How can I get a handle on income taxes in retirement?

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Archimedes
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How can I get a handle on income taxes in retirement?

Post by Archimedes » Sun Mar 31, 2019 6:18 am

I was a fairly typical professional for much of my career, earning in the 200’s for the first decade or so, then in the 300’s for a number of years. Later in my career I started my own business and have found unimaginable success. We currently have loosened the purse strings and gone hog wild, spending on a very plush lifestyle, but this ends up being only a small percentage of our current inflated income.

Current situation:
Spending on living life is around 12% of income, exclusive of taxes.
Spending on taxes is around 44% of income.
Investment, mostly to taxable, is the other 44% of current income.

As I begin to ponder the concept of retirement, my goal is to have some peace of mind. To have peace of mind I need to have an idea of what my expenses will be in retirement. While I have a solid handle on what we spend to live, I am afraid of the unknown and the uncontrollable, specifically the taxes we will pay in retirement. I know that taxes will go down, but by how much? Right now, as a result in the big bump in income, the amount of tax we pay feels incomprehensible. I also know that future RMDs alone will keep us in the highest tax bracket when we reach that age.

Is there any resource out there that might help someone in our particular situation figure out what it will cost us to live in retirement, specifically with respect to taxes?

Current net worth is over 50 times our current spend, exclusive of taxes. However, net worth is only around 12 times our current spend, inclusive of what we currently pay in taxes. We anticipate perhaps another 35 years of existence on this earth.

Again, I am simply looking for peace of mind and some idea of what it might cost us to live in retirement.

Bacchus01
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Re: How can I get a handle on income taxes in retirement?

Post by Bacchus01 » Sun Mar 31, 2019 6:21 am

I-orp will show you what you can spend and the tax implications.

Note that there is nothing “typical professionall” about making in the 200s or 300s. I don’t know any typical professionals that are close to that.

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Archimedes
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Re: How can I get a handle on income taxes in retirement?

Post by Archimedes » Sun Mar 31, 2019 7:01 am

Bacchus01 wrote:
Sun Mar 31, 2019 6:21 am
I-orp will show you what you can spend and the tax implications.
Thank you Bacchus. I just took a quick look at I-orph. I am going to plug in some numbers later today to see what it spits out. I am wondering if it will work for someone with an outlier type situation like me.

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TomatoTomahto
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Re: How can I get a handle on income taxes in retirement?

Post by TomatoTomahto » Sun Mar 31, 2019 7:15 am

If you want some help, please stop being coy about your assets and give real numbers, rather than the “bigger than a breadbox” 20 questions-style clues. We are in a similar situation.

ETA: I reread the above, and it sounds snarkiest than I intended. I no longer give dollar amounts of our assets, other than the fixed income portion ($3+M) portion of our Liability Matching Portfolio, for a number of reasons, so I understand why you’d be reluctant. But, there is a limit to how much assistance we can provide
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Archimedes
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Re: How can I get a handle on income taxes in retirement?

Post by Archimedes » Sun Mar 31, 2019 9:56 am

TomatoTomahto wrote:
Sun Mar 31, 2019 7:15 am
If you want some help, please stop being coy about your assets and give real numbers....
My apologies if my post was somewhat obtuse. I know I am theoretically anonymous on this board, but still... And it doesn't feel right to post big numbers as I have seen that interfere with the conversation.

In an attempt to be more succinct, let me restate my actionable question:

As a high income earner, the current breakdown of our spending is 20% on living expenses and 80% on income taxes. We cannot afford to retire at our current spend level due to the high annual income tax burden. Does anyone have advice about how to figure out how much our income tax bill will go down in retirement? That would allow us to figure out how much we need in assets to retire.

Bacchus01
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Re: How can I get a handle on income taxes in retirement?

Post by Bacchus01 » Sun Mar 31, 2019 10:02 am

Archimedes wrote:
Sun Mar 31, 2019 7:01 am
Bacchus01 wrote:
Sun Mar 31, 2019 6:21 am
I-orp will show you what you can spend and the tax implications.
Thank you Bacchus. I just took a quick look at I-orph. I am going to plug in some numbers later today to see what it spits out. I am wondering if it will work for someone with an outlier type situation like me.
I think it’ll get you close to seeing if you are there or a long ways from “there.”

