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Research

Taxes a Surprise Expense in Retirement

Retirees significantly underestimated the impact taxes would have on them during retirement years, according to a recent Lincoln Financial Group survey.

When asked what they expected their top expenses to be before they retired, the majority of retirees surveyed for the "2013 — Expense Challenges of Age 62-75 Retirees" survey anticipated home and mortgage, health care and travel/leisure to be the most significant expenses during retirement. However, these retirees found their actual top expenses included taxes, rather than health care.

On average, when reviewing all household expenses paid on an annual basis, retirees reported spending the most on federal income tax. Additionally, 36% of retirees said taxes were a larger expense than they had anticipated, while 23% did not even consider planning for taxes as an expense prior to retirement.

"Given the current environment, with taxes at a 30-year high, it is critical that advisers help their clients understand all factors—including taxes—when developing a plan to help clients protect their legacies," says Richard Aneser, chief marketing officer for Lincoln Financial Group Distribution. "Advisers who offer this type of wealth protection expertise will demonstrate their value and unique understanding of their clients' needs."

Underestimating the role of taxes was not based on a lack of knowledge among those responding to Lincoln's study. When participants were asked if they were aware of recent tax law changes, 62% said they were, while only 16% were unaware of tax law changes. Fifty-seven percent of survey participants said their advisers regularly discussed tax changes with them and shared the impact those changes could have on retirement. However, 43% said their advisers did not take that initiative.

Other key survey findings included:

 

  • Women had higher levels of concern, especially as it related to the health of their spouse, health care expenses and receiving full Social Security and Medicare benefits throughout retirement;
  • Reinforcing the need for wealth protection, individuals in the 62 to 65 age range have more intense anxiety than other age segments about major retirement concerns, such as leaving an inheritance, generating enough income, and having assets to last throughout retirement; and
  • About 43% of retirees ages 62 to 65 indicated they would like to pass on a financial legacy to children, grandchildren or a charity, yet nearly half of survey participants indicated they had not worked with a professional to establish an estate plan.

 

The survey is based on interviews with 750 individuals, with an annual household income of $100,000 or more. The survey included individuals who worked with a financial adviser, as well as those who did not.

Rebecca Moore editors@plansponsor.com