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Third of Retirement Investors Not Considering Effect of Taxes: Nationwide

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What your clients don’t think about can come back to haunt them. How taxes will affect their retirement income, for example.

In a survey conducted last year by The Harris Poll for the Nationwide Retirement Institute, 35% of Americans who were retired or expected to retire in the next 10 years said their retirement planning had not taken into consideration how taxes would affect their income.

Thirty-two percent of retirees among the respondents, who had $150,000 or more of investable assets, said they wished they had better prepared for paying taxes in retirement.

“With many Americans already reviewing their finances while submitting their taxes, as well as assessing how COVID-19 has impacted their financial goals, it’s an ideal time to also examine their plans for taxes in retirement,” Eric Henderson, president of Nationwide’s annuity business, said in a statement.

“The reality is many older adults are not considering or knowledgeable about taxes in retirement.”

The survey found that 38% of future retirees worried about what taxes would do to their retirement income, yet 35% said they rarely considered the taxes they were paying or would pay in retirement.

Not only that, only 43% said they knew how to leverage taxable, tax-deferred and tax-free accounts.

“The data clearly illustrates that retirees aren’t always strategically preparing for — or even thinking about — taxes in retirement, and as a result, may be paying thousands of dollars more than needed,” Henderson said.

Nationwide noted that building tax flexibility into a retirement income plan allows older adults to use a variety of investment and retirement accounts to potentially avoid higher tax brackets and effectively manage their income.

COVID-19 Focuses Attention 

Nationwide followed up its 2019 study with two online surveys conducted in April and May among some 2,000 U.S. adults each, again by The Harris Poll. Thirty-eight percent of respondents said they would need to retire later than planned, would not be able to retire at all or were forced into retirement due to the pandemic.

In addition, 41% said they were currently reevaluating their retirement plans to assess the financial impact of COVID-19.

When it comes to retirement income, 63% now said it was more important to develop a strategy to address taxes in retirement, and 59% worried more now about what taxes would do to their income in retirement than they did before.

Nationwide pointed out that the Coronavirus Aid, Relief and Economic Security (CARES) Act recently increased the 401(k) withdrawal limit and eliminated the 10% early withdrawal and 20% federal tax withholding on early 401(k) withdrawals for those affected by COVID-19.

Nationwide said it was important for consumers to know their options before dipping into their retirement savings, and indeed the survey found that a quarter of Americans were seeking help by engaging a financial professional for the first time ever as a result of the pandemic.

The survey also showed that financial professionals headed respondents’ list of trusted sources for general financial and money management advice during the pandemic.

The Opportunity

For their part, financial professionals have an opportunity to discuss tax planning in retirement and educate clients on the best strategies to reduce unexpected taxes on combined income sources, Nationwide said.

And retirees expect their financial professional to help, the 2019 survey showed.

Fifty-seven percent of current and future retirees said they preferred using a financial professional to learn about retirement planning, versus reading printed materials or doing independent research online, both preferred by fewer than half of respondents.

The need for tax guidance from financial professionals is significant, according to the survey. Twenty percent of current and future retirees reported that they had not gotten tax planning advice from any sources.

In addition, 42% of future retirees said they would switch financial professionals for someone who could help them plan for their taxes in retirement.

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