching your retirement goals. Don’t be afraid to ask your financial
adviser questions or even get a second opinion. This is your
retirement plan, and you should feel like you have every resource
available to make informed decisions. Don’t be afraid to think big,
dream big, and plan ahead of time!

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