In Retirement Planning, Don't Forget to Do the Emotional Math, Too

Before you go, we thought you'd like these...
Before you go close icon
retirement planningTalk to a typical financial advisor, and you'd think that retirement planning was an exact science. Sophisticated financial calculators will spit out numbers down to the penny, offering you the appearance of being able to calculate almost to the day when you'll be ready to quit working for good.

Reality, however, isn't nearly as exact. Calculators are only as good as the assumptions that they make, and they never incorporate every aspect of what actually happens over a lifetime of saving and investing. Then there are the subjective emotional factors that are vital to one's happiness in retirement. There's no calculator that can handle inputs like that.

In order to prepare for retirement, you have to meld the financial factors with less concrete subjective factors to come up with the perfect mix -- yet also remain flexible to handle potential bumps in the road.

Have You Really Thought About This?

Recently, Kenn and Patricia Tacchino took on the daunting task of painting a broader picture for would-be retirees. (He's a professor of taxation and financial planning at Widener University, and she's a social worker.) The result was a research paper (to be published in Benefits Quarterly) that includes a checklist of more than two dozen factors to take into account when making the big decision.

Sponsored Links
As you'd expect, the paper includes plenty of basic financial analysis, including weighing expected income and expenses, life expectancy, and the returns potential of your investment portfolio. But the checklist also includes a deeper look into financial matters, considering things like the cost of health insurance and the various ways to claim Social Security or retirement-plan benefits. Moreover, if options like easing into retirement by working part-time or taking an early-retirement package are available, they can affect the analysis considerably.

Moreover, the paper notes that a complete analysis goes well beyond strictly financial measures.

What's Missing from Most Planning Models

The Tacchinos note that it's important to evaluate your health, not just your medical coverage. A recent Fidelity survey showed that average 65-year-olds would need about $240,000 to cover medical expenses throughout retirement. Obviously, those who already have potentially expensive medical conditions could end up spending a lot more than that, which means this factor must be considered in any retirement plan. Similarly, certain occupations give workers more opportunities to work past normal retirement age than others.

Another issue the paper points out that many people fail to consider is whether they'll actually want to be retired. After a full career, many people find that quitting work leaves them without a clear direction of what they really want to do.

Giving up a typical job situation that includes strong relationships with co-workers and fulfilling work to do can require a huge adjustment, and it's one that many people aren't equipped to handle abruptly.

How to Prepare for Life's Curveballs

Building on the takeaways from the paper, the key to planning a secure retirement is understanding that it's impossible to be certain about how everything will work out. Yet you shouldn't take that uncertainty as an excuse not to plan at all. Rather, the best way to handle the inherent uncertainty of retirement is to build flexibility into your plan. Specifically:

• Plan for spending fluctuations. It's important to be able to deal with spending less money than you might prefer. It's all about controlling expenses. If you have expenses you're willing to give up, then it lets you handle contingencies like having to retire earlier than you thought, an unexpected market decline, or needing to support a loved one financially.

• Be flexible with your final retirement date. If your plan only deals with how things will happen if you retire at age 65, then you'll be less able to deal with the possibility that you won't have as much money as you'd hoped by then. Other unexpected events like disability or an early layoff can wreak havoc on a rigid plan. But if you have a broad idea of what retiring at 60 might look like compared to retiring at 65 or at 70, then you'll be in a better position to choose the right option once you get a little closer to the actual dates involved.

• Remember the other people involved with your retirement decision. A spouse and other family members have an obvious interest, but the impact of retiring ripples throughout your social circles. Having others buy in to your retirement concept can be a massive benefit.

Retire Your Way

Deciding when to retire is unquestionably complicated. But by thinking about the right things, you can put together a big-picture look at your golden years that will be a lot more realistic and useful than simply plugging numbers into a computer and having it spit out an amount to save every month.

Motley Fool contributor Dan Caplinger has fun mulling over retirement prospects. You can follow him on Twitter @DanCaplinger.


