Education is Key: 3 Financial Lessons for Retirees Nearing Retirement

When it comes to retirement planning, educating yourself can keep you from making big mistakes. Here are three key lessons that everyone preparing for their golden years should know.

A woman with gray hair looks at a laptop and thinks.
(Image credit: Getty Images)

Do you feel like you know enough about money to get by? A newly released survey by the TIAA Institute (opens in new tab) shows that people of all ages and experience levels could answer only 50% of financial literacy questions correctly! Your level of knowledge in the financial world can have big ripple effects, especially when preparing for retirement.

As financial professionals, we advise clients from a wide range of financial levels. So, we’re sharing our top retirement planning tips for retirees nearing their golden years.

‘Plan ahead to maintain your standard of living in retirement.’

As you begin to consider retirement, take a thorough review of your monthly expense needs. When many people retire, they want to maintain the same standard of living or even increase it! Which is why retirees need a plan.

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A retirement plan is a written income plan that includes income and tax planning, Social Security strategies and long-term care and estate plans. Start saving early to ensure you have enough money in your accounts to sustain your lifestyle in retirement. The U.S. Department of Labor (opens in new tab) reports if you save $6,000 each year and earn a 7% return on your investment, you will have $150,774 after just 15 years. If you add an additional 10 years of savings, that number jumps up to $379,494, proving why starting early can set you up for success.

You should also plan for shifts in the market and inflation to avoid getting caught off guard. Since March, inflation has hit a couple of 40-year highs (opens in new tab). While many are feeling it at the gas pump and grocery store, retirees are concerned about the implications on their nest eggs. For years, many retirement planners have suggested retirees add a 3% annual inflation rate to their plan, but it might not hurt to raise that rate. Talk with your financial planner about adjusting your plan, so you don’t run out of money when it’s time to leave the workforce.

‘You're still going to be paying income taxes, maybe more than you think.’

One of the most common mistakes that some people make is assuming they will be in a lower tax bracket in retirement, but some retirees find themselves in a higher tax bracket. Distributions from retirement accounts like traditional IRAs or 401(k)s are considered taxable income. Depending on how much you plan to withdraw, you could be bumped into a higher bracket.

Another reason for a potential increase in your tax liability is having fewer deductions. You won't be able to claim your children as dependents, and if your home is paid off, you won't be able to deduct the interest from your mortgage.

There are tax strategies that will minimize taxes in retirement. One way is to consider a Roth conversion. This method will shift money from a traditional retirement account to a Roth IRA, which allows your money to grow tax-free. The one drawback is that you will need to pay the taxes on that money at the time of the conversion.

‘Your Social Security benefits might be taxed.’

Social Security is a steady source of income for many retirees in their golden years. These benefits can replace 40% of pre-retirement income (opens in new tab) on average for retirees who qualify– but many people don’t realize that those benefits are subject to income taxes.

If you are planning to work in retirement or your income is above certain income thresholds, some Social Security beneficiaries could pay federal taxes on up to 50% or 85% of their benefits (opens in new tab). Twelve states also take additional state taxes out of your benefits, including Minnesota, Colorado and New Mexico.

You can avoid larger taxation on your benefits by keeping your income under the tax thresholds the IRS lays out. An effective way to do this is by using a Roth IRA or Roth 401(k). This retirement account isn’t subject to taxes because the funds were taxed when you contributed. As long as you wait to take distributions until you are at least 59 ½ years old, these payments won’t affect your taxable income.

Education is key to preparing for life outside of the workforce and reaching your retirement goals. Don’t be afraid to ask your financial adviser questions or even get a second opinion. This is your retirement plan, and you should feel like you have every resource available to make informed decisions. Don’t be afraid to think big, dream big and plan ahead of time!

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Tony Drake, CFP®, Investment Advisor Representative
Founder & CEO, Drake and Associates

Tony Drake is a CERTIFIED FINANCIAL PLANNER™and the founder and CEO of Drake & Associates (opens in new tab) in Waukesha, Wis. Tony is an Investment Adviser Representative and has helped clients prepare for retirement for more than a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and is featured regularly on TV stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them build a strong plan for their retirement.