So… my husband is one of those rare people who will end up with a pension when he retires. Like 25K. I have two rentals. Barring any changes we’ll probably be near 44K a year even taking nothing from our 401K. You’re saying our SS payments if we take them will all just be going to taxes? That’s sad. No point even thinking of taking it early…
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You’re saying our SS payments if we take them will all just be going to taxes?
I don’t think you read that right. When you cross a certain income threshold, then 85% of your SS becomes taxable income. That’s not the same thing as saying that 85% of your SS is paid to taxes. These are very different statements with very different results.
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You’re saying our SS payments if we take them will all just be going to taxes? That’s sad.
No, that’s not what was said, nor is it what will happen. Under current law, at most, 85% of SS will be taxable. And then you have to apply the appropriate tax rate. So, if you put your taxable SS at the top of your ordinary income stack, and it’s all taxed in the 28% bracket*, then 23.8% of your SS payment will go to taxes. That’s much less that ‘all’. Of course, it’s also ignoring the fact that DH’s pension and your rental income (at the bottom of the ordinary income stack) were taxed 0%, 15% and 25%, so your average ordinary income tax rate will probably be more in the 15% - 20% range, so that’s probably a more appropriate rate to apply. If we presume that 85% of your SS income is taxed at an average of 18%, that means that your SS income is taxed at 15.3%
*Presuming that you will be taking SS after 2026, when, under current law, the brackets will revert to the pre-TCJA brackets.
No point even thinking of taking it early…
If the taxability of SS is what tips your decision on when to take it, you probably should take it early. That’s because by taking SS early, the annual income will be lower, and lower income generally results in paying less in taxes.
AJ
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“You need 85% of your current income in retirement.”
Does anyone know how this “rule” came about?
Prior to retirement only 52% of my gross salary ever made it into my bank account. It struck me as absurd to suddenly need to replace 85% of my gross salary after I retired.
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MCCrockett:
{{{“You need 85% of your current income in retirement.”}}}
“Does anyone know how this “rule” came about?”
I always heard 80% not 85%. And I think that it was a quick, back of the envelope, WAG that said no more FICA - 7.65%, no need to save 10% of income for retirement (aggregate 17.65%), and you will no longer need work wardrobe and related expenses (commuting, parking?, lunch out?) - let’s call it 20% total and say you need 80%.
“Prior to retirement only 52% of my gross salary ever made it into my bank account. It struck me as absurd to suddenly need to replace 85% of my gross salary after I retired.”
How much of the 48% was for expenses that would continue post retirement, but would no longer be payroll deductions?
Regards, JAFO
Prior to retirement only 52% of my gross salary ever made it into my bank account. It struck me as absurd to suddenly need to replace 85% of my gross salary after I retired.
Exactly.
IP
“Your results (needs) may vary”
I’m going to interject and cross post on this:
But first thanks to all of you for your thoughtful replies.
#1- my FP is my tax accountant (CPA). He gets nothing from his advice but $400 and the opportunity to do my (super simple) tax return for another couple hundred bucks.
#2- I don’t own any stocks or funds that that are not in either a 401k or Roth.
#3- The FP (tax accountant) was consulted specifically because I don’t know what is taxable and what isn’t in the normal course of a normal retiree’s life. The investments, the drawdown (if any), etc…that information has to come from elsewhere.
#4- re the 521, I mentioned it to him. He agreed. Perhaps he knows that it’s 12 months (or it isn’t only within 12 months) or/and it will not change his calculus. I will investigate further. Thatnks very much for the heads-up on that!!
#5- his over-riding theme: “I’ve seen too many worrying about their money until they suddenly drop dead, and then they stop worrying about it.” Like I said, he’s not young (pushing 70). He’s seen enough like us to know that we have enough…and he knows how we live.
So the relevance to this thread is that we have the same experience as MCCrockett. There was a big warning on YahooFinance basically saying, “sure, go ahead and retire, but you better be ok with only $X dollars per year.” I looked at that and said “gee, we’ve never spent that many dollars in a year.”
There is just tons of information out there, and frankly I like the MF calculators as a good place to start. Everyone offering advice make all sorts of assumptions but a lot of it comes down to how we have organized our lives and the habits we practice. As previously noted, in my family, even though we have been one income since 2007 and that income is about $55k/year in the Northeast US, an expensive part of the country, we can still save…a lot. And none of it is in taxable accounts.
I recognize many of you from other boards, so you may have read me say this before: living tax advantaged means that your kids get scholarships (no left-over money at the end of the month to repay college extortion), but you have to be willing to drive older cars, live in more modest houses and generally just don’t buy stuff. New, added bonus- In retirement, our Obamacare plan will cost us $11/month (exactly the same plan as I had with my employer at $20k per year). And to be clear, I did not mis-type that…$130 bucks a year. We’re poor, ya know?
