As you plan your retirement, you should determine how you will spend your time, the details of your retirement budget, and the source of your money in retirement. As you build your retirement plan, you may discover a few bumps in the road, and the sooner you address them, the better you can prepare. With that in mind, here are "8 Surprising Things You Need to Know About Retirement" from Kiplinger's.
Social Security Benefits and Retirement Savings Are Taxable. Can you believe that Uncle Sam wants some of that money back? Based on your income, up to 85% of Social Security benefits are taxable—and in some states, you'll owe state income tax on your Social Security benefits, as well. The same thing with withdrawals of pre-tax money you contributed to a 401(k) or a traditional IRA throughout your working years. This will trigger a federal and possibly a state income tax bill. You need to take taxes into account. With taxable accounts, tax-deferred accounts, and tax-free accounts, you'll have some flexibility in managing and possibly reducing your annual tax bill in retirement.
Retirees Get Some Great Tax Breaks. Taxpayers 65 and older qualify for a larger standard deduction on their federal tax returns, and many states offer tax breaks on all or part of your retirement income. Some states have special breaks for retirees on sales taxes and property taxes.
Medicare Doesn't Cover All of Your Health Costs. You'll have to pay premiums for Medicare coverage and co-pays on covered services, and some services, like long-term care, aren't covered. The average 65-year-old couple will pay about $240,000 in out-of-pocket costs for health care during retirement, not including those potential long-term-care costs. Look into purchasing a Medigap supplemental insurance policy to cover some of your out-of-pocket costs. There's also Medicare Advantage, which provides health coverage through a private insurer. Consider buying a long-term-care insurance policy. This type of policy can help pay for home health aides or care in an assisted-living facility or nursing home.
Senior Discounts Aren't Always a Good Deal. Sometimes other discounts can save older consumers more money. Compare before you take the senior rate.
Turning Half a Year Older Matters. Two important milestones rely on half years: once you hit age 59 ½, you are no longer subject to the 10% early-withdrawal penalty if you take money out of your IRA or 401(k). Withdrawals of your earnings from a Roth IRA are also not subject to that penalty. And starting in the year in which you turn 70 ½, you must take Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s.
You Must Withdraw From Your Nest Egg. Once you turn age 70 ½ you must take Required Minimum Distributions from traditional IRAs and 401(k)s. If you don't take your first RMD by April 1st of the year following the year you turn 70 ½, it's a hefty penalty—50% of the shortfall. If you don't need the money to live on, reinvest the money in a taxable account.
Your Nest Egg May Need to Stretch for Decades. Your retirement date is only the beginning of potentially decades that your savings are going to be needed to provide income. Life expectancies are increasing, and chances are at least one spouse, if not both, will live well into his or her 90s.
You Can Keep Saving for Retirement. If you are still working later in life (even part-time), you can save in tax-advantaged retirement accounts. If your employer offers a 401(k), you can contribute to that plan, so save enough to get any company match. After you hit age 70 ½, you can't contribute to a traditional IRA, but if you have earned income you can still contribute after-tax money to a Roth IRA. Self-employed individuals have a few other options, like setting up a solo 401(k).
Reference: Kiplinger's (March 2016) "8 Surprising Things You Need to Know About Retirement"