Retirement is coming soon for many, many Americans. In fact, a record high of 4.1 million Americans are expected to turn 65 in 2024. As that numbers grow, more and more people will be retiring, and that means they need to start preparing for retirement sooner rather than later.
And most Americans are woefully unprepared for retirement. Kevin Burkle is a Financial Planner at HCP Wealth Planning who helps people retire early and plan for retirement properly. He shared the 3 mistakes he sees people make when they are preparing for retirement.
Not Properly Planning for Healthcare Expenses in Retirement
If you are trying to determine if you will have enough money to make work optional at a specific age, it is extremely important to accurately project how much healthcare is going to cost you over different stages of your life. Most people benefit from employer-provided group health insurance while they are working. Once they are 65, they can rely on Medicare. However, Medicare premiums can vary widely depending on your income. You need to factor in how much those premiums and out-of-pocket expenses may cost you in retirement.
If you retire before 65, you may be forced to use ACA (Affordable Care Act) insurance. Like Medicare premiums, these premiums can also vary quite a bit depending on your taxable income each year. If you don’t properly evaluate how much healthcare will cost during those years, you may think you have enough money to retire when you don’t since you may be forced to draw down from your assets to cover those expenses sooner than you thought.
Lastly, it’s important to plan for the very real possibility that you may need long-term care at some point towards the end of your life. You have to decide if it’s worth it to pay the expensive premiums for long-term care insurance versus planning to pay for these expenses out of your assets. If it’s the latter, how much of your assets would have to be used to pay for various types of care (in-home care, assisted living, or nursing home). And don’t forget inflation. Healthcare costs typically rise at a faster pace than normal costs of goods.
Not Having a Tax Efficient Distribution Strategy
Many people end up retiring with multiple types of accounts that they plan to use for retirement. For example, they could have savings in a pre-tax 401k, a Roth IRA, and a brokerage account. Knowing exactly when and how much you should withdraw from each account could end up making a huge difference in the amount of taxes you pay over the course of your retirement. This can also impact how much you pay for Medicare and ACA Insurance premiums. Should you withdraw a little out of each account at the same time? Should you use your brokerage account savings first? The correct order of operations for withdrawals in retirement needs to be determined before you pull the trigger on retirement.
Not Taking Advantage of Roth Conversions When Your Situation Calls for It
If you plan to retire a number of years before you begin to receive Social Security benefits and later, Required Minimum Distributions, you could experience a drop in taxable account right after retirement, which could present a golden opportunity to convert some of your pre-tax dollars in your 401(k)s/IRAs into Roth dollars at lower tax rates. Doing so could potentially save you a substantial amount of money on taxes and medicare surcharges later in life.
The key is to determine how much to convert and when based on your personal circumstances.
Roth conversions can also be beneficial from a legacy planning perspective. If you have a lot of IRA assets you intend to leave to your children when you pass away, and it’s all in pre-tax IRAs, they could end up inheriting the money and having to pay tax on it when they are in the prime of their careers, and in higher tax brackets. However, if they inherit Roth IRA assets, they won’t owe any taxes when they withdraw them.
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