A recent Wells Fargo/Gallup survey found investors gave more thought to how they'll spend their leisure time after working than any other retirement-related topic.
Focusing on how you'll spend your free time in retirement isn't bad. But the survey showed that many working investors aren't thinking enough about important retirement fundamentals. For example, the two topics that investors had given the least thought to were long-term medical care and taxes. More than half of the survey respondents considered how they'd spend their leisure time, but only 37% thought about how they'd pay for long-term care if needed, and just 34% thought about future taxes responsibilities.
"The fact that about half of people haven't given serious thought to their future taxes, healthcare expenses, draw-down strategy or Social Security could explain why only a third of investors are highly confident about their retirement savings," Joe Ready, head of Wells Fargo's Institutional Retirement and Trust, said in the survey's press release.
Coming up with the best retirement strategy and understanding when you should take Social Security are both clearly important, but failing to factor in the impact of taxes and long-term medical expenses on your retirement budget could prove problematic. Here's why.
Getting older means more medical expenses
It may be obvious that the older we get the more we'll pay in medical expenses, but some people might not understand just how big those expenses can grow.
Consider this: According to RBC Wealth Management, the average healthy 65-year-old couple today will spend about $404,000 on medical expenses before they die. Healthcare expenses are projected to account for 15% of your overall annual spending by the time you turn 75.
Aside from medical costs, pre-retired workers ought to plan for potential long-term care expenses as well. The price for a single month in an assisted-living facility can range from $1,500 and $4,000. If you need to go into a nursing home that can provide a higher level of medical care, that monthly price range jumps to $4,000 to $8,000.
Since healthcare is likely to become your second-largest expense category in retirement, it's clear investors need to plan ahead about how they'll pay for it -- especially long-term care, which Medicare won't cover.
And while you've got the calculator out, let's consider your future tax liabilities as well.
Taxes won't disappear once you retire
It's understandable to assume your tax responsibilities will dwindle to next to nothing when you stop receiving a paycheck, but there are plenty of reasons why the IRS will continue to require its piece of your action.
Take, for instance, the withdrawals from Traditional IRAs or 401(k)s. You're able to contribute money to these plans tax-free while you're working, but when you take money out in retirement, Uncle Sam treats it like normal income -- so you'll have to pay. When you contribute to a Roth IRA, however, you pay taxes on the money up front, but enjoy tax-free withdrawals later.
Keep in mind that your pension, investing profits, and even Social Security benefits can all be taxed as well. The amount you'll pay varies depending on whether or not you're married and file jointly and how much money you make. For Social Security benefits, if you and your spouse have a modified adjusted gross income of more than $32,000, you can expect to pay at least some taxes on your benefits.
Plan ahead now
Thinking about how you'll spend your retirement can be a good way to set goals and reach them. Just remember: While you're mapping out all the traveling you want to do, and planning ahead for time with your family or new hobbies you intend to start, also devote some thought to how you'll cover long-term care expenses, and factor your taxes into your budgeting. You'll probably thank yourself later.