Retirement Planning
May 18, 2023

The Biggest Financial Regrets of Seniors

Thought leadership for Seniors' Financial Regrets
Stewart Willis
PRESIDENT & HIGH NET WORTH ADVISOR

You’ve saved diligently your entire working life, and it’s finally time to go on that permanent vacation. That’s a great feeling for many, but others enter their retirement with feelings of regret over retirement planning missteps. Here are two of the most common regrets retirees experience; don’t let this happen to you!

Failure to Plan for Taxes

Tax strategy is simultaneously one of the most important aspects of retirement planning and the most frequently overlooked. Many people do a great job of squirreling away money for retirement and investing it in a well-balanced portfolio with an appropriate amount of risk and growth potential, but because they failed to plan for taxes in retirement, they find themselves draining those hard-earned retirement dollars at a faster rate than necessary.

A major factor that most people don’t consider is the fact that 401(k)s and IRAs are tax-deferred when you contribute to them, but you’ll have to pay taxes when you take distributions from them in retirement. This is an unfortunate oversight in normal times and a particularly impactful one right now because of the Tax Cuts and Jobs Act, which gave us very favorable tax brackets. However, that measure is set to expire at the end of 2025 at which point we could see taxes increase.

A common career path is one in which you make comparatively little in the early years of employment and considerably more by the time you’re approaching retirement. This means it’s very possible that you will be in a higher tax bracket in retirement than you are in the first phase of your working life.

When it comes to your tax situation, it might be a wise move to consider converting some of your tax-deferred retirement accounts to their Roth equivalents. You’ll pay taxes on them now, but in exchange will secure a number of advantages for the future.

Money inside a Roth account grows tax-free. Distributions from that account in retirement are also tax-free. And unlike a tax-deferred account, there are no required minimum distributions from Roth accounts, which lets you keep money in your retirement accounts if you don’t actually need to withdraw it.

At Asset Preservation Wealth and Tax, we regularly meet with people who think they’ve done a great job preparing for retirement until we point out their lack of tax strategy is going to cause a cascade of post-retirement tax issues.

To keep this from happening to you, start thinking about retirement taxation at least 5–10 years before you retire. Find a financial advisor who understands taxation and can help you strategize your accounts in such a way that you only pay the tax you actually should be paying, not more.

Not Planning for Medicare

For many retirees, especially those of higher net worth who have the option of retiring before they reach the official retirement age of 67, Medicare becomes problematic. That’s because people assume that once they retire, they’ll sign up for Medicare and much of their health care expenses will be covered.

However, Medicare eligibility only starts once you reach age 65. If you retire earlier than that, there will be a gap between your employer-sponsored health insurance plan and your enrollment in Medicare.

The worst part is that for many people, health care expenses increase dramatically once they enter their 60s. Unfortunately, as we ag our bodies start to experience more problems that require medical intervention, which means healthcare costs often skyrocket between your early retirement and your Medicare eligibility.

If you don’t have a plan in place to fill that gap, the expense could threaten your whole retirement! It’s extremely important to prepare to meet your medical expenses before Medicare takes over. Some retirees make sure their Health Savings Accounts are well-funded. Because you can use the money in an HSA for medical expenses, it can help mitigate the high costs of those retirement gap-years.

A common mistake many early retirees make is putting all their money into IRAs and 401(k)s, then withdrawing money from those accounts to pay for medical expenses. This creates several downsides. First, you’re draining your retirement accounts faster than expected which could impact your retirement longevity.

Second, by withdrawing from tax-deferred accounts to pay your health care costs, you’re creating another chunk of taxable income. If your health care bills are high, you could potentially add tens of thousands of dollars worth of income, which is taxable and could catapult you into a higher tax bracket as well.

Selling the Wrong Assets at the Wrong Time

This mistake often happens with people already in retirement. When people need to draw assets from their retirement accounts for living expenses, they frequently don’t have a strategy for which accounts to draw from and at what times.

Most are familiar with the idea that in order to avoid losing money, you should buy low and sell high. When markets turn volatile and your market-based investments experience a slump, that’s generally a great time to avoid selling them, yet too often those investment accounts are the ones tapped for funds.

This causes a larger impact on your retirement accounts than if you withdrew the same amount of money from an account that was not suppressed in value, because if the market rebounds, you will not be able to take advantage of it with the assets you sold. This is called locking in your losses, and it’s best to avoid this scenario whenever possible.

Here at Asset Preservation Wealth & Tax, we advocate for balanced portfolios, which often include assets that are not impacted by market fluctuations. This gives our clients a more stable pool of assets from which to draw when their more volatile investments are down, which keeps them on healthier financial footing than if they were to sell other assets at a loss.

When is it Too Late to Course Correct?

If you’re already in or near retirement, and you recognize you’ve made one or more of these mistakes, don’t despair! Never throw up your hands and say it’s too late or you’re too old to fix the situation.

If you’ve deferred too many taxes which will impact the health of your retirement accounts, it might be wise to take on some short-term tax pain for long-term tax gain by converting some of your tax-deferred accounts to Roths. While it may have been more ideal to have done so before you retired, there’s still a good argument for doing it now.

Currently, we’re in a favorable tax environment for Roth conversions, but the tax law providing that environment sunsets at the end of 2025. Your financial advisor may find that paying taxes on conversions now will likely save you money in taxes down the road if the tax environment isn’t as advantageous.

Above all, if you think you’ve made mistakes in your retirement preparation, consult a trusted financial professional. We can help you course correct your finances to give you a better chance of retiring confidently.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.

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