You shouldn’t have to pay FICA taxes in retirement, which are 7.65% of your gross income (with another 7.65% from your employer, but you won’t see that cut). That alone could cut your effective tax rate from 25% down to 17%.
Also federal income taxes can be lower if your SS isn’t taxed, which depends on how much income you have they may tax 50-85% of your SS income. Some retirement investments like Roths are post-tax so they aren’t taxed at withdrawal.
Plus some investments could be taxed as dividends or capital gains rather than income.
I’m not an expert, but thats my understanding of how it can work.
I was assuming while working if you make 100k a year you pay 25-30% of gross income in taxes, and save 10% of gross income for retirement, so you’d have 60-65k net income.
When retired with a lower tax rate and no need to save 10%, you’d have 85k net on a 100k gross income.
OK, I see that taxes on SS benefits for incomes below $34,000, are 0%. But we’re talking $100,000 combined income, so normal income taxes are levied on 85% of the benefits. Not much tax savings there.
For pension benefits, if the payments to the pension were post-tax, then the post-tax benefit that comes out is tax free, but you need to apply a formula from the IRS based on life expectancy to determine what percent over what you paid in (the investment gain) is taxed – I’ve no idea how that works out in real life as a % tax on the benefit, but my thumbnail guess is <15% tax total.
For investments, it’s all over the map. Capital gains rate is 3 rates from 0% for <$39,375 income (doesn’t apply here), to a very more likely %15 rate.
OK, so we’ve got 85% of the SS benefit taxed normally at the rate for someone making $100k, the pension taxed at wild-guess 10-15%, the investments at 15% if it’s capital gains, but could be much more. Or it’s tax free muni stuff, not much experience there.
I’m not seeing 15% total tax burden here, more like >%20 because of the SS benefit tax, perhaps more. But the error bars are pretty wide in that guess.
ETA: oops, posted before I saw your post, Wesley Clark but I’ll leave mine up because it has more detail on the different tax rates. Thanks for your response. My reading of the SS stuff is you’re definitely at a tax of 85% of SS total benefits, since it’s stipulated the couple has $100000 income for the year.
Also there was an error in my post: taxes on SS benefits below $25000 (total income, not SS benefits alone) are tax free. Between that and $34000 are “up to” a tax on 50% of benefits. Above that 85% of benefits are taxed as normal income. Or just see the link above. ^^^
My statement was more that most people’s tax rate is lower in retirement, not just the couple making 100k.
If your income is low enough you pay no taxes on your SS income, or you pay for 50% of it, or at most 85%. In pre-retirement you’d pay taxes on 100% of your income.
The FICA tax savings alone will save you almost 8% of your gross income. Add in the tax savings from investments taxed as capital gains or dividends, the tax savings from investments like Roths where you paid the taxes decades ago, and the tax savings from social security being taxed at a lower rate than income and saving 10-15% of your gross income which would’ve gone to taxes before retirement is realistic I believe for many people.
I’ve never caught one of the native Brook Trout. Just Rainbows. Our son is in school in Ithaca, and I’m thinking I’d like to go after Lake Trout there. I’d have to hire a guide/boat, though.
I found out recently that when my parents were first moving to the area from NC in the late fifties Dad was looking at a remote place near Watauga for them to live. Mom put the kibosh on that idea immediately. That was no place to live with a two year old (I didn’t come along for another 6 years.)
Totally not arguing with your assumptions, just trying to get my head around your thinking, and think about this too. I’m 57 and utterly driven by the thought of how the heck I’m going to pull off retirement. Thanks for the post.
Random responses:
The FICA savings is indeed important and a very good point.
SS benefits are not taxed at a lower rate than income, except that not all of the benefit is taxed, which adds up to pretty much the same thing.
This was years ago in college and I don’t know the details of this couple, they just told me their tax rate is much lower in retirement than before despite their gross income being about what it was before retirement (around 100k).
Agreed, SS is taxed as income, but only 0%, 50% or 85% gets taxed as income rather than the full 100% of your SS income.
In theory, I would assume if your income comes entirely from qualified dividends, Roth IRA withdrawals, and SS and your total income is below the 25k cutoff, your total tax rate may be 5-10% max.
However when they say income has to be below 25k, or below 34k, etc to determine if SS is taxed, I’m not sure if they are talking about your income after deductions or before, I assume before.
My assumption is the same, and that that 0% (to whatever 50% of $34000 works out to) rate is for retirees who have only SS + maybe a small incremental income added, i.e. they are very poor retirees.
I spent ten years, single, in a non-pretentious Texas town (75K), on SS of $12k. I think two could have made it on $15k.
Well-managed but low-end safe 1br apartment. All I needed from thrift shops. Nothing I wanted. No car, but walkable and busses ok. Never ate out, cooked frugally from scratch. Fans, learn to keep hands off thermostat if its 62-86
I had savings, but never went there, could always make do on SS. The sense of security is nice, and makes frugality fun. But I’d hate to try it without a net. At that income, Medicaid will pay Medicare premium. There are probably other state aids, I never checked.
For your fishing, you’ll need a car, you’ll have to add that in.
