11 Signs Your Retirement Will Cost More Than You Thought

You Didn’t Take Taxes Into Consideration

You might not realize how big of a bite taxes will take out of your retirement income. For example, you’ll have to pay income taxes on withdrawals from a 401k or IRA. So if you need $50,000 a year to cover expenses, you’ll have to withdraw even more to cover the tax bill. If you don’t take taxes into consideration, you could go through your savings quicker than you expected.

• What to Do

A 401k is a tax-deferred account because contributions are made from your paycheck before taxes. The money grows tax-free, but you have to pay taxes on withdrawals at your regular income-tax rate. A Roth IRA is a tax-free account because you can withdraw money tax-free in retirement.

“You can reduce the tax bite on your retirement income by saving in a combination of taxable, tax-deferred and tax-free accounts,” said Mark Wilson, president of MILE Wealth Management in Irvine, Calif. For example, a taxable account would be an account with a brokerage company where you invest in stocks, bonds or mutual funds.

Contribute after-tax dollars to this sort of account. But, when you cash out your investments, you’ll pay the capital gains tax rate, which is typically lower than the regular income tax rate. If you have a traditional IRA, consider converting it to Roth IRA in early retirement for a source of tax-free income, Wilson said.