A recent Wells Fargo/Gallup survey found that about half of people haven't given serious thought to their retirement taxes or healthcare expenses, which could be a big mistake. Many people devise a savings draw-down strategy, and investigate when they should take Social Security. Both are clearly important, but many fail to factor in the impact of long-term medical expenses and taxes for their retirement budget.
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. According to experts, 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 normal medical costs, people should 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 to $4,000. If you need to go into a nursing home that provides a higher level of medical care, the monthly price jumps to $4,000 to $8,000. Since healthcare is likely to become your second-largest expense category in retirement, you'll need to plan for how you'll pay for it - especially long-term care, which Medicare won't cover.
And then there’s the IRS. You may think your tax responsibilities will dwindle when you stop receiving a paycheck, but there are plenty of reasons why your taxes will continue to be a significant expense. With traditional IRAs or 401(k)s, you may contribute money to these plans tax-free while you're working, but when you take money out in retirement, unless it’s a Roth IRA, the IRS treats it like normal income for tax purposes.
However, some investments may provide certain tax benefits. Unlike other tax-deferred retirement accounts such as 401(k)s and IRAs, there is no contribution limit for an annuity so you can build up your nest egg. Indexed Universal Life policies allow cash value within the policy to grow tax-free over time while maintaining a death benefit.
Keep in mind that your pension, investing profits, and even Social Security benefits can all be taxed. The amount you'll pay depends on your filing status, the investment vehicle, and how much money you make. If you need help planning for your retirement expenses, or want to understand the tax implications of your investments, we’re here to help at Penny Lane Financial. Call today to schedule your personal consultation.