In my last column, I described a number of mistakes I saw retirees make. But these were specific to 2020.

I received a number of e-mails from readers lamenting other mistakes they see frequently. These can largely be placed in three categories. I share them here with examples I have encountered recently.

Ignoring Taxes
While reviewing a new client’s tax return, I noticed a small IRA distribution. The client and his wife were in their mid-60s. They had retired and were living off a buyout from his former employer in 2018. He needed some money in 2019 for a cruise. Instead of using buyout money, he took from his IRA.

With his bills covered by withdrawals from the buyout cash and Social Security, he didn’t think the taxes would be high. He knew wages could affect his Social Security, but he wasn’t working.

Unfortunately, being new to retiree taxes, he didn’t know about the notorious Social Security tax “torpedo”—when additional income changes the taxation of the benefit.

The tax rate on that cruise distribution turned out to be roughly 40%.

Managing taxes in retirement is a completely different challenge than managing them while you’re accumulating funds. Too many people think that since they are retired, their tax situation is simple. But then they are shocked when they find out how complex the tax code actually is, even at lower levels of income. The Social Security tax torpedo is just one example. Two additional wrinkles clients can easily miss are taxes triggered by Medicare and capital gains.

How much one pays for Medicare Part B is also a function of income. The income related monthly adjustment amount (IRMAA) increases Part B premiums as income reaches certain thresholds. The higher premiums start two years after the income threshold is reached. I see many retirees paying higher premiums because their income was barely over one of these thresholds. In most cases, they could have opted to do something just a little different and avoid the extra Part B cost—they could have, for example, taken a little less from their retirement accounts or sold a smaller number of shares for a gain.

One thing people can take advantage of is the zero percent rate on long-term capital gains for lower income households. That’s a great opportunity that is often overlooked. People miss nuances, not realizing, for instance, the effect of adding more taxable income to a return that has tax-free gains on it.

Capital gains are stacked on top of other income. When those gains are roughly filling up the 12% and lower tax brackets, they are not taxed. When the gains exceed the threshold, however, they’re taxed at 15%. It’s easy for a retired client to pull money from a retirement account thinking it will get taxed at 12%, but then income from a distribution pushes the gains into the 15% bucket. The 15% additional tax imposed on the now-taxable gains makes the marginal rate on the distribution 27%, not 12%.

Obsession Over Taxes
Last year, I spoke with a 66-year-old man who didn’t ignore taxes but instead obsessed about them. He had a sizable nest egg divided into various types of accounts. His No. 1 goal was to keep as much money as possible away from the government and keep it in the hands of his family. He was married with one child. The son was a successful surgeon making a seven-figure income who shared his dad’s hatred of the taxman. The son had no family of his own and intended to keep it that way.

The father thought putting the assets in his taxable accounts in a variable annuity was a great way to reduce his taxes. He had done this before and owned several contracts because of it. He was going to receive proceeds from the sale of some land and called me to see if any annuity we could put him into was better than the ones he already had.

It was a classic case of the tax tail wagging the investment dog. He was very proud of the fact that he was keeping his tax bills low by stuffing money into the annuities. He was keeping Uncle Sam at bay. But he was dramatically failing at his goal of letting his family keep more of what they had.

Because while he was lowering his current taxes, he was also increasing his future taxes. His required minimum distributions would be higher when they started, and by tapping the annuities he would trigger ordinary income. When he or his wife passes away, the survivor will be filing as a single taxpayer using compressed brackets. And when the son inherits, he will pay tax at the high rates applicable to such a high income.

The father might have been better off using the proceeds for his expenses and making strategic withdrawals or conversions of the IRA retirement accounts to Roth accounts. Yes, he would pay some taxes now, but at rates much lower than what his family is probably facing in the future.

The choice he made to place deferral above all else will likely cost his family far more money than what he saves choosing among competing annuity contracts.

The Assumption Of Good Health
Many retirees make the mistake of assuming they will be healthy into their old age. Some stay healthy for a long time, but most eventually face some issue that causes problems for them or their families.

Many people assume physical ailments like arthritic joints will be handled by surgery and that there’s no need to think about long-term care. “I’ll be able to get around enough,” is a common sentiment. If you are active, it is difficult to see yourself struggling to get to an upstairs bedroom. But the idea of moving into a “retirement community” may make you cringe.

The fact is, even the most fit people will slow down—first a little, then a lot. Retirees are wise to think through what they would want in different scenarios, besides thinking just about how they will pay for it. It is not a fun conversation, but it beats ignoring the possibility and creating a pinch.

The riskiest assumption is that one will remain mentally sharp. I’ve lost count of the number of times someone said to me, “If I start losing it, then I’ll turn things over to (fill in name here).” That may be a fine plan, but without the proper documents in place, it may not be possible.

When people are suffering from cognitive decline, they do not have a good grasp of how their acuity has changed. My father passed away in 2018 after suffering dementia. He did not understand that the wild things he said were wild, or even that he’d said them.

But Dad had his affairs in order long before the signs of decline were evident—so decisions could be made for him. I’ve seen a lot of families who were not so well prepared. A particular aggravation involves seniors, usually men, who “run the money” for the household but do not adequately prepare their spouse to handle the assets.

It is common for a couple to divide labor, and that works well until it doesn’t. Every year I speak with several wives whose husbands are not as sharp mentally as they used to be. It is tough to witness people in decline, but when they’re in charge of the money and you don’t know what’s going on or feel as if you can control things, it can be downright terrifying. These ladies are scared.

A good planner can help alleviate, if not eliminate, fears about finances and what needs to be done. Sadly, too many retired men need to keep handling money because it gives them a sense of relevance. They can’t imagine enlisting the help of a professional. But consider what my dad did. You’re more likely to properly prepare when you realize it’s better that your wife has her finances in order when you’re not there to handle things.

Financial planning is so powerful because it anticipates these types of mistakes. I assure you, Mom didn’t care about the category ranking of the mutual funds in dad’s IRA anywhere near as much as she cared that his documents were well constructed and valid. Planning starts with bigger-picture strategic issues and then finds the tactics needed to support the strategy. Doing things in the opposite order can lead to costly mistakes. 

Dan Moisand, CFP, practices in Melbourne, Fla. You can reach him at [email protected]