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Mathjak, I hate to get into the weeds (though I suppose we are there already!?).... but this has me thinking about how these two approaches might intersect, and eventually collide. I am not finding clear answers so far, in my reading.
My question is whether these two strategies work against each other, once you reach a certain point? That is, will the capital gains from that taxable brokerage account raise your income to the point you lose that opportunity to draw down IRA (in a no tax or low tax manner)? Or conversely, at what point does drawing down that taxable IRA kick you up to a place where you lose the capital gains advantage?
if you stay in the zero percent capital gains bracket there is no taxable income on that brokerage accounts long term gains . it is a balancing act to try to stay there while drawing out some ira money too but the lowest brackets extend high enough that you can usually juggle with good pre retirement planning so you have a mix of efficient income sources ..
Whether I take it early or not, has no effect on my day to day living expenses. I still have to pay for utilities, HOA, insurance, property taxes, food, gas, vacations, clothes, taxes... whether I take it at 62 or a 162.
Exactly. And you are paying for those expenses with something which, unless you have cash sitting under your mattress earning nothing, is getting some kind of return. Using up that money (and losing those returns), instead of using SS, represents a cost that many of us overlook... and seldom gets factored in to the "too-simple" website calculators.
I believe what mathjak is telling you with his list of questions is that, once you start factoring in all those other things, your real break even point is likely to be quite different than the "just count the checks" calculation is showing you.
Last edited by HeelaMonster; 06-14-2019 at 09:41 AM..
Reason: ETA: and mathjak said as much, while I was typing that.
if you stay in the zero percent capital gains bracket there is no taxable income on that brokerage accounts long term gains . it is a balancing act to try to stay there while drawing out some ira money too but the lowest brackets extend high enough that you can usually juggle with good pre retirement planning so you have a mix of efficient income sources ..
Thanks. That's what I was beginning to understand, but the "balancing and juggling" part was tripping me up! In particular, it seems that the capital gains brackets are different (i.e., have different break points) than the overall income brackets.
Holding off is always good for those that continue working because they need the money. Once they stop SS replaces their salary. They don't have a pension and very little in retirement savings so they are better off taking SS at 70 because that's the most they can get.
That's the easy scenario.
Retirement funding can be a 1 legged stool, 2 legged stool or 3 legged stool.
Pension, Retirement funds, SS
Answers can vary widely depending on how many sources of retirement income you can tap, whether or not you have a spouse, how much you need for an annual budget, etc.
I enjoy reading these types of threads because it gives you insight as to how others think and analyze. It provides another viewpoint and data that you may have overlooked in your own planning.
At the end of the day though, there is no one single answer that "fits all".
if they continue working unless they are earning very little they can't collect.. these discussions are not about working longer ... they are about those who retire at 62 and have the choice to take ss early or delay while still needing money to live on from somewhere. that is where it is a complex situation many times .
Thanks. That's what I was beginning to understand, but the "balancing and juggling" part was tripping me up! In particular, it seems that the capital gains brackets are different (i.e., have different break points) than the overall income brackets.
i am not sure where they are now but as long as you can fit the gains and other income in the 15% bracket they were tax free ... remember that 15% bracket is after all deductions so it is pretty high in pretax dollars ..
@HeelaMonster, use TurboTax and input different scenarios to get an idea. Honestly, that’s how I do it. It’s your personal situation with your own deductions, etc..
Last edited by NewbieHere; 06-14-2019 at 11:19 AM..
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.
Just to add another dimension to the SS discussion, there is legislation that is getting attention that would change SS in several ways. Of course, it's still just a proposal, but it's gaining traction, since the current "forecast" is for SS to only be able to payout about 80% of benefits starting in 2035, and some predict sooner, 2031.
Some of the features being discussed include raising the limits on income to $50,000 (indiv) and $100,000 (couples) before benefits are taxed. Right now those limits are 25,000 and 32,000, and haven't changed in 35 years, not indexed for inflation. Raising the limit on wages subject to payroll tax to 400,000 (132,900 now), and increasing payroll taxes over time (from 6.2 to 7.4% over 13 years).
COLA formula would also be changed, and would average about 2% a year.
Again, it's just a proposal, and a lot would change before anything becomes law, but this topic seems to be moving from the back burner to at least the middle burner.
"Under current law, cuts would start in 2034, when the main trust fund is expected to be depleted, or in 2035, if Congress authorizes Social Security to pay old-age benefits through the Disability Insurance Trust Fund."
"The reductions of roughly 20 percent on average are just a starting point. If current laws are unchanged and current economic projections remain intact, the cuts would rise to 25 percent in later years, a New York Times analysis of Social Security data indicates."
"And life expectancy is increasing. By 2035, Social Security estimates, the number of Americans 65 or older will increase to more than 79 million, from about 49 million now. If the program has not been repaired, they will encounter a much poorer Social Security than the one seniors rely on today."
"The Social Security mess already complicates some commonly accepted retirement-planning wisdom — such as the advice to delay claiming benefits until age 70."
"People who do so are entitled to an 8 percent annual increase in benefits. That makes Social Security 'the best annuity that money could buy,' said Wade Pfau, a professor of retirement income at the American College of Financial Services, in a 2015 report. But he redid his calculations at the request of The Times, and for workers who are 55 now, statutory benefit cuts just when they turn 70 could make that approach far less attractive, Professor Pfau said."
Somehow it doesn’t make intuitive sense to raise SS income when the program is in trouble.
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