12 PHOTOS
10 Most Tax-Friendly States for Retirees
See Gallery
In Retirement Planning, Don't Forget to Do the Emotional Math, Too

State Income Tax: Flat rate of 3.07%

State Sales Tax: 6%

Estate Tax/Inheritance Tax: No/Yes

Pennsylvania is one of only two states (Mississippi is the other) that exempts all retirement income -- including public and private pensions, IRAs and 401(k) distributions -- from its state income tax. Non-retirement income is taxed at a low, flat rate of 3.07%. Food, clothing and medicine are exempt from state sales taxes. But property taxes can be high in the Keystone State, especially near larger cities. One caveat for the wealthy: Your heirs won't get off so easily. Pennsylvania is one of a handful of states to have an inheritance tax, paid by the heirs.


Photo: Nicholas A. Tonelli, Wikipedia

State Income Tax: 2.2% to 6.75%

State Sales Tax: None

Estate Tax/Inheritance Tax: Yes/No

The First State is number one with many retirees, thanks to low real estate taxes, modest income taxes and no sales taxes. In fact, its highway billboards welcome visitors to the "home of tax-free shopping." Social Security benefits are exempt from income taxes, and residents 60 and older can exclude $12,500 per person of qualified pension benefits and investment income, including dividends, interest and capital gains, from income taxes. Income tax rates on remaining income range from 2.2% to 6.75%, with the top rate kicking in for both individuals and married couples when income reaches $60,000. Residents 65 and older who do not itemize their deductions are eligible for an additional standard deduction of $2,500. Real estate taxes vary by county but are generally low, and homeowners 65 and older qualify for a credit against school taxes of up to $500.

State Income Tax: 2% to 6%

State Sales Tax: 4%

Estate Tax/Inheritance Tax: No/No

For retirees, every day is like Mardi Gras in Louisiana. Social Security and military, civil service, and state and local government pensions are exempt from state income taxes, plus up to $6,000 per person of pension and annuity income. Personal income tax rates max out at 6% on taxable income over $50,000. Property taxes are among the lowest in the nation, according to the Tax Foundation. Assessments are based on 10% of the fair market value. Homeowners receive a homestead exemption of $7,500 of their home's assessed value, and homeowners 65 and older may qualify for a freeze on the value of their home. But sales taxes can be steep. The statewide sales tax is 4%, and local parishes and jurisdictions within those parishes can add their own sales taxes. Louisiana's average combined sales tax rate of 8.86% ranks third-highest in the nation, according to the Tax Foundation. But food and drugs are exempt from sales taxes throughout the state.

State Income Tax: 3% to 7%

State Sales Tax: 6%

Estate Tax/Inheritance Tax: No/No

South Carolina extends its Southern hospitality to retirees. The Palmetto State exempts Social Security benefits from state income taxes, and it allows residents who are 65 and older to deduct up to $15,000 per person ($30,000 per couple) of retirement income, regardless of the source. Younger retirees can deduct up to $3,000 of retirement income, including public and private pensions and IRA distributions, from their taxable income. Property taxes are very low. Taxes are based on 4% of the market value of a home, and homeowners 65 and older qualify for a $50,000 homestead exemption. Senior homeowners are also exempt from school taxes on their properties. But sales taxes can be high. The statewide rate is 6%, plus localities can levy an additional tax of up to 3%. Prescription drugs are exempt, but food is not.

State Income Tax: 2% to 5%

State Sales Tax: 4%

Estate Tax/Inheritance Tax: No/No

Alabama is a tax haven for retirees. Social Security benefits, as well as military, public and private pensions, are excluded from state income taxes (but IRAs and distributions from 401(k)s and similar defined-contribution retirement plans are not exempt). Remaining income is taxed as high as 5%, the maximum rate that kicks in when taxable income tops $3,000. Alabama also has some of the lowest property taxes in the U.S. Homeowners 65 and older are exempt from state property taxes, but some cities assess their own property taxes. The only downside is sales taxes. The statewide rate is just 4%, but cities and counties in the Yellowhammer State can impose their own levies. Together, the combined sales tax can add up to a whopping 10% -- among the highest in the nation. Food is taxed, but prescription drugs are not.

