3 Mistakes Almost All Retirees Make

3 Mistakes Almost All Retirees Make


Retirement is often seen as the golden chapter of life, filled with relaxation and freedom. However, while stepping into this new phase, many retirees unknowingly make critical mistakes that can turn their dream retirement into a financial burden. Today, we’re going to dive deep into the three most common mistakes that almost all retirees make and how to prevent them, ensuring a smoother, more financially stable retirement.


If you’re nearing retirement or already in it, read on to learn how to avoid these pitfalls. Taking the right steps today can safeguard your tomorrow.


Understanding Retirement Taxes: The Misconception


One of the most common and costly mistakes retirees make is misunderstanding their tax obligations. Many assume that retirement equals lower income and, consequently, lower taxes. Unfortunately, this assumption can be very wrong, especially for state employees.


The Truth About Retirement Income and Taxes


For retirees, especially those with pensions and Social Security, a common belief is that they’ll fall into a lower tax bracket because they’re making less money. However, the reality is that both of these income streams are pre-tax, meaning taxes are owed when you start receiving payments.
Consider this: If your pension and Social Security combined bring in a fixed income each year, any withdrawals you make from other pre-tax accounts (like a 401(k) or other retirement plans) will be stacked on top of that fixed income. This can push you into a higher tax bracket.


How Taxes Stack in Retirement


Let’s say you and your spouse’s combined pension and Social Security bring in $94,000 annually. Now, if you decide to take an additional $10,000 or $20,000 from your pre-tax retirement account (such as a Plan 3), those withdrawals will be taxed at the next tier. If you’re married and filing jointly, the top end of the 12% tax bracket is $94,000. That additional $10,000 or $20,000 withdrawal will now be taxed at the 22% bracket.


Many retirees see their retirement account balances—$500,000, $800,000, or even $1 million—and think all of it is theirs. The truth is, that money hasn’t been taxed yet, so the actual amount you get to keep will depend on how much and when you take it as well as what taxes are that year.


The High Cost of Early Withdrawals


To make things even more complicated, if you withdraw from your retirement accounts before age 59 ½, you’ll face a 10% early withdrawal penalty on top of the regular tax bill. So, if you take a large distribution—say $500,000—you might end up losing almost half of that money to taxes and penalties.
This can be a harsh realization for retirees who thought they had enough saved but didn’t account for how much of that money would go to taxes. Understanding how withdrawals work and consulting with a tax professional is crucial before making any major moves.


Trip Wires: Hidden Tax Traps for Retirees


Beyond the standard tax brackets, there are several other “trip wires” that retirees must watch out for. These can catch you off guard and significantly impact your finances.


Social Security Taxation


Most retirees don’t realize that Social Security benefits can be taxed. If you have income above a certain threshold, up to 85% of your Social Security benefits can be subject to taxes.
For example, if you earn more than $44,000 (as a couple), then up to 85% of your Social Security benefits will be subject to taxes. This doesn’t mean your tax rate is 85%, but rather that 85% of your benefits will be taxed at your regular income tax rate.


Medicare Premium Penalties


Another trip wire is Medicare premium penalties. Medicare uses a two-year look-back period to determine your income, meaning the income you earned two years before turning 65 could affect your premiums. If your income is over a certain threshold, you’ll face higher premiums for both you and your spouse.


Even worse, if you take a large distribution from your retirement accounts, this could push you over that threshold and result in higher premiums for an entire year. That’s why it’s essential to plan withdrawals carefully to avoid these unnecessary penalties.


Healthcare Costs: An Overlooked Expense


One of the biggest expenses retirees face is healthcare. Many people mistakenly believe that Medicare will cover all their medical needs in retirement. However, Medicare doesn’t cover everything, and many retirees are surprised by the high cost of healthcare.


The Cost of Medical Care in Retirement


According to recent statistics, two-thirds of bankruptcies in America are caused by medical bills. This makes healthcare a major financial risk for retirees, who often face increased medical needs as they age.
While Medicare does cover some costs, it doesn’t cover everything. For instance, long-term care, home health care, and many dental and vision services aren’t covered by Medicare. Without proper planning, retirees can quickly find themselves overwhelmed by medical bills.


