Elean
Hi everyone. Welcome to the Paragon Podcast. I’m Elean Mendoza and I’m here with Evan Shorten, the firm’s founder and principal.

Evan
Hello. I hope you’re all doing well and I want to thank you for listening to the podcast.

Elean
Ok so let’s jump right in. One of our firm’s specialties in helping pre-retirees transition into retirement. This includes things like income planning projections, withdrawal strategies, social security planning, and the mindset shift to go from asset accumulation to asset distribution. With that said, we’ve noticed there tend to be a couple of expenses pre-retirees often underestimate and today we want to discuss four of the more prominent expenses.

The first one is probably the most obvious one, and despite that, it still one of the most underestimated expenses – and that is healthcare.

Evan
Yes. I think most people know healthcare is going to be one of their primary expenses in retirement, but I don’t think most realize how big of an expense it’s actually going to be. For example, most people know healthcare generally rises faster than inflation and they tend to assume their assets combined with Medicare and Social Security will suffice. However, that’s not always the case. For example, Medicare coverage tends to have very high deductibles. Additionally, depending on your retirement income, your Social Security benefits may also be taxed. In other words, Medicare may not cover as much as you think and your Social Security may not net out to as much as you expect.

Additionally, lack of adequate long-term care insurance could really drive up healthcare expenses to the point that it could even wipe out a retiree’s assets. Unfortunately Medicare does not cover long-term care or staying in a nursing home.  

Elean
So we don’t want to scare anyone or paint a bleak picture. In this episode, we’re really trying to give someone who is beginning to think about their transition to retirement a few items to begin focusing on. So with that said, could you provide some insight into a few items that one should think about to help cover their retirement expenses once they retire?

Evan
Right. The last thing you want to do is try to figure this out on the spot when you’re filing out your benefits application with the Social Security department. In order to get your healthcare expenses in order when you retire, you really want to focus on Medicare planning.

For example, Medicare part A covers hospital stays, hospital services like lab tests, and procedures like surgeries; Medicare part B covers your doctor visits, preventive services, medical equipment, and some of the deductibles in Medicare part A. Also, Medicare part A and part B do not cover prescription medication, that would be Medicare part D and is an additional cost. This is where Medicare part C, also referred to as Medicare Advantage Plans, or Medicare Supplement Insurance, also known as Medigap, need to be considered.

Now, as previously mentioned, Medicare does not cover long-term care or nursing homes. This would require a specific long-term care insurance policy in addition to any Medicare supplement or Medigap policies.

Now this episode isn’t focused on going in depth into Medicare – we’ll save that for a later episode. Really, the take away is that you can’t just rely on basic Medicare coverage when you begin planning your retirement otherwise, like the title of this episode says, you probably underestimating your healthcare expenses. This is why it’s important to begin planning for your retirement a few years in advance.

Elean
Ok great. The next major expense that is often underestimated, especially in today’s economy, is housing.

Evan
Housing is tricky because most people have convinced themselves that once their home is paid off, they can take a breather as one of their biggest expenses should finally disappear, but as we’ve seen in the last few years, the cost of housing will still creep up in other ways. For example, you may own your home, but you will forever rent the land. Now, I say that facetiously but the reality is you’ll never stop paying property taxes and depending on which state you live, property taxes can add up fast.

On one hand, a state like California has a stable property tax with a very low cap on how much your property tax can increase in a given year. On the other hand, we have seen property taxes in parts of Cook County, Illinois, where Chicago is located, increase as much as 134% in 2023; and it’s not just limited to higher tax states. Last year Tennessee, a state notable for its low taxes, saw increases of 52% in property taxes in the Chattanooga metro area.

Another housing cost that can creep up over time is your home insurance. In just California alone we’ve seen insurance premiums increase by as much as 15% in the past year and odds are next year’s insurance premiums will have an even higher increase. If you live in Florida or Texas you have also experienced your home insurances significantly increase.

One last housing item I want to mention that gets underestimated, and sometimes forgotten about, are large one-off expenses. For example, if you retire around age 65, there is a good probability you may live well until your 90’s. That’s 30 or more years. I can almost guarantee you’re going to need to repair or replace your home’s roof within that 30 year period. Some states won’t even renew your insurance policy once your roof reaches a certain age.

Additionally, your health may require significant modifications to your existing home. This could include things like wheelchair ramps to your front door; to your backyard; wheelchair accessible bathrooms; a wheelchair lift in your home; or even bigger modifications like a tube elevator.

Elean
For those who are interested, I’ll link some articles referencing the property tax increases to this episode in both the Youtube video description and on our website’s blog. In the meantime, could you provide some things that potential retirees should start thinking about in order to reduce their housing costs.

