Boatman: Planning for a secure retirement
A recent study by Genworth Financial finds that many people have unrealistic expectations about retirement.
Although 73 percent of pre-retirees are confident they will retire as planned, only 48 percent actually do. Some workers are forced to retire earlier than planned because of job loss, health or family issues.
Two things that used to be expected in retirement were that you only needed 70 percent of your income during retirement and that your income taxes would be lower. These things are not certain in today's economy. The Genworth study found that 65 percent of retirees found that their expenses stayed the same or increased during retirement. This is partially because many people start their bucket list when they retire or have more time to do expensive activates such as golf and traveling.
Another big reason expenses are more than expected during retirement is medical costs. This may well be your biggest expense during retirement. Anyone retiring before age 65 must deal with the total cost of health insurance. Once you reach 65, you probably qualify for Medicare. However, Medicare is not free. Medicare Part A covers hospital care. It is funded through payroll taxes that we pay while working.
Part B covers doctor visits and outpatient services. Part D covers prescription drugs. These two parts are funded with subscriber premiums. There is a sliding scale based on your income. If you withdraw a large amount of qualified funds to make a large purchase, it may increase your next year's Medicare cost. This should be a consideration if you are making a Roth conversion while receiving Medicare.
Your Medicare premiums are calculated using the Medicare modified adjusted income. This is figured differently than MAGI figures used in other areas of retirement planning. To calculate yours, look at your 1040 and add line 37 to the tax exempt interest amount on line 8b. Remember, the premiums you are calculating are for a single person, so you need to double them for a couple.
While a Roth conversion while receiving Medicare will increase your cost, a conversion before starting Medicare can give tax free income that does not increase your insurance cost. Many people use tax exempt bonds to avoid the 3.8 percent Medicare surtax. This tax free income is included when calculating your Medicare cost.
It is important to consider medical costs while you are planning your retirement income. If you do not take this into consideration, you may not have enough funds to fulfill all of your retirement dreams.
Next week, we will look at all of the confusion with the Affordable Care Act. Many things are up in the air with the president's announcement this week that some parts are being pushed back for a year.
To help you plan for Medicare, we are offering a free 24-page Life Guide…Social Security and Medicare. To get your copy, e-mail your name and address to firstname.lastname@example.org.
Gary Boatman is a certified financial planner and a local businessman who serves as president of the Monessen Chamber of Commerce.