8 Retirement Surprises That Can Catch You Off Guard

8 Retirement Surprises That Can Catch You Off Guard

A Sonoma County retirement can be a wonderful thing. But it takes careful preparation. 

Sonoma County is one of the most expensive counties in California. While you may live here during your working years, maintaining your lifestyle while transitioning into retirement can be tricky. At Montgomery Taylor Wealth Management, we’ve been helping families in Sonoma County do just this since 2002. As a life-long Sonoma County resident, I understand the unique concerns that come with calling this special area home. 

In fact, I even wrote a book, “Happy and Secure in Sonoma County,” to help identify areas of a Sonoma County retirement that can catch you off guard. (If you are interested, please call our office to request a copy.) In our experience, there are 8 common surprises when it comes to retirement.

Are you on track to retire as planned? Schedule a no-obligation conversation with the Montgomery Taylor Wealth Management team and get a second opinion.

 

1. You’re in a Higher (or Lower) Tax Bracket Than Expected

Your tax bite matters at all times, and retirement is no exception! If you have a Traditional retirement account, contributions were taken out pre-tax. While the money in these accounts grows tax-free, you’ll be taxed at your ordinary rate when you make withdrawals later on.

Be sure to estimate what your tax bracket will be in retirement. If it will be higher than it is during your working years, it may benefit you to convert your Traditional retirement accounts into Roth accounts. Contributions to Roth accounts are made with after-tax money, so withdrawals aren’t taxed, as long as you’ve held the account for a minimum of five years. This can really change your tax picture in retirement. 

Read our recent blog post: Roth Vs. Traditional, and When a Conversion Makes Sense.

2. Healthcare is Expensive, and Medicare Isn’t Free

The older we get, the more prone we are to changes in health. Review your healthcare plan to make sure you’re well-covered and can pay for deductibles, co-pays and more. 

If you’re eligible for Medicare in retirement, make sure you understand what it covers, what it doesn’t cover and how it works. In our experience, many retirees are surprised to learn that Medicare isn’t free. Medicare charges premiums, copays and deductibles. You can get Medigap or other types of insurance plans that will cover these costs, but you’ll have to pay for those separately.

Medicare also doesn’t cover prescription drugs automatically, or long-term care. 

Read our recent blog post: Sonoma County Wealth Advisor Weighs in on Healthcare in Retirement.

3. Your Parents Need Care

Longevity rates continue to improve in America. While this is great news, it means that not only are you likely to live longer in retirement than earlier generations, but your parents are likely to live longer too. What will you do if your parents need care?

Medicare does not pay for long-term care. Are you in a position to pay for your parents’ care, either out of pocket or with a long-term care policy? Are they? Asking questions and making a plan ahead of time can avert an emergency in the future.

4. Your Children Move Home

Many empty-nesters are finding their nests full again as their adult children move home to save money either for a down payment on their own home or recently, to make up for unexpected financial shocks due to COVID-19.

If you’re a parent, have you considered that in your retirement plans? If you planned to downsize in retirement, will you have room for them? Will you feel comfortable asking them to chip in for living expenses or their share of food? 

Having more mouths to feed can obviously change your budget in retirement and can affect your day-to-day plans. 

5. You Need More Money than You Initially Thought 

Don’t assume that your costs will necessarily go down in retirement. Traveling can be expensive. Moving has a price tag. Even spending time with family can cost more than you thought if it includes family vacations or trips to Disneyland. 

When creating your budget for retirement, go through each expense. Sure, you may no longer have to pay for commuting to work, but you’ll still need to eat and heat/cool your house – and those expenses could increase if you plan to be home more often. Be sure to factor in inflation, too – a common oversight in retirement planning.

6. There’s More to Your Living Expenses than Just a Mortgage

If you are lucky enough to be mortgage-free in retirement, you may assume that your living expenses are therefore $0. But that’s not the case! Don’t forget about property taxes (which can be high in a Sonoma County retirement), landscaping, maintenance and upgrades. Depending on how long your retirement lasts, you may face an expensive remodel at some point, such as your kitchen or a new roof.

7. You Have a New Cost of Living

Do you plan to downsize to save money? Remember, downsizing isn’t an automatic cost savings. Property taxes can change per state and even city. Retirement communities often come with extra fees. Many new developments, though smaller than you may be used to, can come with expensive HOAs or Mello-Roos. The cost of utilities, garbage, water and other expenses can also increase, depending on where you live.

8. Taxes (and Penalties) Don’t End in Retirement 

California fully taxes income from retirement accounts and pensions at some of the highest state income tax rates in the country. Social Security retirement benefits are exempt, but California has some of the highest sales taxes in the U.S.

Not only that, but you are subject to new tax penalties in retirement. If you forget to take your Required Minimum Distributions (RMDs) at the appropriate time, for instance, you can be subject to a penalty of 50 percent of the amount you should have taken. 

Talk to a financial advisor so you’re fully prepared for retirement. No one likes expensive surprises, especially when you’re on a fixed income. If you’re currently looking for a financial advisor to help you navigate a Sonoma County retirement, contact our team to see how we can help.

 

Montgomery Taylor Realistic Financial Planning