Lest you think we live some meager existence, we own a nice (not big) house, we put solar on the roof, it’s on a beautiful bit of land in a nice small city in a tourist area with tons of cultural amenities, but where most things are still owned by locals (stores and restaurants, etc). We have a choice of fine (locally owned) markets where we buy local and organic foods, not much meat, and live what can only be characterized as a “privileged life.” And we do have 6 months of expenses in our checking account and only use a credit card for our own convenience, etc. I’m sure you all are down with that. Lastly, up until the pandemic put the ki-bosh on it, we’d traveled to New Zealand every year since 2012 (for fun). We expect to get back there soon.
So, MCCrockett- I’m with you…not everybody spends like a millionaire, on the hamster-wheel of more more more. But we have a privileged life just the same, for which we are very grateful.
-Randy
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“Prior to retirement only 52% of my gross salary ever made it into my bank account. It struck me as absurd to suddenly need to replace 85% of my gross salary after I retired.”
How much of the 48% was for expenses that would continue post retirement, but would no longer be payroll deductions?
None of the 48% was for expenses that would continue with the exception of Medicare Part B and Part D premiums withheld from my Social Security retirement benefit that started the month after I retired. The Medicare premiums replaced the overly expensive corporate medical insurance that stopped on my retirement.
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Prior to retirement only 52% of my gross salary ever made it into my bank account.
I will point out that tax withholdings never make it into your bank account, but still pay for expenses that will need to be accounted for, even in retirement. For those who are relatively high paid and live in a high tax location like CA or NYC, tax withholdings could easily be 25% of gross salary - which would get you up to 77% Yes, that’s not quite 85% (or what I’ve more commonly seen, which is 80%). But it doesn’t account for things like health insurance premiums withheld from your paycheck that you will still have to pay for in retirement.
That said - money going into your bank account isn’t necessarily money that gets spent. If you invested 20% of your gross salary into taxable accounts after it hit your bank account without building up any debt, then you were spending, at most, 32% of your gross salary after it hit your bank account. That still doesn’t show what your expenses in retirement will be, because you would need to add back the taxes, and any additional spending (like travel and, possibly, healthcare) that you will spend in retirement.
On it’s own, pointing to the percentage of your gross salary that went into your checking account is just as bad of a way to estimate your income needs in retirement as saying you’ll need 85% (or 80% - I’ve seen both) of your pre-retirement income.
AJ
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On it’s own, pointing to the percentage of your gross salary that went into your checking account is just as bad of a way to estimate your income needs in retirement as saying you’ll need 85% (or 80% - I’ve seen both) of your pre-retirement income.
I agree, and I have to admit that I never understood using some percentage of gross income to figure income needs in retirement. I took the opposite approach. I looked at what we spent on various categories each year (Quicken was a great help with this), and used the high water level on the various categories as a basis to start. From there, I adjusted by getting rid of things that would not be expenses in retirement (mortgage, life insurance) and adding or increasing categories where I anticipated we would spend money because we had time in retirement for more hobbies. Hence, I did things like doubled the golf line. When I was done, my retirement budget, which includes all expenses (even taxes) ended up about 40% more than our pre-retirement spending. I used that as our planning number, and when the 4% SWR covered that, I retired.
In reality, we have been way underspending in retirement, but some of that is due to the pandemic because we can’t do some things, but I knew that the budget had fat, and I didn’t want to have to worry about if we could afford anything in retirement.
But I much preferred building the retirement budget and the associated savings goal off of our actual spending rather than as some arbitrary percentage of gross income. Different strokes for different folks, I guess.
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On it’s own, pointing to the percentage of your gross salary that went into your checking account is just as bad of a way to estimate your income needs in retirement as saying you’ll need 85% (or 80% - I’ve seen both) of your pre-retirement income.
No kidding. The last few years before I retired I was saving 50% of gross salary, lost 25% of gross to state and Federal income taxes plus FICA, and I lived comfortably on the remaining 25%.
intercst
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Okay, I have a problem here. When your AGI + 1/2 of SS benefit is more than $44,000 then your SS is 85% taxed. $44,000 is far below what a middle-upper income would be. So financially successful people are going to be above that and the “tax torpedo” is here.
Depends on how much of their total income the upper middle income taxpayer is getting from Roth withdrawals vs. Traditional withdrawals and other sources like pensions. Income does not necessarily translate directly to taxable income. For those who spend their early retirement (before taking SS) doing significant Roth conversions, especially at the currently low tax rates, they may still be able to avoid significant taxation of their SS benefit. Doing significant Roth conversions while collecting SS will likely result in taxation of 85% of the SS benefit, so that’s another item that should be considered when making the ‘when should I take SS’ decision.
That said, unless the SS benefit taxation limits are changed, either to a higher static level or by being indexed to inflation, at some point, everyone who gets SS will be taxed on it.
AJ
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Depends on how much of their total income the upper middle income taxpayer is getting from Roth withdrawals vs. Traditional withdrawals and other sources like pensions. Income does not necessarily translate directly to taxable income.
Fidelity & others say the best order of taking withdrawals is:
1st: taxable investment accounts (take advantage of low capital gain tax rate)
2nd: tax-deferred. 401k, IRA (leave the Roth money to grow tax-free)
last: Roth IRA
Pensions, etc. are of course taxable income.