State Income Tax: 1% to 6%

State Sales Tax: 4%

Estate Tax/Inheritance Tax: No/No

Georgia is doing its part to attract retirees to the Peach State with a sizable exemption for income taxes on retirement income. Taxpayers ages 62 to 64 can exclude up to $35,000 per person from state income taxes for a total of $70,000 per couple. Georgia residents who are 65 and older can exclude up to $65,000 of retirement income (or $130,000 per couple) from state income taxes in 2012. Retirement income is broadly defined as interest, dividends, capital gains, net income from rental property, pensions, annuities and up to $4,000 of earned income. Non-retirement income is taxed at a rate as high as 6%. The statewide sales tax is 4%, but local jurisdictions can add up to 4% of their own taxes. Food and prescription drugs are exempt. Property-tax rates are close to the national average, but higher than in many neighboring southern states.

State Income Tax: 3% to 5%

State Sales Tax: 7%

Estate Tax/Inheritance Tax: No/No

Mississippi turns on its Southern charm for retirees. It not only exempts Social Security benefits from state income taxes, but it is one of only two states that excludes all qualified retirement income -- including pensions, annuities, IRAs and 401(k) distributions -- from state income taxes. Non-retirement income is taxed at a maximum 5%. Property taxes in the low-cost Magnolia State are below the national average, according to the annual 50-state property-tax comparison study conducted by the Minnesota Taxpayers Association. Single-family homes are taxed at just 10% of assessed value, and statewide, property taxes average about $1,070 per $100,000 of a home's market value, according to Kiplinger's calculations. In addition, for residents 65 and older, the first $75,000 of property value is exempt from taxes.


Photo by Natalie Maynor, Flickr.com

State Income Tax: None

State Sales Tax: 4%

Estate Tax/Inheritance Tax: No/No

Thanks to the abundant revenues Wyoming collects from oil and mineral companies, residents of the Equality State don't have to fork over much of their income to taxes. There is no state income tax, so you'll pay nothing on your Social Security benefits, pension or IRA distributions. The state sales tax is 4%, and counties can add up to 2% in additional levies. Still, Wyoming has one of the lowest combined sales tax rates in the U.S., and prescription drugs and groceries are exempt. For most residential property, only 9.5% of market value is subject to tax. With a top property-tax rate of 80 cents per $100 in most cities and towns in Wyoming, annual property tax is just $760 per $100,000 of a home's market value.

State Income Tax: None

State Sales Tax: 6.85%

Estate Tax/Inheritance Tax: No/No

Nevada is a good bet for retirees because it shifts much of its tax burden to out-of-state tourists and gamblers. The Silver State has no income tax, so your Social Security benefits, pension, IRA distributions and even income from a part-time job won't be taxed. Property taxes, which are assessed on 35% of a home's appraised value, are reasonable and typically run about $1,050 per year for a $100,000 house. But sales taxes, which can top 8% in some areas, are higher than average. Overall, Nevada has the second-lowest combined state and local tax burden in the nation, according to the Tax Foundation.

State Income Tax: None

State Sales Tax: None

Estate Tax/Inheritance Tax: No/No

Alaska is a true tax haven for retirees -- if you don't mind the cold weather and you enjoy rugged outdoor beauty. In addition to enjoying no state income tax, Alaska residents benefit from the cold, hard cash of an annual dividend ($1,174 for 2011) from the state's oil reserves that is distributed to every permanent resident who has lived there for at least one year. There is no statewide sales tax. But some localities impose a sales tax, at an average of less than 2%. Alaska real estate taxes and home prices can be high, but homeowners 65 and older are exempt from municipal taxes on the first $150,000 of the assessed value of their home. "Alaskans are consistently the least taxed residents in the nation," according to the Tax Foundation.

of
SEE ALL
BACK TO SLIDE
SHOW CAPTION +
HIDE CAPTION
Read Full Story

From Our Partners