Many Retirees Fail to Consider Effect of Taxes

Thirty-seven percent of retirees admit they did not consider how taxes would impact their retirement income, a Nationwide Retirement Institute survey found. As a result, the institute says, they may have lost the opportunity to save six years’ worth of income in retirement.

Sixty percent of pre-retirees, 70% of recent retirees, and 75% of those who have been retired for more than 10 years say they are only somewhat knowledgeable or not at all knowledgeable about tax planning.  Fifty-two percent of pre-retirees and 47% of recent retirees wish they better understood how their income in retirement will be taxed.

Fifty-one percent of future retirees say they are only somewhat or not at all knowledgeable about how tax brackets work, and 40% of future retirees did not know that someone in a high tax bracket might pay two to three times more in taxes than someone in a lower tax bracket.

Forty-six percent of recent retirees wish they had better prepared for paying taxes in retirement, and 24% said they have paid several thousands of dollars more in taxes than they had expected.

Eighty-two percent of those nearing retirement, 64% of those recently retired, and 62% of those retired for more than 10 years want to learn about taxes. Among those who work with an adviser, 85% of those nearing retirement, 82% of those recently retired and 68% of those retired over 10 years expect their adviser to help them plan for taxes in retirement. Thirty-eight percent of future retirees said they would switch advisers for someone who could help them plan for taxes in retirement.

“Building tax flexibility into a retirement income plan is crucial,” says Eric Henderson, president of Nationwide’s life insurance business. “Doing so allows you to use different types of investments and retirement accounts to potentially avoid higher tax brackets. Financial advisers can provide a fact-based estimate of taxes in retirement and a unique plan to address those costs.”

Among those retired more than 10 years, Social Security is their primary source of income for 49%. Among recent retirees, this is true for 43%. Twenty-five percent of those approaching retirement say that their 401(k) will be their primary source of income, followed by their pension (22%) and Social Security (20%).