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I've recently spent some time learning about income taxes during retirement. Unfortunately, the tax code that applies to people who are drawing Social Security benefits and also drawing income from other sources gets really messy, and giving any sort of general advice is difficult. Looking at scenarios in TurboTax or other commercial packages is too slow and tedious, so I've coded up pieces of the tax code in order to look at the total tax paid over an entire retirement under different scenarios.
Here is an example I ran for the purpose of posting here. I intentionally made it as simple as I could. We have a single person who wishes to quit working at age 62 and have $60,000 after taxes for spending in the first year. This income will be derived from (1) a SS benefit, and (2) taxable withdrawals from a 401k account. This person has an age-62 SS benefit of $2000/mo, which if delayed until age 70 becomes a little over $3500/mo (expressed in "today's dollars"). Also, for this example I've used an inflation rate of 2%, which gets applied to the SS benefit check, the amount of spending, the standard deduction, and the income thresholds for federal tax brackets.
Cutting to the chase, below is the total federal income tax paid over a 25-year retirement under two scenarios. RMDs are not considered in this example, and of course I'm not considering state income taxes. (Numbers rounded to nearest $100.)
Take SS at age 62 scenario: $214,800 federal tax paid
Take SS at age 70 scenario: $130,300 federal tax paid
The difference is $84,500 over 25 years. I consider that significant, but YMMV of course. Moral of the story (for me, anyway) is to question any quick and dirty reasoning that ignores taxes.
once rmd's and zero percent capital gains brackets come in to play along with investment returns and taxes things can change by a lot . the variations and combinations are endless almost that can happen .
I've recently spent some time learning about income taxes during retirement. Unfortunately, the tax code that applies to people who are drawing Social Security benefits and also drawing income from other sources gets really messy, and giving any sort of general advice is difficult. Looking at scenarios in TurboTax or other commercial packages is too slow and tedious, so I've coded up pieces of the tax code in order to look at the total tax paid over an entire retirement under different scenarios.
Here is an example I ran for the purpose of posting here. I intentionally made it as simple as I could. We have a single person who wishes to quit working at age 62 and have $60,000 after taxes for spending in the first year. This income will be derived from (1) a SS benefit, and (2) taxable withdrawals from a 401k account. This person has an age-62 SS benefit of $2000/mo, which if delayed until age 70 becomes a little over $3500/mo (expressed in "today's dollars"). Also, for this example I've used an inflation rate of 2%, which gets applied to the SS benefit check, the amount of spending, the standard deduction, and the income thresholds for federal tax brackets.
Cutting to the chase, below is the total federal income tax paid over a 25-year retirement under two scenarios. RMDs are not considered in this example, and of course I'm not considering state income taxes. (Numbers rounded to nearest $100.)
Take SS at age 62 scenario: $214,800 federal tax paid
Take SS at age 70 scenario: $130,300 federal tax paid
The difference is $84,500 over 25 years. I consider that significant, but YMMV of course. Moral of the story (for me, anyway) is to question any quick and dirty reasoning that ignores taxes.
Yes but under your scenario the retiree must be able to take put at least 24k each year for 8 years replacing SS to get there. That’s not even including your 2% scenario.
So that’s 192,000 off your 401k over what you are already taking out even at 62 claiming SS.
60000 for 8 years means 480,000 from your portfolio. How many people can sustain that?
Yes but under your scenario the retiree must be able to take put at least 24k each year for 8 years replacing SS to get there. That’s not even including your 2% scenario.
So that’s 192,000 off your 401k over what you are already taking out even at 62 claiming SS.
60000 for 8 years means 480,000 from your portfolio. How many people can sustain that?
Not many really have the choice to delay safely if they retire at 62 ..this is why only 2% of men and 4% of women file at 70....these discussions usually make little sense since most who delay would not get a dime more in income for 8 long years unless they had enough money to layout up front ..
I would never delay if I could not afford to layout the money up front so I don’t have to breath half a lung of air for years , when I can file at 62 and have more money to enjoy day one ..
For most if they stop working at 62 ,they need the max they can get day one of retirement unless they have a pension that can support things
once rmd's and zero percent capital gains brackets come in to play along with investment returns and taxes things can change by a lot . the variations and combinations are endless almost that can happen .
If a person expects to be receiving unwanted RMDs, that tips the scale more towards delaying SS benefits.
Yes, introducing taxable accounts (your capital gains comment) will make the analysis more complex. That is my own situation, for better or for worse, but I'm not going to toss that into the mix.
If there is any generalization to be made here, it's that any pre-tax analysis will tend to make delaying SS look a bit worse that it is after taxes are paid. This is fairly simple to understand, as 100% of SS income is never taxed. At most it is 85%, and for many people it's less than that. The first step in understanding all of this is to dig into the provisional income calculation.
All I know is that when push came to shove and real money was now on the line , all my intentions of delaying until 70 went right out the window after just 4 years of pulling 6 figures a year out of our assets to live on ....with social security banging on the door saying spend me, and the fact my wife could not get a 4500 dollar spousal adder until I filed , I threw in the towel and said delaying any further just makes no sense .....the assets we spent down already missed out on big market gains .
So as Tyson said ,everyone has a plan ,until they get punched in the face
Yes but under your scenario the retiree must be able to take put at least 24k each year for 8 years replacing SS to get there. That’s not even including your 2% scenario.
So that’s 192,000 off your 401k over what you are already taking out even at 62 claiming SS.
60000 for 8 years means 480,000 from your portfolio. How many people can sustain that?
Sure, that's a separate issue and honestly it has been discussed here and elsewhere ad nauseam. If it's not possible to delay 8 years, then one can do what is feasable... 5 years, 3 years, etc.
All I know is that when push came to shove all my intentions of delaying until 70 went right out the window after just 4 years of pulling 6 figures a year out of our assets to live on ....with social security banging on the door saying spend me, and the fact my wife could not get a 4500 dollar spousal adder until I filed , I threw in the towel and said delaying any further just makes no sense .....the assets we spent down already missed out on big market gains
Sure, all financial decisions have a human element as well. I don't make every decision "by the numbers", but I think it's still useful and interesting to do the calculations.
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