Also, most of your retirement years you will be taking RMD’s. Upper middle income people will probably have large IRA balances, so their RMDs will be substantial. The age 75 RMD on a $1,000,000 IRA is $41,000 (only $34,850 is taxed).
Let’s make sure we don’t mix income levels in these discussions—we are talking about upper middle income. None of us here plan to be below average net worth.
Income does not necessarily translate directly to taxable income.
True. But that money is going to be taxed sometime. All you can do is fiddle with when you pay the tax. It’s not honest or informative to push that time out beyond the the period under discussion so you can ignore it.
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Rayvt analyzes,
Fidelity & others say the best order of taking withdrawals is:
1st: taxable investment accounts (take advantage of low capital gain tax rate)
2nd: tax-deferred. 401k, IRA (leave the Roth money to grow tax-free)
last: Roth IRA
True. But that money is going to be taxed sometime. All you can do is fiddle with when you pay the tax. It’s not honest or informative to push that time out beyond the the period under discussion so you can ignore it.
Not really. Capital gains you’re able to defer to death get a tax-free stepped up basis to your heirs. That lack of taxation is the source of the vast majority of the nation’s multi-generational, inherited wealth. Not whatever productive activity the first generation worker bees were up to.
intercst
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Fidelity & others say the best order of taking withdrawals is:
1st: taxable investment accounts (take advantage of low capital gain tax rate)
2nd: tax-deferred. 401k, IRA (leave the Roth money to grow tax-free)
last: Roth IRA
Again - a rule of thumb that is not necessarily correct, just like the rule of thumb that you will need to replace 80% of your pre-retirement income for retirement.
Each taxpayer should use their own circumstances to determine what is best for their circumstances.
That said - if a taxpayer follows this rule of thumb, by the time they get down to spending their Roth account and presumably are also taking SS, they could very well not be taxed on their SS. So, I’m not sure how you providing this rule of thumb actually disputes what I said.
But that money is going to be taxed sometime.
Maybe, maybe not. As I’ve pointed out before, those who are self-funding long term care can have significant medical expenses that can offset the taxability of RMDs. Those using Roth accounts to pay these expenses effectively paid more taxes than they needed to, because they get little/no benefit from the medical deduction. So, even though there seems to be a push for people to have all of their retirement money in Roth accounts, it could be best for taxpayers who are planning on self-funding long term care to leave some money in Traditional accounts.
It’s not honest or informative to push that time out beyond the the period under discussion so you can ignore it.
Nor is it honest or informative to ignore the fact that, under current law, tax rates will return to the previous higher brackets in 2026, and that fiddling with when you pay the taxes may result in lower overall taxes being paid by taking advantage of the lower rates.
AJ
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But I much preferred building the retirement budget and the associated savings goal off of our actual spending rather than as some arbitrary percentage of gross income.
Same (big shock 
but in my case, we came off 10 years of college with two double years, my husband was diagnosed a few months later and died about 18 months later. While I knew about SEPP, I didn’t want to start and it was an interesting time for a few years until I hit 59.5. Not sure exactly how I did those years but always being used to LBMM, I suspect what I had was what I had.
Now that I am mid-ish 60s, I definitely spend more and when travel fully opens, I will spend like a drunken sailor.
The percent thing was the weirdest to me was the percent spent on cars. Wackiest thing ever.
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Rayvt notes:
Fidelity & others say the best order of taking withdrawals is:
1st: taxable investment accounts (take advantage of low capital gain tax rate)
2nd: tax-deferred. 401k, IRA (leave the Roth money to grow tax-free)
last: Roth IRA
If you are upper-middle class, already subject to RMD withdrawals, your spouse has died, and your beneficiaries are you children; the above doesn’t make sense. It makes more sense to withdraw in the following order:
1st: tax-deferred 401(k) and IRA accounts.
2nd: tax-exempt Roth IRA accounts.
3rd: taxable investment accounts.
Reducing the tax-deferred 401(k) and IRA accounts reduces the amount of taxable income that your beneficiaries will need to withdraw over a 10 year period.
While there isn’t a tax penalty to your beneficiaries they are still required to withdraw all monies from a Roth IRA in 10 years. (I don’t have any Roth accounts, so I’m not sure about the 10 year period.)
Beneficiaries of assets in the taxable investment accounts receive a new cost basis when you die. They can retain the assets for as long as they like. They only need to pay taxes on their qualified dividends and their capital gains when they sell the assets.
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If you are upper-middle class, already subject to RMD withdrawals, your spouse has died, and your beneficiaries are you children; the above doesn’t make sense. It makes more sense to withdraw in the following order:
1st: tax-deferred 401(k) and IRA accounts.
2nd: tax-exempt Roth IRA accounts.
3rd: taxable investment accounts.
.
.
.
Beneficiaries of assets in the taxable investment accounts receive a new cost basis when you die. They can retain the assets for as long as they like. They only need to pay taxes on their qualified dividends and their capital gains when they sell the assets. - McCrockett
??? It seems to me that withdrawing Roths last is optimal. Your heirs effectively get a stepped up basis at the point of withdrawal from the Roth, which is up to ten years after the basis would be established for the inherited taxable account.
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