You are also assuming a very high tax rate. That number must include state and FICA taxes, right? If so, drop the FICA right away as you won’t have earned income.

Next, understand that your investments in after-tax have a basis that will not be taxed on withdrawal.

ROTH conversions of pre-tax can also save you big tax money in the long run if you can do them while in low income years.

Most importantly, how much is your spending now? That’s not clear at all. You have income ranges and supposedly a large net worth, but none of that is clear with the data you’ve given. Income means nothing relative to retirement. You want to know what your spending is.

Your income tax burden in retirement likely goes down by 90%, but there is no way to know with the data you have.

Run I-orp. It won’t answer all your questions but it will simulate how much you can spend and how it will be spent from taxable and non-taxable accounts and approximately how much your taxes will be. If the “what you can spend” is higher than what you are spending now (the 20%, not the 80% taxes), then you should be good.

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TomatoTomahto
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Re: How can I get a handle on income taxes in retirement?

Post by TomatoTomahto » Sun Mar 31, 2019 10:03 am

I would model your numbers in https://maxifiplanner.com. It will give you a good idea about taxes, RMDs, SS, etc.

It’s a fine line between financial disclosure and inleashing the class warfare dogs here, so I don’t blame you. Do you have bequest motivations?
Okay, I get it; I won't be political or controversial. The Earth is flat.

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BenfromToronto
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Re: How can I get a handle on income taxes in retirement?

Post by BenfromToronto » Sun Mar 31, 2019 10:31 am

I am not sure I fully understand the question the way it is asked but I believe I am facing a similar situation and I will describe the way I am handling it.

My taxes in retirement should have vert little to do with my current taxes since I do not expect to generate any earnings from my work (if I you have a business, you could assume you will have sold it, so it will not generate any income anymore).
To estimate one's taxes in retirement, one has to estimate one's future retirement income.

For me it will consist of :
(1) Required Minimum Distributions (RMDs) from several retirement accounts.
There are excellent online calculators that will tell you what RMD you will need to take (starting at age 70.5 at the latest) based on the current balance of your retirement accounts, your current age, the age at which you plan to retire, and a projected rate of growth between now and then (including contributions, I use 6% but I can also do simulations using a lower or higher rate).
Here is the calculator I have used (there are many others): https://www.schwab.com/public/schwab/in ... lators/rmd

(2) Dividends and interest from several taxable accounts.
Based on my asset allocation, it is currently about 2% of the total assets in my taxable accounts. So, I am using 2% of the projected value of my taxable accounts at the age I plan to retire. For the projected value, including contributions, I use 8% (but I can also do simulations using a lower or higher rate).

(3) Estimated pensions and SS income.
Both my past employers and SS provide me annually with estimates, which can be adjusted depending on age of retirement and when one plans to start receiving these pensions and SS. I do that for both me and my spouse.

Based on (1), (2), and (3) and the current tax tables, it is easy to estimate state and federal taxes grouping streams of income that are taxed similarly (e.g., (1), (3), and interest are taxed as earned income. (2)is taxed as interest. Note that I do not plan to sell anything in taxable accounts and thus, I do not plan to pay any capital gain taxes. Also, I used to have income from rental properties (I recently sold all of them to reduce some potential catastrophic liability - e.g., a fire and several deaths; this has happened in my community); if I still had them, I would add the income and the associated taxes.
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Artful Dodger
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Re: How can I get a handle on income taxes in retirement?

Post by Artful Dodger » Sun Mar 31, 2019 1:01 pm

In an attempt to be more succinct, let me restate my actionable question:

As a high income earner, the current breakdown of our spending is 20% on living expenses and 80% on income taxes.

I’m having a hard time understanding the above.

Federal tax rate on joint income above $612k is 37%. Even if you live in a state with ridiculously high taxes, it’s hard to imagine a rate over 50%. And most states exclude some income (SS income, some pensions, retirement income), and several states have no state income tax.

What am I misreading?

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JDCarpenter
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Re: How can I get a handle on income taxes in retirement?

Post by JDCarpenter » Sun Mar 31, 2019 1:14 pm

Artful Dodger wrote:
Sun Mar 31, 2019 1:01 pm
In an attempt to be more succinct, let me restate my actionable question:

As a high income earner, the current breakdown of our spending is 20% on living expenses and 80% on income taxes.

I’m having a hard time understanding the above.

