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Many Retirees Wish They Had Prepared Better for Taxes in Retirement

A new survey finds that a surprising number of older Americans lack knowledge about the impact of taxes in retirement and wish they would have done more planning for the expense.

Nationwide Retirement Institute’s “Retirement Income and Tax Planning Consumer Survey” finds that 60% of future retirees, 70% of recent retirees and 75% of those retired for more than 10 years admit they are “somewhat knowledgeable” or “not at all knowledgeable” about tax planning in retirement.

Recent retirees (46%) were found to be more likely than those retired for more than 10 years (32%) to wish they would have better prepared for paying taxes in retirement. And 37% of retirees overall admit they did not consider how taxes would affect their retirement income. Consequently, these individuals may have lost the opportunity to save the equivalent of an additional six years of income in retirement, the report notes.

Other areas of confusion in retirement tax planning include:

  • Nearly half of all three groups (future retirees, recent retirees and those retired for more than 10 years) believe their retirement income is guaranteed for life.

  • 51% of future retirees report being somewhat or not at all knowledgeable on how tax brackets work.

  • Among future retirees, recent retirees and those retired for more than 10 years, 38%, 41% and 34% respectively don’t know that required minimum distributions (RMDs) start at 70½.

  • Among the three groups, 74%, 70% and 54% respectively don’t feel knowledgeable or very knowledgeable about how capital gains taxes impact their income in retirement.

It should be noted that failure to plan for taxes may have an adverse impact on the annual tax returns of current and future retirees. According to the study, a quarter of older U.S. consumers (27%) say they owe additional taxes each year, and those retired for more than 10 years were found to be the least likely to receive a tax refund each year (29%). In addition, 24% of respondents say they have paid several thousand dollars more in taxes than they expected to in retirement.

Craving Guidance

With many older consumers admitting they are not knowledgeable about taxes in retirement, the overwhelming majority of those nearing retirement (82%) express interest in learning more about the impact. This view is also shared by 64% of recent retirees and 62% of those retired for more than 10 years.

Not surprisingly, older consumers reportedly want their financial advisors to help. Among those who use a financial advisor, 85% of future retirees, 82% of recent retirees and 68% of those retired over 10 years say they expect their financial advisor to help them plan for taxes in retirement. Among future retirees, 38% say they would switch advisors for someone who could help them plan for taxes in retirement.

Future retirees, meanwhile, appear more ready to act when it comes to planning for retirement income. More than 60% of future retirees reported that they are knowledgeable or very knowledgeable about knowing how to use their investable assets for income in retirement, while only 38% of longer retirees and 45% of newer retirees said the same way.

Moreover, 78% of future retirees say they have completed a retirement income plan. Of those, 39% did it on their own and an equal amount did it with an advisor. Of the few future retirees who do not have a plan but do have a financial advisor, most say they do not have a plan because they never knew the difference between a retirement savings plan and a retirement income plan.

“Today, the majority of older consumers are focusing on saving for retirement, which is a critical component of your retirement plan, but not the only factor,” notes Eric Henderson, president of Nationwide’s life insurance business. “It is also important to determine how to spend your retirement income. Building tax flexibility into a retirement income plan is crucial. Doing so allows you to use different types of investments and retirement accounts (taxable, tax-deferred, and tax free) to potentially avoid higher tax brackets.”

The online survey was conducted by The Harris Poll on behalf of Nationwide Retirement Institute Aug. 15-29, 2018, among 1,031 U.S. adults age 50 or older.