2023 EP0603 | Financial Updates | Hidden (and not so hidden) Fees, Penalties, and Taxes in Retirement

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Peter, good to see you. As always, I'm excited about today's topic. It is hidden and not so hidden fees, penalties and taxes in retirement. Of course, it's not easy to determine exactly what you'll need to live on in retirement. That calculation is made even more difficult because there are going to be a few surprise expenses and some penalties that can even last a lifetime. So we're going to break down some of those hidden fees in order of severity. And we are going to start with the Irma penalty.

Yeah. Excited about the topic, but people are not excited when they encounter these additional unexpected costs. Aaron, so thank you for the time and bringing this topic up as a conversation. And yeah, Irma is one of several different factors where the more you make, the more you're going to pay. And this seems to be kind of the way the world is moving. But Social Security, Medicare, college funding, taxes, it's all sort of a progressive system. So Irma deals with Medicare premium costs for Part B and Part D, your basic coverage and your prescription drug costs. Essentially, the higher your amount of income, the more you are going to pay in premium.

So there's a graphic on the screen here that shows a hypothetical one hundred and eighty eight thousand dollars of income. OK, if we're married filing jointly, then we are covered under the base costs. But if we cross that one hundred ninety four thousand dollar threshold, they're going to add sixty six dollars to your Part B premiums and your Part D prescription drug costs are going to increase as well. So the more you make, the more income you have, the more you're going to pay for your Medicare premiums. Now, this is one area where there are some reasonable people somewhere within the government, because if we retire, the premium costs are actually based on the previous two years income and retirement income may look very different than working career income. So if that is your case, if you are experiencing Irma, but the Irma additional surcharge is not reflective of your real current income and it's because you retired and walked away from a reasonable salary and now don't have that, obviously, because you're retired. Well, then you can apply for an exception to that Irma surcharge. So it is one place where we we need to pay attention and possibly can avoid this additional unexpected cost. OK, let's talk about next this Medicare Part B and D penalty. This penalty is for life.

So how do we avoid this one? Yeah, well, enroll when you should. You become eligible for Medicare at sixty five and you can enroll for Medicare the three months prior, the month of your birth date and the three months following your birth date. If you do not, if you fail to enroll in Medicare when you were eligible and supposed to, then for every year that goes by, there's a 10 percent penalty that is added on to your base costs.

Now, again, this is an area where there is is some reasonable entity behind this that that can say, well, there were life altering circumstances. But generally, even if you are covered by an employer's plan, Medicare still is something you need to enroll in. It's just it becomes your secondary insurance.

You need to go ahead and apply. You need to put yourself a reminder three months before your birthday and then every month until you get it done to go ahead and take that step to enroll in Medicare. It's there for your benefit and it does have significantly lower costs than most private insurance.

I know some people's employers sponsor plans where they may have lower costs, but you still need to go ahead and enroll to avoid that 10 percent per year. You miss this penalty that's added on to the top of your base costs. Yeah. Ouch.

All right. Next, let's talk about my least favorite. Well, it's hard to pick one least favorite, but inflation. Right. We've been talking about inflation for years, Peter. And I was surprised to learn that only 42 percent of people have ever calculated what they'll need to live on in retirement. And we often fail to include inflation.

Yeah, this isn't so much of a penalty, but it is at the same time. Right. It's that the government is a de facto kind of silent tax increases the money supply and the money supply does expand on a healthy economy. The pie grows and grows and grows, but it does water down the value of existing dollars.

And we need to account for that. And a lot of people's plans and projections for retirement simply don't. Well, we've certainly seen inflation over the past three years, and maybe now some people are waking up to the fact that they need to plan for this. But a lot of people have this expectation that their activities are going to wane in sort of the second phase of retirement.

Right. We've got these different phases, the go go years, the slow go years and the no go years. And a lot of people anticipate that they're going to do all of their activities in the first several years of retirement. So not only do people underestimate the costs a lot of times of their first several years of retirement, but then in those slow go years, when we sort of slow down on some of those activities and vacations and bucket list items, we have to understand that inflation is going to bring up the cost of even just the baseline subsistence type of expenses. So while we may not be doing as many things, the things that we are still doing and our base costs are going to increase. And we definitely need to factor that in.

And you're right, Aaron, not enough plans, not nearly enough plans account for and address inflation. Right. I want to stay on inflation real quick, though, Peter, because even though there is a cost of living adjustment in Social Security payments that does take inflation into account, that usually comes in lockstep with an increase in Medicare costs. Yeah, absolutely.