Federal tax rate on joint income above $612k is 37%. Even if you live in a state with ridiculously high taxes, it’s hard to imagine a rate over 50%. And most states exclude some income (SS income, some pensions, retirement income), and several states have no state income tax.

What am I misreading?
OP indicated that their annual savings are not included in spending. Thus, if you have a 40% effective tax rate and spend 10% of your gross whilst saving 50%, you have taxes as 80% of your spending....

Archimedes, when working, we too had taxes in excess of all other spending (not as much as you, but still ....). Run the iOrp and maxifiplanner. Pay close attention to what assets are in each tax category. For example, since retiring before 59.5 years old, we could have paid zero taxes while spending down our "regular" accounts. But, we were/are very lopsided with heavy tax deferred accounts. Thus, we do Roth Conversions to fill all federal tax brackets through and including 24%.... Tax hit now is projected to be well worth it--even if one of us doesn't die young. The answers here are going to vary widely even among people who might look similarly situated.
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munemaker
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Re: How can I get a handle on income taxes in retirement?

Post by munemaker » Sun Mar 31, 2019 1:19 pm

Try the free Retirement Porfolio Model (RPM) spreadsheet created by Boglehead Bigfoot48. Then you will know very closely what your taxes will be in retirement.

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

livesoft
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Re: How can I get a handle on income taxes in retirement?

Post by livesoft » Sun Mar 31, 2019 1:27 pm

I don't know if this will be helpful to you, but here goes ...

You probably do not fill out your own tax return and may have no clue whatsoever how your different kinds of income are taxed. You might ask your tax people to do such a "What if?" or mock tax return given any income projection that you tell them, but you can also do this yourself. Just buy some tax prep software for less than $50 and put in your 2018 numbers, then change the numbers to whatever you expect in retirement. If you don't know what to expect in retirement, then just change retirement plan contributions to zero, including your deferred compensation plan contributions, change your W-2 earnings maybe near zero (people like you usually keep doing a little consulting all through retirement, don't they?) and away you go.

One thing about your taxes in retirement: They will never be 100% of your income, so I don't think you really have to do this exercise. You will be fine.
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scubadiver
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Re: How can I get a handle on income taxes in retirement?

Post by scubadiver » Sun Mar 31, 2019 2:17 pm

Others have alluded to this, but I'll add to the chorus.

I get that you're concerned that 80% of your current spending is simply on taxes. But what will your tax bill be in retirement when you no longer have that high annual income. Probably much lower, right?

Bottom line, do some homework and take a closer look at what your tax bill will be in retirement and stop worrying about what it is now. Report back when you've completed the assignment.

Scubadiver

EnjoyIt
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Re: How can I get a handle on income taxes in retirement?

Post by EnjoyIt » Sun Mar 31, 2019 3:29 pm

scubadiver wrote:
Sun Mar 31, 2019 2:17 pm
Others have alluded to this, but I'll add to the chorus.

I get that you're concerned that 80% of your current spending is simply on taxes. But what will your tax bill be in retirement when you no longer have that high annual income. Probably much lower, right?

Bottom line, do some homework and take a closer look at what your tax bill will be in retirement and stop worrying about what it is now. Report back when you've completed the assignment.

Scubadiver
Run some tax software and create a few scenarios so as to better understand them.
If you want an easy calculation, what I do is take my expected expenses and subtract $24k standard deduction. The rest of the cash will be taxed.
I suspect that your spending is above the current 12% tax bracket so your capital gains rate will be 15% or 20% plus a possible 3.8% Obamacare surtax.
I assume 2% average dividends from equites in my taxable account. Just for calculation purposes I also assume 50% capital gains on any sale of equities.
Bonds that are not tax exempt are taxed at your normal tax bracket. Anything you withdraw from pre-tax accounts is taxed at your regular rate.

Pretty easy once you understand what is going on. I even made my own spreadsheet to adjust everything on the fly for myself. I set this up to help me understand the best way to do Roth conversions every year once I retire.

delamer
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Re: How can I get a handle on income taxes in retirement?

Post by delamer » Sun Mar 31, 2019 4:19 pm

The TaxCaster app is a quick-and-dirty way to estimate annual federal income taxes in retirement.

You enter various types of income — Social Security, RMD, qualified dividends, etc.

It isn’t that useful for long-term tax planning, but it is easy to change amounts or swap out different income types.

