Death, taxes and inflation: Scott Huband, CFP® of Pure Financial Advisors goes into the details on all the ways that each of these three factors can decrease your income in retirement.
There are many different factors that can reduce retirement income. The first may be fairly obvious, but it’s the effect of death. For two spouses when there’s a pension involved, the death of a spouse could mean the loss of a pension income. Now, if there’s a survivor benefit that income may continue, so it’s important to evaluate your options when making pension decisions. A lot of people will use insurance to protect against this type of income loss.
Another way death can reduce retirement income has to do with social security. When two spouses are receiving social security and one spouse passes, there will be a loss of one of the benefits. Now, the surviving spouse will receive the higher of the two benefits, but there still will be some loss of income.
The final way that death can reduce retirement income has to do with taxes. Moving from married filing jointly to now filing single can push the survivor into higher income tax brackets. The reason for this is that the income thresholds for married filers is about twice of what it is for single filers. This can have a major impact on the surviving spouse’s net after-tax income in retirement.
Taxes, in general, is another area that a lot of people overlook when it comes to retirement income. The reality is that taxes will take much more from you than the market ever can. For instance, going back to 2008 during the Great Recession, the average portfolio might’ve declined 20-30%, assuming it was well diversified of course. That might’ve taken a couple of years to recover. But taxes in retirement can easily cost anywhere from 30-40%, and that’s money that will never come back. So, it’s really important to consider where your different sources of income are coming from in retirement. Will it all come from pensions, social security, IRAs, 401(k)s, sources that will be taxed at ordinary income rates? Or do you have good tax diversification? Where you can choose where to pulling money from maybe Roth IRAs, or non-qualified accounts and really get a lot of control of taxes in retirement.
And finally, inflation. Inflation is absolutely something that can reduce your income in retirement. And it does this by reducing the purchasing power of your dollar in retirement. Inflation isn’t just something that happened in the past; things will continue to cost more in the future. So, let’s look back 30 years. 30 years is about the average time frame for most people in retirement. So, in 1989, the average cost of a first-class postage stamp was 25 cents. Today, that same stamp will cost you 55 cents. Also, in 1989, the average cost of a new car was $15,000. Today, the price of a new car will set you back, on average, $37,000. So, you need to look at how well your different sources of income will keep up with inflation in retirement.
For help optimizing your retirement income, visit us at PureFinancial.com.