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TOP 10 RETIREMENT MYTHS
Edelman Financial Engines
February 6, 2024

DEBUNKING COMMON MISCONCEPTIONS ABOUT TAXES, SOCIAL SECURITY AND MORE.

Retirement is a stage of life that many of us eagerly anticipate. It’s a time
when you can finally bid farewell to the daily grind and enjoy the fruits of
your labor. However, there are numerous myths and misconceptions surrounding
retirement that can hinder your ability to plan effectively for this important
life transition. Let’s debunk the top 10 retirement myths and share some
knowledge that can help you retire with confidence.

MYTH 1: YOU WILL PAY LESS IN TAXES IN RETIREMENT

It’s a common belief that your tax bill will decrease once you retire. However,
this doesn’t always hold true. The reality is that your tax situation in
retirement could become more complex and may not necessarily result in lower
taxes.

For example, some people believe they will pay fewer taxes in retirement because
their income will be lower. While this may be true for some retirees, others may
face unexpected tax liabilities due to Required Minimum Distributions from
retirement accounts and other sources of income.

At retirement, you may have substantial retirement savings in tax-deferred
accounts, like a 401(k) and IRAs. When you start withdrawing from these accounts
in retirement, you’ll owe income tax on those distributions. This can lead to a
significant tax liability.

To navigate this, consider a diversified tax strategy that includes a mix of
tax-deferred, tax-free and taxable accounts. This can help you optimize your tax
situation in retirement and potentially reduce your overall tax burden.

MYTH 2: YOU CAN EXPECT YOUR EXPENSES TO DECREASE IN RETIREMENT

Many people assume they can maintain the same lifestyle in retirement as they
did during their working years. However, retirement often entails a shift in
spending habits. While certain expenses may decrease, others tend to rise into
and through retirement.

You might choose to continue to maintain a lifestyle that includes travel,
hobbies and leisure activities. Additionally, health care expenses tend to rise
with age and grow faster than annual inflation, and it may be necessary to plan
for long-term care costs. These expenses – both planned and unplanned – can
quickly offset or outweigh any reductions in housing, child care, community or
work-related costs.

In some cases, your expenses may eventually decrease to the point where your
household no longer needs to withdraw funds from your investment accounts. In
these cases, you may be forced to withdraw funds from tax-deferred accounts to
satisfy the legal requirement and then end up investing those funds in a taxable
account, resulting in an inefficient withdrawal strategy. This is another
example of where a tax-efficient drawdown strategy can help you potentially
avoid this scenario.

In any case, it’s important to consider that retirement can span several
decades. Inflation can erode the purchasing power of your savings over time and
may significantly impact your retirement income. With your goals and risk
tolerance in mind, it’s essential to invest in assets that have the potential to
outpace inflation and regularly review your retirement plan with your financial
advisor to make necessary adjustments.

MYTH 3: YOU SHOULD ALWAYS STAY IN THE LOWEST POSSIBLE TAX BRACKET

While it’s true that staying in the lowest possible tax bracket might be an
appealing strategy for any given year, this may turn out to be suboptimal if you
consider a multiyear strategy, where incurring higher taxes in one year can lead
to several years of potentially lower taxes. Paying at a higher rate in some
years may result in a lower overall tax burden over time.

Striving to always stay in the lowest tax bracket could limit your financial
flexibility and result in missed opportunities for tax-efficient planning.

MYTH 4: EVERYONE SHOULD TAKE SOCIAL SECURITY AT THEIR FULL RETIREMENT AGE

While waiting until your full retirement age to claim Social Security benefits
can result in higher monthly payments, it’s not always the best choice. You may
have unique circumstances and financial goals that warrant a different approach.

Consider factors like your overall financial health, other sources of retirement
income and your life expectancy when deciding when to claim Social Security.
Delaying benefits can provide a guaranteed income boost, which may be beneficial
for individuals who want to maximize their retirement income.

If you’re not able to work past age 62 – or do not want to – and you need the
Social Security income to withstand accelerated withdrawals and protect you from
unforeseen events, like medical expenses, it may make sense to take your Social
Security early.

