A Surprising Number of Retirees Admit Struggling with Taxes

Woulda. Coulda. Shoulda.

That is how a surprising number of retirees feel about their tax planning. In a recent study by Nationwide Retirement Institute, staggering proportions of retired Americans wished they had done more to prepare for their sometimes-surprising tax bills.

Over the course of the “Retirement Income and Tax Planning Consumer Survey,” researchers asked people in different life stages about their preparedness for paying taxes in retirement.

The survey was revealing. An estimated 60% of future retirees, 70% of recent retirees, and 75% of those retired for more than 10 years said they are only “somewhat knowledgeable” or “not at all knowledgeable” about tax planning in retirement.

That’s right. Three of every four people retired for at least a decade still admit to feeling less than certain about planning for taxes in retirement.

The Impact of Ignoring Planning for Taxes

Counting those in all stages of retirement, 37% admitted they hadn’t considered how taxes would impact their retirement income. As a result, the report concludes, these people may have lost the opportunity to save an amount that could equal an additional six years of retirement income.

Taxes are a much bigger issue than many people may believe. Nearly one out of every three dollars spent by high-income retirees goes to taxes, according to a survey by Lincoln Financial Group. The survey polled people ages 62 through 75, having household incomes greater than $100,000.

While many would find it hard to face unexpected expenses, unfortunately being caught off guard at tax time is not uncommon for retirees. The NRI study found that 27% of older Americans say they owe additional taxes each year. Those who have been retired for 10-plus years were the least likely to receive a tax refund each year at just 29%.

In all age ranges of the NRI survey’s respondents, who were age 50 and older, 1 in 4 reported that they have paid several thousand dollars more in taxes than they anticipated. Naturally, they would have preferred to hold onto more of their money rather than seeing it siphoned off in taxes.

In Control, But Still Confused

The NRI said one of the key findings of its survey is that, while they say they have retirement income planning under control, taxes on retirement assets confuse people.

“Many respondents say they are unclear about how taxes on annuities, Medicare, capital gains and Social Security impact their retirement income — or even how tax brackets work,” according to survey highlights.

Among the most common areas of confusion in retirement planning, according to the survey:

• Roughly half of all three groups believe their retirement income is guaranteed for life
• 3 or 4 out of every 10 (depending on their retirement stage) don’t know that required minimum distributions (RMDs) start at 70.5
• 3 to 5 out of every 10 (depending on their retirement age) don’t feel knowledgeable or very knowledgeable about how capital gains taxes impact their income in retirement

Specifically, the tax issues that retirement and retired investors struggle with include:

• How annuity taxes affect their retirement income
• How capital gains taxes affects portfolio income
• How Medicare taxes/premiums affect them (tax pulled from payroll at all ages, premiums deducted from SS benefit payments)
• How Social Security taxes affect Social Security payouts
• How Required Minimum Distributions affect income from retirement accounts

Interested in Assistance

The majority of respondents in the three categories—not yet retired, shorter retirees and longer retirees—said they are “very or somewhat interested” in understanding taxes better than they do and wish they better understood how their retirement income is taxed.

And from whom do they seek advice?

For many, their financial advisors. Among those working with a financial professional – 85% of future retirees, 82% of recent retirees and 68% of those who have been retired more than 10 years say they expect their financial advisor to help them plan for taxes in retirement.

Proving their commitment to planning for taxes in retirement, 38% of future retires say they would switch to an advisor who could help them plan for taxes in retirement…if their current advisor didn’t.

Why This Could Be a Concern for You

Wondering how it’s possible that you could pay more in taxes after you have collected your gold watch? Here are a few factors that could change your tax bracket or put you at risk for paying higher taxes:

• You may lose valuable tax deductions and credits as you age
• You may wind up working longer than you anticipated
• You may have more taxable income than you planned for
• If you reach age 70.5 and are required to start taking Required Minimum Distributions

To determine your own situation and how you can take action now to minimize taxes, whether you are retiring in 10 days or 10 years, financial professionals stand ready to help you here.

Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.