Cook County Property Tax Increases 2023: https://www.illinoispolicy.org/cook-county-property-taxes-rise-most-in-suburbs/

Chattanooga County Property Tax Increases 2023: https://www.timesfreepress.com/news/2023/jun/07/red-bank-commissioners-approve-tax-rate-increase-tfp/

Evan
Stay up to date with your home’s maintenance. It’s much easier and much cheaper to address small problems as they come up versus letting your home get run down and having to do major maintenance at once. Similarly along those lines, if you’re children have moved out, you can always consider downsizing your home. It’s no secret, maintaining a smaller home is more affordable in the long run. Lastly, you may consider moving to a friendlier tax jurisdiction with less imposing property taxes.

Elean
Ok, along those lines, another big expense that seems obvious at first but is often underestimated are taxes. A lot of people assume once they retire, their taxes will be significantly reduced simply because they won’t be earning an income for their labor, but unless most of your retirement assets are held in Roth accounts, most incomes are subject to some level of taxation.

Evan
Correct. If you’ve been diligent in saving for retirement in non-Roth accounts, like a traditional 401k or traditional IRA, your retirement distributions are federally taxable and maybe subject to state taxes. Additionally, most pensions are also federally taxed. So if you’re set to receive a pension that averages your highest earning years, you may not see much of a reduction in the amount of income tax you have to pay in retirement. As with non-Roth retirement accounts, your pension income may also be subject to state income tax in the majority of U.S. states.

Elean
If you’re curious which states don’t tax your retirement income, there are currently nine states that do not have an income tax. Those states include; Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Additionally, there are four other states that don’t tax retirement income specifically. Those four include; Illinois, Iowa, Mississippi, and Pennsylvania.

So up to this point, we’ve only talked about the taxation status of retirement accounts and pensions, but most retirees still have a third source of retirement income and that’s their Social Security benefits.

Evan
Yes. Social security is unique in that it’s not taxed by most states. In fact, only nine states tax social security benefits. Those states include Colorado, Connecticut, Kansas, Montana, New Mexico, Rhode Island, Utah, and Vermont. However, Social Security may be taxable at the Federal level for some individuals with up to 85% of their Social Security benefit potential subject to taxation.

Now one thing to keep in mind with respects to the tax treatment of retirement income, the taxable income ranges vary wildly from one state to another. While we try to present information for a wide range of individuals, the reality is, retirement planning and financial planning as a whole, is very specific to the individual, their family, and their specific situation.

Elean
Ok and do you have any tips for retirees with regards to income taxes in retirement?

Evan
Look into the possibility of a Roth conversion. If you can, it may pay off to convert your tax-deferred retirement accounts to tax-free retirement accounts. Of course, this is something that should be done with a financial advisor and tax professional as there will tax implications when you do a Roth conversion. Contrary to popular belief, Roth conversions don’t always make sense.

If the majority of your retirement assets are held in tax-deferred accounts, meaning you received a tax benefit when you contributed to them but will owe taxes on the distributions, charitable giving may be a good way to promote a cause you’re passionate about while reducing your tax liability. Charitable giving might make even more sense if you expect to have large required minimum distributions in retirement as you can redirect your RMDs directly to a charity of your choice.

Additionally, as with your housing expenses, it may make sense to move to a more tax-friendly jurisdiction.

Elean
Lastly, let’s finish off the podcast on a lighter note and talk about the fun retirement expenses, entertainment and leisure.

Evan
Spending on entertainment is an interesting one. Many retirees have looked forward to and planned for increased travel. So in that regard, it’s not usually underestimated. But spending on family is often underestimated. Especially if you have chosen to move to a different state or even a different country. In that scenario it may not be uncommon to help your children or grandchildren with their travel costs to come see you. So while, you may have planned ahead for your travels, often times, you may also need to consider the travel expenses of those who come visit you. 

Now let’s focus on leisure a bit. I think leisure is sort of an add-on to entertainment and perhaps it’s the leisure aspect of entertainment that might creep up cost wise. For example, your retirement planning might incorporate increased travel or perhaps you even anticipated covering the travel costs of family members to come visit you. Well, traveling coach on Southwest might not be an issue when you’re 45 or 50, but at age 70 or 80, you may want to opt for upgraded seating. If your family comes to visit you, you may not be interested in cooking for 10 or more people for an entire weekend. At age 70 it may be best to hire a catering service or a chef for family events.

Elean
That’s a good point. You may have planned ahead for the large category items like “travel,” but as you age those creature comforts become more valuable or may even become a necessity.

Ok, so we hope that gave you a few things to think about as you start looking towards retirement. This is not a comprehensive list of what expenses to expect when you retire, nor are we trying to give specific advice. This podcast is really about getting you to think about the future and to present things that you may want to look further into as they relate to you or your specific situation. There is no “one size fits all” when it comes to retirement, but at least we can start the conversation.

If you enjoyed the podcast or heard something that peaked your interest, please subscribe on Apple Podcasts, Spotify, or YouTube.

Thank you for listening and we’ll see you here next time.