While Social Security provides essential income during retirement, it’s not
intended to be your sole source of support. The average Social Security benefit
is modest, and relying solely on it may leave you with an insufficient income to
maintain your desired lifestyle. Your plan should include drawing on your
additional retirement savings to complement your Social Security benefits.

For some, the idea of working indefinitely may sound appealing, but it’s not
always within your control. Health issues, caregiving responsibilities, or
unexpected job loss can force an early retirement. Planning for retirement means
preparing for the possibility of not being able to work as long as you’d like. A
financial advisor can help you understand when to ideally draw on Social
Security and how to balance your other retirement income to meet your lifestyle
needs.

MYTH 5: SOCIAL SECURITY BENEFITS CANNOT BE TAXED

Speaking of Social Security, we should also dispel the notion that your benefits
can’t be taxed. Your Social Security benefits can indeed be subject to federal
income tax, and they often are, especially for individuals with other
substantial sources of income. The portion of your benefits that may be taxed –
up to 85%1 – depends on your combined income, including your Social Security
income and other taxable income.

Understanding how Social Security benefits are taxed and planning accordingly
with your CPA or financial advisor can help you manage your tax liability –
including using a tax-efficient drawdown strategy with your investment accounts
to potentially avoid paying taxes on Social Security whenever possible.

MYTH 6: ONCE I CHOOSE MY WITHDRAWAL RATE, IT’S SET IN STONE

Some people use a single withdrawal rate and a predetermined account source as a
simple way to calculate cashflows for several years in the future. But this
simplistic approach misses the opportunity to adjust withdrawals to meet your
particular needs as they arise in any given year.

Approach your retirement withdrawals with flexibility. Life circumstances can
change, and your financial needs may evolve. Tax laws are consistently changing
as well. Instead of rigidly sticking to an initial withdrawal rate or account
source, consider periodic assessments and adjustments to help ensure your
financial plan remains on track. Working with an advisor who can provide you
with that flexibility is a good way to gain confidence that your plan can evolve
with you.

MYTH 7: YOU HAVE NO CONTROL OVER YOUR REQUIRED MINIMUM DISTRIBUTION AMOUNTS

RMDs are a crucial aspect of retirement planning, and understanding both how
they are calculated and their potential impact is essential for retirees. RMDs
are mandatory withdrawals from tax-deferred retirement accounts, such as a
traditional IRA or 401(k), and they play a significant role in ensuring that
retirees utilize their retirement savings as intended.

RMDs are required by the Internal Revenue Service once you reach the age of 72
(73 if you reach age 73 in 2023 through 2032; and 75 if you reach age 74 after
Dec. 31, 2032).2 The purpose of RMDs is to ensure you do not indefinitely defer
paying taxes on your retirement savings. Instead, you must begin withdrawing a
portion of your account balance annually, which is then taxed as ordinary income
– just like the income you earn from a job or other sources – and the withdrawn
amount is added to your annual taxable income. And in some cases, this could
also trigger taxes on Social Security benefits or surcharges on Medicare
premiums.

The RMD amount is directly influenced by the balance in your tax-deferred
retirement accounts (as of December 31 of the previous year). A higher account
balance will result in a larger RMD, which in turn means a higher taxable
income. This could potentially push you into a higher tax bracket.

RMDs can seem inflexible, but you can exercise some control over them. This is
where strategic planning with a CPA or financial advisor can be a big help.

MYTH 8: MEDICARE WILL COVER ALL OF YOUR HEALTH CARE COSTS

While original Medicare provides valuable health insurance coverage for
retirees, it doesn’t cover all of your health care expenses. You should budget
for Medicare premiums, copayments and deductibles, as well as any supplemental
insurance you may need. Long-term care costs are typically not covered by
Medicare and should also be factored into your insurance planning and overall
retirement plan.

Once your RMDs impact your Adjusted Gross Income, some may also be surprised to
find themselves subject to income-related Medicare surcharges. A tax-efficient
drawdown strategy can help account for this and potentially avoid triggering
such premium surcharges.

MYTH 9: A TAX-EFFICIENT DRAWDOWN STRATEGY IS THE SAME AS DOING AGGRESSIVE ROTH
IRA CONVERSIONS

Roth IRA conversions are only one aspect of a tax-efficient drawdown strategy.
In addition, it also provides suggestions for the type of accounts from which
your withdrawals should come each year as well as the amount of those
withdrawals. And it manages your withdrawals to help maximize after-tax wealth
by seeking to reduce the taxation of Social Security benefits, income-related
monthly adjustment surcharges, capital gains tax and net investment income tax.

