Retirement is a wonderful time of life. You get to do the stuff you want to do...live the life you want to live...stay as busy or as idle as you want to be. Just be forewarned that there are some hidden financial traps that can sabotage the idealized retirement. Here are 5 retirement traps to navigate:
1) Health care Costs--most folks totally underestimate this large expense item. According to Fidelity investments, the average 65 year old couple will spend about $400,000 out of pocket through retirement until age 92. Medicare can be expensive. While Part A is free, you will pay a premium for Part Band a premium for Part D. You will also need a medigap policy to pay for the costs that Medicare doesn't cover. If your income is high in retirement, you will pay a surcharge on your annual medicare premiums. And remember that Medicare does not cover long term care costs. That can run upwards of $6000 per month.
2) Distributions from your IRA and 401k accounts (not Roth IRAs) are taxed at ordinary income tax rates, depending on your tax bracket. I think it is safe to assume that taxes will be higher in the future. For example, if you need $30,000 to buy a new car and you are in a 25% tax bracket, you will need to withdraw $40,000 and pay the tax bill if $10,000.
You can leave money in these accounts until age 70 1/2 and then you must start taking prescribed withdrawals.
3) Retirement spending comes in stages. In the initial stage (the go go years) you will most likely spend more money on travel, upgrades to the house, grand kids etc... Also, if you were previously self employed, many of your personal expenses may have been picked up by your company.
In the next phase (the slow go years) spending will slow down and in the final phase (the no go years) spending will really slow down. Depending on your health and activity level, the goo go years may last for a long time.
4) Depending on your income level, you may end up paying taxes on your social security income. This comes as a big surprise to many folks as they assume this money is exempt from taxes. Benefits lost their 100% tax free status in 1984. Now, up to 85% of Social Security benefits can be taxable. And remember, if you start taking early Social Security benefits prior to your full retirement age (for most folks that is age 66 or 67) and you continue to earn more than $14,640 per year, you will be required to pay back $1 for every $2 in benefits received over that amount.
5) Surviving spouses can dramatically see their income reduced. If both spouses are receiving Social Security benefits, then the surviving spouse will only receive either his/her own benefits or will receive the benefits of the deceased spouse but not both! The same thing can happen if the deceased spouse was receiving a pension and did not make any provisions for his/her death by selecting a reduced pension that has a benefit going to the surviving spouse. Surviving spouses often see their income drop by over 50%. It is important o plan ahead and make sure that a surviving spouse is provided for.
Bottom Line: Get your financial house in order NOW before your retirement.
No comments:
Post a Comment