The SS tax bubble occurs when income + 1/2 of SS benefits exceed $32,000. For those who need to save well beyond that, there's little chance to avoid it unless they are starting now and have access to the Roth 401(k). Any of us who have worked 20 years or more and maxed the regular 401(k) are likely beyond that point.
A person just starting, with the Roth and/or Roth 401(k) availability, needs to be aware of the 0 (standard ded, exemption) bracket and cutoffs for 10% and 15%.
In the end, you are right, as was Dave's remarks, but the path isn't clear cut. Just as we agree the input variables needed for the retirement withdrawal decisions are known only as variables, not fixed numbers ("I will die at 97, inflation will be 3.2%, etc.), if one considers this each year, there's still some fuzzy math involved. It gets pretty clear close to retirement, the bubble is easy to calculate, one can defer SS benefits, and convert to Roth each year to deplete pre tax savings and fill their current tax bracket. 30 years out, crapshoot, diversify. JOE
I think this will be one of the first tax to be changed when the cost crunch arrives. Basically I expect 100% of SS to be included in taxable AGI. If you are couple receiving the average pension and nothing else, there will be no tax. But for someone decently off, all of your SS pension will be in your marginal bracket. Sounds fair to me.
Actually, we more commonly talk about 25x expenses. Gross and Net aren't as important - if you're grossing say, $100k, netting, say, $75k but only *spending* $50k, while it would be nice for your savings to throw off $75k, the fact is that since you're living on a lot less than that, your savings is throwing off an excess - which might be nice, but it's not necessary and may imply that you could have retired sooner or spent more along the way.
Of course, taxes are quite a trick - if you're actually spending $50k and plan on continuing to do so, your collection of investments needs to throw off at least that much *after taxes*. However the taxes on those investments may be quite a mixture - money pulled from a traditional IRA may (mostly) be taxed as income. Money pulled form sale of long-held appreciated investments may be (partially - exclude cost basis!) taxed at long-term cap-gains rates. Money pulled from a Roth will have no taxes. SS money, if you're counting that as part of what you'll be living off of - may be partially taxable as income. Similarly, payouts from annuities may be partially taxable as income, too. It's *very* messy and everyone's situation will be different.
If, say, your *entire* savings is in a Roth, it's easy. You need 25x your spending. If it's entirely in 401k and/or traditional IRAs (to make this easier, assume no non-deductible contributions, too) - then the entirety of it is taxable income and you can guess at an overall effective rate by plugging that into a tax estimator (or just guessing that your overall rate in retirement will be similar to what it is now and just looking at how much you paid last year).
The bottom line is that these are all *rough* estimates with about a zillion variables - future tax rates, the "4% payout" assumption, etc. etc. Besides between now and your retirement, your spending level may change, too. You have to approach this kind of dynamically - both before and after retirement. These rules of thumb are *not* cold and precise answers. Well, okay, they are cold and precise answers. They are just not *solutions*.
As BWS replied, 4% rule = 25X gross withdrawal each year. If you are earning 60K at pre-retirement, 25X would gross you the same $60K. But - the net is far higher, no FICA withholding, no need to save
15% off the top, etc. So I rounded down to 20X for that example.
The PIA formula (sic*) from
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with a bit of arithmetic, that the $60K earner will have 38% of that income replaced with SS benefits at retirement. So, whatever the $60K earner lived on, likely $45K or less, the replacement ratio is even higher, 50% of the $45k net spending.And in closing, this makes the goal of 25 x $22.5K = $562K savings far less intimidating, especially when the income will be half an inflation adjusted annuity in the form of SS, and the other half can be aggressively invested for the long term. JOE
That's logical, and tax considerations of retirement income make sense.
My current rate of savings probably will not accrue 25x of my current expenses, but I fully expect those expenses to go down. I have 2 kids in school and anticipate paying for college. They both might benefit from Bright Futures scholarships (in Florida), but that's only as dependable as their dedication to studying, and the political will of any given year's batch of legislators.
Once the kids are gone, I'll be out of this house and living a cheaper lifestyle. Medical expenses will go up of course, but most other expenses will go down, inflation notwithstanding.
While I disagree with some of the ultraconservative financial attitudes in this forum, most regular contributors give useful advice with a pragmatic approach. I appreciate the efforts made on behalf of myself and other lurkers. Thanks.
(I'm not using the term ultraconservative in a political sense. No barbs necessary.)
Chris, as we recently debated (yet again) here, the 4% rule have quite a few variables, the values of which mostly can't be known, at least not all at once. I'd make the same claim for retirement needs. About a year (?) ago, I posted here that Barron's had an article about people overestimating their needs, and same week, WSJ showed surveys indicating people underestimated. As you suggest, many will enter retirement dropping off the mortgage payment (maybe 15-20% of gross income?) college savings (5%?) retirement savings (10%?) and the hit of paying FICA (7%). This totals 37%+ leaving a 63% replacement need. A single person making $45K will find half his income replaced by SS benefits, so even if that 63% is way low, the difference they need to make up is reasonable. At higher incomes, the SS benefit drops as a replacement percentage, so the task is tougher.
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