MYTH 10: YOU CAN WAIT TO START SAVING FOR RETIREMENT

The final and perhaps most dangerous retirement myth is the belief that you can
figure things out as you go along. Retirement planning requires careful
consideration, strategic decision-making and a well-defined plan. Without a
clear road map, you risk making costly mistakes that could jeopardize your
financial security in retirement.

Life is full of unexpected expenses, and it’s a mistake to assume you can easily
catch up on your retirement savings later in life. Emergencies, family
obligations and other financial priorities can derail your plans.

Procrastination can also be costly. It’s wise to save as much as you can for as
long as you can. Start saving and working with a financial advisor early to
build a robust retirement plan that aligns with your unique goals and financial
circumstances. The earlier you start, the more time you have to leverage any
compound growth and make informed financial decisions.

NOT A MYTH: PROFESSIONAL ADVICE CAN HELP YOU OPTIMIZE YOUR PLAN

Retirement planning is a complex and multifaceted process that can be influenced
by numerous factors. By identifying and dispelling these top 10 retirement
myths, you can approach retirement from a more realistic and informed
perspective. Remember, it’s never too early to start planning for retirement,
and seeking professional financial advice can be invaluable in helping ensure
your retirement plan is well-structured and optimized for your unique situation.

And if you’re closer to the finish line at work, remember –
planning in retirement is just as important and complex as
planning for retirement.

 

¹ SOCIAL SECURITY ADMINISTRATION. (2022, OCTOBER 14). MUST I PAY TAXES ON SOCIAL
SECURITY BENEFITS? RETRIEVED NOVEMBER 6, 2023,
FROM HTTPS://FAQ.SSA.GOV/EN-US/TOPIC/ARTICLE/KA-02471

² IRS. (2023, MARCH 14). RETIREMENT PLAN AND IRA REQUIRED MINIMUM DISTRIBUTIONS
FAQS. RETRIEVED DECEMBER 4, 2023,
FROM HTTPS://WWW.IRS.GOV/RETIREMENT-PLANS/RETIREMENT-PLAN-AND-IRA-REQUIRED-MINIMUM-DISTRIBUTIONS-FAQS

NEITHER EDELMAN FINANCIAL ENGINES NOR ITS AFFILIATES OFFER TAX OR LEGAL ADVICE.
INTERESTED PARTIES ARE STRONGLY ENCOURAGED TO SEEK ADVICE FROM QUALIFIED TAX
AND/OR LEGAL EXPERTS REGARDING THE BEST OPTIONS FOR YOUR PARTICULAR
CIRCUMSTANCES. TAX STRATEGIES ARE JUST ONE ASPECT OF YOUR OVERALL FINANCIAL
PLAN. CERTAIN SERVICES PROVIDED ON AN EDUCATIONAL AND GUIDANCE BASIS ONLY.

© 2024 EDELMAN FINANCIAL ENGINES, LLC. THIS PUBLICATION IS FOR INFORMATIONAL
PURPOSES ONLY AND DOES NOT CONSTITUTE INVESTMENT ADVICE OR AN OFFER TO BUY OR
SELL ANY SECURITY. FUTURE MARKET MOVEMENTS MAY DIFFER SIGNIFICANTLY FROM THE
EXPECTATIONS EXPRESSED HEREIN, AND PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS. EDELMAN FINANCIAL ENGINES ASSUMES NO LIABILITY IN CONNECTION WITH THE
USE OF THE INFORMATION AND MAKES NO WARRANTIES AS TO ACCURACY OR COMPLETENESS.
FUTURE RESULTS ARE NOT GUARANTEED BY ANY PARTY. FINANCIAL ENGINES® IS A
TRADEMARK OF EDELMAN FINANCIAL ENGINES, LLC. ADVISORY SERVICES ARE PROVIDED BY
FINANCIAL ENGINES ADVISORS L.L.C. (FEA), A FEDERALLY REGISTERED INVESTMENT
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