A new Nationwide Retirement Institute survey finds nearly two in five retirees (37 percent) admit they did not consider how taxes would affect their retirement income when planning for retirement. As a result, they may have lost the opportunity to save an additional six years' worth of income in retirement.

The survey highlights a lack of understanding about taxes in retirement. In fact, 60 percent of future retirees, 70 percent of recent retirees and 75 percent of those retired for over 10 years admit they are somewhat knowledgeable or not at all knowledgeable about tax planning. Over half of future retirees (52 percent) wish they better understood how their income in retirement will be taxed, a feeling also shared by nearly half (47 percent) of recent retirees.

In addition, just over half of future retirees (51 percent) report being somewhat or not at all knowledgeable on how tax brackets work. Also, 40 percent of future retirees did not know that, depending on one's tax bracket, they may pay two to three times more in taxes than those in a lower tax bracket.

"Today, the majority of older consumers are focusing on saving for retirement, which is a critical component of your retirement plan, but not the only factor," said Eric Henderson, president of Nationwide's life insurance business. "It is also important to determine how to spend your retirement income. Building tax flexibility into a retirement income plan is crucial. Doing so allows you to use different types of investments and retirement accounts (taxable, tax-deferred, and tax free) to potentially avoid higher tax brackets."

The failure to plan for taxes may be having an adverse impact on the annual tax returns of current and future retirees. In fact, findings from an online study of 1,031 U.S. adults age 50 or older conducted by The Harris Poll on Nationwide's behalf show that a quarter of older US Consumers (27 percent) say they owe tax money each year and those retired for more than 10 years are least likely to receive a tax refund each year (29 percent).

As a result, many retirees express regrets. Nearly half (46 percent) of recent retirees say they wish they would have better prepared for paying taxes in retirement and nearly one in four (24 percent) say they have paid several thousands of dollars more in taxes than they expected to in retirement.

Sources of retirement income

Whereas Social Security is the primary source of income for many of those retired for more than 10 years (49 percent) and recent retirees (43 percent), it is often overlooked as one of the primary sources of income for future retirees. A quarter of those nearing retirement say their 401(k) will be their primary source of retirement income, followed by their pension (22 percent) and Social Security (20 percent).

While those in retirement depend mostly on Social Security and pensions, future retirees expect to use a variety of sources for retirement income, including: Social Security (91 percent), savings accounts (70 percent), 401(k) (68 percent), stocks (57 percent), IRA (56 percent), pension (51 percent), mutual funds (48 percent), Roth IRA (38 percent), employment (35 percent) and annuities (30 percent).

"When planning for taxes in retirement, the goal is to reduce the unintended impact of taxes on combined income sources like Social Security, Medicare or capital gains," Henderson said. "Smart strategies for sequencing withdrawals can extend a client's income in retirement up to an additional six years.^"

Older Consumers want to learn more and crave guidance

While many older consumers are not knowledgeable about taxes in retirement, the overwhelming majority of those nearing retirement (82 percent) want to learn about taxes. A desire shared by 64 percent of recent retirees and 62 percent of those retired over 10 years.

Most older consumers also expect financial advisors to help. In fact, among those who use a financial advisor, 85 percent of future retirees, 82 percent of recent retirees and 68 percent of those retired over 10 years say they expect their financial advisor to help them plan for taxes in retirement. And nearly two in five future retirees (38 percent) say they would switch advisors for someone who could help them plan for taxes in retirement.

Future retirees are eager to act when it comes to planning for retirement income. Nearly four in five future retirees (78 percent) say they have completed a retirement income plan. Of those, 39 percent did it on their own and 39 percent did it with an advisor. Of the few future retirees, who do not have a plan but have a financial advisor, most say they do not have a plan because they never knew the difference between a retirement savings plan and a retirement income plan.

"It is important to develop a plan for how taxes will impact retirement income based on a person's situation and goals," Henderson said. "Financial advisors can help people plan for and live in retirement by providing a fact-based estimate of taxes in retirement and a unique plan to address those costs."