Given this year’s tax deadline is extended to July 15, it could be a good time for consumers to reevaluate their retirement plans, assess how COVID-19 has impacted their financial goals, and develop a strategy to optimize taxes in retirement.

According to 2019, Tax-Efficient Retirement Income survey conducted online by The Harris Poll on behalf of The Nationwide Retirement Institute among U.S. adults age 50+ who are currently retired or planning to retire in the next 10 years, a third of current retirees (35%) did not consider how taxes would affect their retirement income when planning for retirement. As a result, many express regrets, with a third of retirees (32%) reporting they wish they had better prepared for paying taxes in retirement, according to a Nationwide Retirement Institute news release.

“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,” said Eric Henderson, president of Nationwide’s Annuity business in the news release. “The reality is many older adults are not considering or knowledgeable about taxes in retirement.”

Survey Says

The survey found two in five future retirees (38%) are terrified of what taxes will do to their retirement income, yet 35% rarely consider the taxes they are paying or will pay in retirement. Further, less than half of current retirees (43%) say they know how to leverage taxable, tax-deferred, and tax-free accounts.

“While being in retirement can reduce or eliminate several expenses in older adults’ budgets, their tax bill may not be one of them,” Henderson said in the news release. “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.”

Building tax flexibility into a retirement income plan is crucial. Doing so allows older adults to use a variety of investment and retirement accounts (taxable, tax-deferred, and tax-free) to potentially avoid higher tax brackets and effectively manage their income.

Older adults were concerned about retirement security before COVID-19

The 2019 survey reveals that older adults (50+) had concerns about various uncontrollable and controllable aspects of retirement that could threaten their financial security even before COVID-19 impacted financial plans. Top concerns in retirement among current and future retirees are health care costs (61% very/somewhat concerned), the impact of market volatility on retirement income (57%), planning for and potentially needing long-term care (56%), the impact of inflation on retirement income (55%), and not having enough money to cover unplanned medical expenses (48%).

“While we are all adjusting to our new environment, it’s difficult to gauge what could happen in the future, such as where the stock market is headed or what the impact of inflation will be in 10 years,” Henderson also said in the release. “Therefore, consumers should focus on what they can control: building a strong financial plan that accounts for the unexpected, as well as optimizes tax strategies. By taking the right steps to plan for taxes in retirement, retirees can help offset potentially negative impacts on their retirement income.”

Due to COVID-19, many Americans are likely to withdraw money from their retirement plan early

Roughly two in five Americans (38%) say the COVID-19 pandemic has impacted their retirement plans by having to retire later than planned, now not being able to retire at all or being forced into retirement. Plus, 41% are currently reevaluating their retirement plans to assess the financial impact of COVID-19. These are among the findings revealed by a new COVID-19 Tax Survey conducted online in May 2020 by The Harris Poll on behalf of The Nationwide Retirement Institute among U.S. adults 18+.

When it comes to retirement income, 63% say it is more important now to develop a strategy to address taxes in retirement, and 59% worry more now about what taxes will do to their income in retirement than they did before.

The 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 impacted by the crisis. Given the changes, two in five Americans with a 401(k) (39%) – including more than half of millennials (53%) – now say they are likely to withdraw money from their retirement plan early because of the pandemic.

Americans look to financial professionals for guidance as a result of the pandemic

Consumers need to know their options before dipping into their retirement savings, and data shows many Americans are now seeking help. The Nationwide Retirement Institute’s COVID-19 Financial Survey, conducted online in April 2020 by The Harris Poll among U.S. adults 18+, finds that roughly one quarter (24%) of Americans are seeking help by engaging a financial professional for the first time as a result of the pandemic.

Heightened uncertainty and complexity are driving a need for greater financial protection. Roughly half of Americans agree that the COVID-19 pandemic has made them recognize the need for annuities to protect their investments against market risk (47%) and to protect their retirement income (48%). More than half of all U.S. adults (57%) and investors (60%) also say the pandemic has made them recognize the need for life insurance, according to the release.

The survey also shows that financial professionals (37%) top the list of trusted sources for general financial and money management advice during the pandemic.

Financial professionals should work with clients to optimize taxes in retirement

There is an opportunity for financial professionals to discuss tax planning in retirement and educate clients on the best strategies to reduce unexpected taxes on combined income sources – and retirees expect their financial professional to help. According to the 2019 Tax-Efficient Retirement Income survey, current and future retirees prefer using a financial professional to learn about retirement planning (57%) versus reading printed materials (46%) or doing independent research online (45%).

The need for this guidance from financial professionals is significant. Twenty percent of current and future retirees do not get tax planning advice from any sources, underscoring an important opportunity for financial professionals to work with clients.  Further, 42% of future retirees would switch financial professionals for someone who could help them plan for their taxes in retirement. A financial professional can ask smart questions, help consumers effectively and holistically prepare for the future, and determine how to correctly use income sources to maximize retirement income and minimize taxes, according to the news release.

To learn more about Nationwide Retirement Institute’s Tax-Efficient Retirement Income survey, visit here.

Methodologies

The Tax-Efficient Retirement Income survey was conducted online by The Harris Poll on behalf of The Nationwide Retirement Institute between April 18 and May 7, 2019, among 1,301 U.S. adults age 50 or older who currently collect or plan to collect Social Security benefits, have at least $150K in investable assets, and are either currently retired or plan to retire within the next 10 years. Throughout the report, consumers who anticipate retiring within the next 10 years are referred to as “future retirees” to be more concise.

The COVID-19 Tax survey was conducted online within the United States between May 15-19, 2020 among 2,026 adults (aged 18 and over) by The Harris Poll on behalf of The Nationwide Retirement Institute via its Harris On Demand omnibus product.

The COVID-19 Financial survey was conducted online within the United States between April 8-10, 2020 among 2,042 adults (aged 18 and over) by The Harris Poll on behalf of The Nationwide Retirement Institute via its Harris On Demand omnibus product.

Respondents for these surveys were selected from among those who have agreed to participate in our surveys. Because the sample is based on those who agreed to participate in the online panel, no estimates of theoretical sampling error can be calculated. Data are weighted where necessary by age by gender, race/ethnicity, region, education, income, marital status, and propensity to be online to bring them in line with their actual proportions in the population.

Note: This information is general and is not intended to be tax, legal, accounting, or other professional advice. The information provided is based on current laws, which are subject to change at any time, and has not been endorsed by any government agency.

Nationwide and Harris Poll are separate and non-affiliated companies.

Nationwide Investment Services Corp. (NISC), member FINRA, Columbus, OH. Nationwide Retirement Institute is a division of NISC.

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Source: Nationwide