Choosing the Right Health Insurance Plan


For Washington state employees, PEBB offers some excellent health insurance plans in retirement. While they may have higher premiums, they often cover more, especially in the case of major surgeries or emergencies.


One of the most reliable options is the Uniform Medical Plan (UMP). Although it’s one of the more expensive options, clients who have faced major surgeries, such as hip or knee replacements, often find that their out-of-pocket costs are minimal.


Having the right health plan can prevent financial disasters later in life, so it’s worth paying for comprehensive coverage instead of opting for the cheapest plan.


The Importance of Long-Term Care Planning


Long-term care is another area where many retirees are caught off guard. It’s estimated that 70% of people will need some form of long-term care at some point in their lives. Yet, many people believe it will never happen to them.


Long-term care isn’t just about nursing homes. It can also involve home care, where someone comes to your home to help with daily tasks like cooking or bathing. These costs add up quickly, and without long-term care insurance, most of them will come out of pocket.


If long-term care insurance isn’t a feasible option, there are other alternatives, such as long-term care annuities or reverse mortgages, which can help cover these expenses.


Risk Management: Preparing for the Unexpected


Retirement planning isn’t just about investing and managing money. It’s also about protecting yourself from risks that could derail your plans.


The Importance of an Estate Plan


One of the most critical steps you can take is to create a solid estate plan. This includes having a will, power of attorney, and health care directives. These documents ensure that your wishes are carried out if something happens to you and that your loved ones aren’t left in a legal battle over your estate.
Without an estate plan, your assets could go through probate, which can be a long and expensive process. Proper planning ensures your estate is passed on to your loved ones efficiently and in line with your wishes.


Beneficiary Updates


Another common mistake is failing to update beneficiaries on retirement accounts. This might sound simple, but many people forget to do it. For example, if a spouse or child predeceases you, your remaining heirs might not receive what was intended.
When you designate beneficiaries, ensure that your forms are properly filled out with terms like “per stirpes” or “per capita” to ensure that, in the event of a beneficiary’s death, the money is passed on to the correct heirs.


Liability Coverage and Umbrella Policies


Beyond estate planning, protecting your assets with liability insurance is crucial. Many retirees are unaware of how exposed their assets can be in a lawsuit.
In America, you don’t need to be a millionaire to be sued like one. If you cause an accident and the other party suffers significant losses, you could face a lawsuit that exceeds the limits of your auto or homeowner’s insurance.


An umbrella policy is a smart way to protect yourself from lawsuits that could otherwise wipe out your retirement savings. Umbrella policies are relatively inexpensive and can provide an additional layer of protection beyond your regular insurance coverage.


Conclusion


Retirement can be a wonderful time to relax and enjoy life, but only if you’re properly prepared. By understanding your tax obligations, planning for healthcare costs, and managing risk, you can avoid the three major mistakes that derail most retirees.
Take control of your future today by planning carefully and consulting with a professional to ensure that your retirement is everything you dreamed it would be.


FAQs


What are the biggest mistakes retirees make?

The most common mistakes retirees make are misunderstanding taxes, underestimating healthcare costs, and not managing risk properly through estate planning and insurance.


Why are taxes in retirement higher than expected?

Many retirees assume they’ll pay less in taxes due to lower income, but pre-tax income from pensions and retirement accounts can push them into higher tax brackets, leading to unexpected tax bills.


How can I protect myself from healthcare costs in retirement?

Opting for a comprehensive health insurance plan and considering long-term care insurance or other options like reverse mortgages can help protect against rising healthcare costs.


What is an umbrella policy, and why do I need one?

An umbrella policy provides additional liability coverage beyond your existing insurance policies. It’s essential for protecting your assets in case of a lawsuit.


How often should I update my estate plan?

You should review and update your estate plan regularly, especially after major life events like a death in the family or changes in your financial situation.


Ready to start taking control of your future? Schedule a meeting with us here:
https://www.watrspers.com/personal-help/
Get Personalized Investment Advice on your TRS 3 & DCP Plans:
https://scenicfinancial.net/scenic-plan-confidence1/

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