4 Facts You Don't Know About Retirement

Don't fall into one of these traps that can ruin your golden years.

Christy Bieber
Christy Bieber
Feb 28, 2019 at 6:45PM
Investment Planning

Planning for retirement can be challenging because there's so much to think about. Unfortunately, many people are missing important facts that are necessary to make fully informed choices about retirement preparedness.

To make sure you're ready for your golden years, here are four key facts you need to know. 

Binder labeled retirement savings plan with calculator, pen, and glasses on top of it, and a cup of coffee next to it.

Image source: Getty Images.

1. Healthcare is going to cost you a fortune

Healthcare is one of the most significant expenses most seniors face -- but far too many people underestimate the amount they'll spend on health and medical costs. A Nationwide survey found that pre-retirees expected to spend 15% of their Social Security benefits on medical care. The reality is those who claim Social Security at 62 spend an average of 64% of their benefits on healthcare. 

One reason healthcare costs so far exceed our expectations is the significant coverage gaps in Medicare -- particularly for prescription drugs -- that many people don't plan for. Further, the cost of long-term care is astronomical and you're more likely to need it than you realize. In fact, a person turning 65 today has a 70% chance of requiring long-term care at some time during their lifetime. 

Before retiring, it's imperative to have a plan for covering healthcare expenditures. If you have a high-deductible health plan (HDHP), you can save, and even invest, money in a health savings account (HSA). You can withdraw funds tax-free from an HSA as long as the money is used for qualifying healthcare expenses, and the funds never expire. If you aren't fortunate enough to have an HSA, dedicate a portion of your savings for medical costs in retirement.

2. Social Security will only replace a small percentage of your income

Future retirees responding to Nationwide's survey estimated they'd receive around 30% more in Social Security benefits than current retirees were receiving. The misconceptions about how much income Social Security will provide may explain why more than 1 in 4 retirees think Social Security will provide enough income to live on in retirement. 

The reality is that Social Security is designed to replace 40% of pre-retirement income, while most retirees need at least 80% of their pre-retirement income to make ends meet. Not having additional income to supplement Social Security benefits could mean living barely above the poverty level at the end of your life.

You need to save money in a retirement account to provide yourself with additional income during retirement beyond your Social Security check. The sooner you begin saving, the better off you'll be in retirement.

3. You'll probably help your kids financially

Nearly 8 in 10 parents with adult children provide at least some financial support. Chances are good that if you have offspring, they won't be completely independent by the time you retire.

When your kids ask for financial help, it can be hard to say no. Unfortunately, offering support can be detrimental to your retirement savings. Careful budgeting won't get you as far if you're still paying allowance to adult children, and if you're doling money out to your kids for a house or college, your retirement nest egg will seriously suffer.

Troublingly, around three-quarters of parents say they put their children's financial needs ahead of their own retirement security. Plan for what help you can offer your children, don't give more than that, and make sure you save enough for your own retirement to afford any assistance you offer others.

4. Your retirement benefits could be taxed

Hopefully, when you're nearing retirement and looking at your 401(k) or IRA balance, you'll feel pretty good about the amount you see. But don't forget you'll owe taxes on most of the money you withdraw to live on (unless it's a Roth account).

Typically, you're taxed on the distributions you take at your ordinary income tax rate, so the amount of tax you'll pay depends on the tax bracket you occupy that year. The federal government also taxes most pension income, so if you're counting on an employer pension, that money will also be reduced by Uncle Sam's cut.

And, for Social Security purposes, your income is calculated differently. If your income exceeds $25,000 as a single filer or $32,000 for married couples, you could be taxed on at least 50% of your Social Security benefits and as much as 85% of your benefits. Your income for this purpose equals half your Social Security benefits, plus your taxable income plus any nontaxable income, such as income from municipal bonds. 

Depending where you live, you'll likely owe state tax on withdrawals from IRAs and 401(k)s, too. Your state may charge taxes on pensions and Social Security benefits as well. 

Don't forget these retirement facts

All four of these retirement facts mean you should increase your retirement nest egg above the level you may have planned, so you have a cushion to pay for healthcare, help your adult children and pay taxes. Also, you won't be relying too much on Social Security for your income in retirement, like most Americans do.

Getting fully informed about your financial needs during retirement will help make sure you have enough money to be comfortable and not worried. The sooner you make a solid plan for a secure retirement -- that takes all these facts into account -- the better off you'll be in the last act of your life.