Most of the people I work with have a pretty good idea of where they stand. They know what they can afford and what they can't, and they usually have a feel for whether they're doing okay.
But a plan isn't only about what you know. It's also about what you don't know to ask. That's why working with a professional matters: you may be missing something and have no way of knowing it. Test yourself with the five questions below, then read on for the five things I see people miss most often.
Retirement Readiness Quiz
Five quick questions. Pick an answer, then use the arrow to move on. Nothing is saved or sent anywhere.
1.The beneficiary form on your retirement account, like an IRA or 401(k), names who receives the money when you pass away. If your will says something different, who generally receives the account?
Correct. The beneficiary form generally controls, even when your will says something different. That's why it's worth keeping up to date.
Not quite. The beneficiary form generally controls, even when your will says something different. That's why it's worth keeping up to date. See point 1 below.
2.What happens to money in a traditional IRA or 401(k) if you never need it?
Correct. Required minimum distributions force the money out, and the withdrawals are taxed.
Not quite. Required minimum distributions force the money out, and the withdrawals are taxed. See point 2 below.
3.When you retire, which of these decides how much tax you pay over the years?
Correct. Taxable, pre-tax and Roth accounts are each taxed differently, so the order you use them matters.
Not quite. Taxable, pre-tax and Roth accounts are each taxed differently, so the order you use them matters. See point 3 below.
4.Two retirees earn the same average return over 30 years. One has the bad market years first, the other has them last. Who is more likely to run low on money?
Correct. Selling investments while prices are low early on leaves less to recover when the market rebounds.
Not quite. Selling investments while prices are low early on leaves less to recover when the market rebounds. See point 4 below.
5.Does Medicare generally pay for long-term custodial care, such as help with bathing and dressing?
Correct. Medicare generally won't pay for non-medical long-term care, so you'd need a plan to cover it.
Not quite. Medicare generally won't pay for non-medical long-term care, so you'd need a plan to cover it. See point 5 below.
Your score
Schedule a free callThis is a general quiz, not advice. Your situation is different, and a conversation can fill in the details.
What People Miss When Planning for Retirement
Depending on your score, you may have been surprised, or not at all. That was a short quiz on some of the most common things people miss. In the sections below, you can read about what I see, as a financial advisor, to be the things most often missed when planning for retirement.
1. Out-of-Date Beneficiary Forms
Your beneficiary form on a retirement account or life insurance policy generally decides who receives it, even if your will says something different. That's what makes it so powerful, and so easy to get wrong.
These forms are filled out once, when the account is opened, and then forgotten. A lot changes over 20 years: marriages, divorces, new children, deaths. An ex-spouse who is still listed, a beneficiary who has passed away, or no backup beneficiary at all can send the money somewhere you never intended, and a will can't fix it afterward.
What to do: Pull up every beneficiary form this year, including old 401(k)s from past employers. Check each name, make sure the percentages add up, and make sure you have a backup beneficiary. See What Are the Essential Legal Documents for Estate Planning? and When Living Trusts Fail, They're Unfunded.
2. Taxes on a Large Pre-Tax Account
Money in a traditional IRA or 401(k) hasn't been taxed yet, so it's taxed as it comes out, and required minimum distributions eventually force it out whether you need it or not. If you have a high balance, you could end up paying more tax than you did while you were working, because the required distributions may not be large enough to keep up with the growth in the account.
Higher income can also raise your Medicare premiums. The surcharge, called IRMAA, is based on your tax return from two years earlier, so one big income year can follow you for a while.
What to do: Ask what tax bracket you're likely to be in later in retirement, not just today. The years between retiring and your required distributions are often the best time to move some money to a Roth. See How to Time Roth Conversions and Standing on the Edge.
3. Which Account You Draw From First
It's not only how much you take out, but where it comes from. Taxable, pre-tax and Roth accounts are each taxed differently, so the order you spend them can change your taxes for decades. Pulling only from one account because it's easy can push your income higher than it needs to be.
What to do: Before you retire, map out which account you'll use each year instead of taking from whichever is easiest. See Retirement Asset Withdrawal Strategies.
4. A Market Drop Right After You Retire
Two retirees can earn the same average return over 30 years and end up in very different places. The difference is the order. A down market in the first few years of retirement does the most damage, because you're selling while prices are low and there's less left to recover when the market comes back. It's one of the least intuitive risks in retirement.
- Bad years last
- Bad years first
What to do: Ask how your plan holds up if the first few years are bad, and decide where your next few years of spending will come from. See What Happens If the Market Crashes Right After You Retire? and How Much Can You Withdraw in Retirement?
5. Long-Term Care Isn't Covered by Medicare
Medicare generally won't pay for non-medical long-term or custodial care, such as help with bathing, dressing or eating. It's a common surprise, and the costs can be large.
What to do: Decide ahead of time how you'd pay for it, whether that's savings, insurance or a plan with your family. The earlier you decide, the more options you have. See Understanding the Medical Costs That Medicare Doesn't Cover.
Why a Second Set of Eyes Helps
None of these is hard to understand on its own. The trouble is that they affect each other. Your tax planning changes your Medicare premiums, where you draw from changes how long your money lasts, and a market drop at the wrong time changes everything else. A good plan looks at them together.
If you have a good handle on your situation but you're still not sure, a conversation can confirm that you're on track or catch the one thing you didn't know was there.
The Bottom Line
Knowing your numbers is the first step, and most of the people I meet are already there. The next step is making sure there's nothing hiding behind them.
Thanks for reading.
This article is general education and not personalized tax, legal or investment advice. Rules change, and your situation is different. Please talk with a qualified professional before making changes.
Frequently Asked Questions
I already know my numbers. Do I still need a plan?
Knowing your numbers is a great start. A plan tests them against the things that are easy to miss, like taxes, health care costs and the order of market returns, so you aren't relying on a snapshot.
What is the most commonly missed item?
Beneficiary forms and taxes. Many people plan around what they've saved and not around who receives it or what they'll keep after taxes.
How often should I review my retirement plan?
At least once a year, and any time something big changes, like retirement, a move, a health event or a change in your family.
Sources
Scott Hamilton, CFP®
Fee-only fiduciary financial planner with offices in Austin and Houston, Texas, helping people plan for retirement.
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