Not quite. I never thought about this before I retired.
It depends on where your savings is. If you have post-tax money, you can live off of it with very few taxes, except capital gains - and often you have paid them already if you have a fund.
The you can control pre-tax withdrawals to keep in a lower bracket. If you are careful, you can do it and pay relatively little tax, and still have plenty to live on.
If you play things right, you can look poor for tax purposes (the tax rate in the lower brackets is pretty small) while living comfortably.
We saw a CPA to figure this out - the best thing to do depends on the situation.
OP:
No one, not a single person other than yourself can answer your question.
Open a spreadsheet, start entering data and sum up the monthly/annual costs.
I don’t understand why you expect others to be able answer this question…can you explain?
I’m an avid fly fisher and do most of my fishing in rivers and streams, not lakes. The South Holston is a blue ribbon tailwater wild brown trout river. For brook trout, your best bet in the area are the streams around the Virginia Creeper trail, there is also a wild rainbow population there (although not native, of course). If you ever need the name of a top notch guide in the area, PM me, but he only does fly gear, not bait or spinner. He does have a guide who does the lakes in the area.
I’m beginning to think about retiring in a few years and I thought a good place to start would be to solicit ideas to shape my thinking from this message board community that I have been a member of for almost 20 years. Anything else I can clear up for you?
It is phrased rudely, but phxjcc has an important point. Lifestyle costs vary so widely that its really really hard to know what anyone else considers normal costs to be. There are a million examples here where one person’s frugality is another person’s splurge. So much is just what you are used to and sorta consider essential to a happy, functional life. Is "out to dinner " a $35 event, a $100 event, a $300 event? All three of those seem like the perfectly normal and obvious expense of going out to dinner for different people, even people in the same income bracket.
The community CAN help you identify some unanticipated costs and savings of retirement living. That’s super valuable. But no one else can even begin to estimate what you consider an adequate lifestyle.
I certainly don’t mean to create the impression that I’m going to simply print out this thread and hand it to my financial advisor. It’s a thread in IMHO in which I’m looking for people’s humble opinions. Nothing more. It’ll be ok.
I downsized everything before I retired and redid all the major repairs on the home like roof and plumbing etc. have been retired for 7 years now and have spent about $1,000 a month more than my income. I make enough to get by fine but I will have to tighten up my budget for the remainder of my life. I earn about $50,000 annual and live in So Cal. My son and his family took over the house and I live in the guest house which I am very happy with.
Bear in mind that even if your social security is taxable, the maximum amount that is taxable is 85%, so 15% is still sheltered, and that the first $100,000 of gross earnings are taxed at a very low rate. Taking the standard deduction as a couple my wife and I can gross $105,950 and still stay in the 12% marginal tax rate, so on our first $105,950 we only pay 8.5% in federal income tax.
We take $27,000 off the top for the standard deduction and the extra aged deductions. After that it jumps to 22%, but doesn’t jump to 24% until more than $195,000 in gross income.
That’s federal taxes, and assuming normal income. Capital gains and qualified dividends are a whole other thing, but having those will more often than not only drive your tax rate lower, what with the maximum tax rate being 20%.
I’d add some states don’t tax Social Security at all. NJ doesn’t, among a relatively few taxpayer friendly aspects of the state, but several others don’t which have lower tax/cost of living to begin with. TN only taxes investment income ( interest, dividends etc).
There’s a number of tax optimizing things to do if retiring before you have to start withdrawing IRA/401k money (which recently got changed to age 72) and especially if retired but can delay Social Security (which is a pretty good deal to do until 70, if you can get by without it till then). If in the interim you have low income you can convert traditional IRA/401k’s to Roth IRA during those years, recognizing the accounts as income as you convert them, but in a 0%/low bracket if getting by draining down already taxed non-IRA savings (which again of course you’d have to have). Then when SS kicks in, up to 85% is federal taxed but in low bracket if that’s all, and if the IRA’s are now Roth those withdrawals aren’t taxable either.
Loads of discussion of this kind of stuff on for example bogleheads.org forum. And that forum also gives a lot of interesting views of what various people think is ‘how much money you need’ (with a tendency to some nutty*, IMO, levels of frugality, though some other sites are more extreme, like Mr Money Mustache blog) but I agree with several other posts that that actually varies too much by person, even in ostensibly similar situations, for it to help much directly in crafting one’s own budget. Past detailed history of one’s own spending plus specific info about what’s going to change is the best guide I think. Looking up on ‘city data’ type sites the general cost of living or median income in a new area compared to own is probably the most useful data that the person doesn’t already know (if they organize it) better than anyone else.
*not meant as a negative comment on people who make a low X and simply have to find a way to live on it. I mean people with decent incomes planning on a savings rate while working and a minimum pot of money to retire early. Some people on those sites seem willing to trade off quitting work early for a harsh life, voluntarily, which I find hard to understand sometimes at the extremes, but of course it’s their life.
One thing you don’t want to overlook is inflation. Determining a spending rate that you can afford now is great. But take a look at your income sources and ask if they will be able to keep up with inflation or not. Retirement hopefully will last decades, but that’s also a timeframe for inflation to make a big impact.