Yeah. The Medicare costs increase when the Social Security costs increase and it offsets it somewhat. But not only that, Aaron, Social Security generally does not account for 100 percent of people's true living expenses. So just for example, nice round numbers, if we have five thousand dollars a month as our living expense and then have 10 percent inflation and Social Security does give us a 10 percent cost of living increase, but Social Security only represented twenty five hundred dollars of our monthly income. Well, our true cost of living just increased five hundred dollars, but Social Security only offset that by two hundred and fifty dollars and Medicare also increased lockstep, as you mentioned, as it usually does.

And so we have not truly nearly accounted for the true impact of inflation on our living expenses. And last, of course, we have to talk about taxes, Peter. Do we?

Yes, we do. Yeah, taxes. Again, there are certainly penalties. There's penalties for Social Security, by the way, too, that a lot of people get surprised by. But the taxes, baseline taxes are an expense that a lot of people somehow forget to account for.

I call it the gross planning expense. I talk with a lot of people who very rightfully so are very proud of themselves because they're entering into retirement debt free. They've paid off all the cars, maybe bought a new car before they enter into retirement, paid off the mortgage even.

Fantastic. And come in and say we're ready for retirement, we're debt free. And then we take a look at the retirement accounts and wait. Not so fast. You've got that million dollar 401K or IRA, but it's all tax deferred.

So guess what? You've got a debt right there. It's a debt inside of your balance to the IRS. And taxes could potentially more than potentially as tax laws stand today, taxes are going up into the future. And for every dollar that you withdraw from that 401K or IRA or tax deferred retirement account, you're going to need to account for taxes.

Moving into retirement is very much like beginning to own your own business. Instead of W2 income, you transition to 1099 income. And every source may be taxed a little bit differently. And you have to opt for the amount of taxes that are going to be withheld. So, you know, again, depending on your income, the more you make, the more income you have, the larger bite of taxes is going to take out of that. But you need to be proactive and understanding that before retirement, not surprised by it after retirement, because it could be anywhere from 20 to 25 to 30 percent of your gross income is eaten up by taxes. And you only get to spend what you get to keep. I'm glad you brought that up because I want to say again on taxes right now. Imagine that you're retiring in a down market.

The average recession last 18 months. And if you have no tax free money to tap, as you're saying, you could be paying 30 percent or more in taxes every year and for the rest of your life. Yeah. Imagine on the day that you retire, you've got a finite amount of money. So just imagine that amount of money stacked up on a table.

Right. And then you have to put a slice in it and take some to the side for taxes. And then you've got to take a slice out of it and put some aside for inflation. Then you've got to take a slice of it, put some aside for health care expenses. And then what if the market declines?

Right. If the market declines 30 percent and a million dollars becomes seven hundred thousand dollars, you still have to cover your bills. Not one of my bill collectors called me and said, hey, the market's down.

We'll take less this year. No, and that's not going to happen in retirement either. So now not only do you have less of a base, your finite amount of money, some of it disappeared without you having anything to show for it, without you having spent it because it lost value in the investments. But you have to take a withdrawal. And of that withdrawal from your now seven hundred thousand dollars, hypothetically here, you also have to account for taxes. And so you are liquidating an even larger percentage of your retirement nest egg in a down market, removing those dollars from your portfolio and their ability to recover. And these factors are not individually sealed off in little vacuums.

They all compound on each other and interplay. And not accounting for these are one of the main reasons people fear running out of money sooner than expected or unfortunately actually experience that. Yeah, they feel like variables, but when you get down into the math, we can start planning for them. And that's why it all comes back to that proactive planning.

So, Peter, if somebody wants your help with anything that we've covered today, what's the best way to reach you? Yeah, smart people learn from their own mistakes, Erin, but we don't have that time or luxury in retirement. That's why running through planning proactively and looking at these factors, a lot of them can be avoided or addressed. The cost of them eliminated or at least minimized and controlled. And a variable is a risk.

Anything that we can't control is a risk to our future financial security and stability. That's why we plan proactively and put together that optimized retirement plan. And if you'd like to get your plan put together, pick up the phone, give us a call at Rashan planning nine one nine three hundred five eight eight six nine one nine three hundred five eight eight six. You can schedule a convenient time for your own strategy session right on our Web site as well. It's Rashan planning dot com. It looks like rich on planning dot com.

You can email me at Peter at Rashan planning dot com. So just be in touch if you have concerns about your retirement, would like to address any of these variables and expenses. And we'll put that optimized retirement plan together for you. OK, Peter, thank you. Always a pleasure.

And thank you. This has been planning matters radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment tax or legal advice from an independent professional adviser. Any investments and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooke's own capital management. A registered investment adviser fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.