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Archimedes
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Re: How can I get a handle on income taxes in retirement?

Post by Archimedes » Sun Mar 31, 2019 7:53 pm

I tried out the i-orp app and plugged in the numbers. The prediction of that calculator is that our taxes will drop by approximately 90% from the current level. It says we will have plenty of money to spend each year, about 125% of our current spending level. I am going to try some of the other calculators suggested and see how they compare.

Thanks to everyone for the links to these calculators. I don't know how confident I feel in the precision, but it does give me some comfort that we could retire if we wanted to.

EnjoyIt
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Re: How can I get a handle on income taxes in retirement?

Post by EnjoyIt » Sun Mar 31, 2019 9:16 pm

Archimedes wrote:
Sun Mar 31, 2019 7:53 pm
I tried out the i-orp app and plugged in the numbers. The prediction of that calculator is that our taxes will drop by approximately 90% from the current level. It says we will have plenty of money to spend each year, about 125% of our current spending level. I am going to try some of the other calculators suggested and see how they compare.

Thanks to everyone for the links to these calculators. I don't know how confident I feel in the precision, but it does give me some comfort that we could retire if we wanted to.
The only way you will get full confidence is to understand how the taxes are collected. Take some time to figure it out and make yourself comfortable.

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Re: How can I get a handle on income taxes in retirement?

Post by AlohaJoe » Sun Mar 31, 2019 9:56 pm

EnjoyIt wrote:
Sun Mar 31, 2019 9:16 pm
Archimedes wrote:
Sun Mar 31, 2019 7:53 pm
I tried out the i-orp app and plugged in the numbers. The prediction of that calculator is that our taxes will drop by approximately 90% from the current level. It says we will have plenty of money to spend each year, about 125% of our current spending level. I am going to try some of the other calculators suggested and see how they compare.

Thanks to everyone for the links to these calculators. I don't know how confident I feel in the precision, but it does give me some comfort that we could retire if we wanted to.
The only way you will get full confidence is to understand how the taxes are collected. Take some time to figure it out and make yourself comfortable.
Yep. The best way to get a handle on income taxes in retirement is to just fill out a fake tax return using the numbers that you'll have during retirement. The more edge case you are, the less likely that shortcuts like Taxcaster or Excel 1040 will perfectly map to your reality. Of course, tax law can change, so even filling out a fake tax return is no guarantee of what taxes you'll be paying for the next 30-40 years.

If you don't file taxes yourself, then it is even easier: ask your tax accountant what the answer is.

KlangFool
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Re: How can I get a handle on income taxes in retirement?

Post by KlangFool » Sun Mar 31, 2019 10:10 pm

Archimedes wrote:
Sun Mar 31, 2019 9:56 am
TomatoTomahto wrote:
Sun Mar 31, 2019 7:15 am
If you want some help, please stop being coy about your assets and give real numbers....
My apologies if my post was somewhat obtuse. I know I am theoretically anonymous on this board, but still... And it doesn't feel right to post big numbers as I have seen that interfere with the conversation.

In an attempt to be more succinct, let me restate my actionable question:

As a high income earner, the current breakdown of our spending is 20% on living expenses and 80% on income taxes. We cannot afford to retire at our current spend level due to the high annual income tax burden. Does anyone have advice about how to figure out how much our income tax bill will go down in retirement? That would allow us to figure out how much we need in assets to retire.
Archimedes,

<< We cannot afford to retire at our current spend level due to the high annual income tax burden. >>

In order for someone to help you, we need to understand the breakdown of your income.

A) X% on salary income

B) Y% on capital gain

C) Z% on dividend

D) N% on interest income

E) O% on Busines income

Some of that will be gone when you retire.

I do not understand why you need to generate more income in order to be taxed. Especially your annual expense is low. Can you stop generating or deferred some of that income?

KlangFool

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tractorguy
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Re: How can I get a handle on income taxes in retirement?

Post by tractorguy » Sun Mar 31, 2019 11:03 pm

At your income and savings level, you are probably going to not have any problems. However, several lottery winners and entertainment industry stars have proven that it is possible to burn through astonishing amounts of money in a short time so it is best to have a plan.

As others have said, the best way to get a handle on taxes is to do the math and model them. If you are comfortable using tax software to figure your taxes, use the same software package to run some what if scenarios. If you aren't, have your tax accountant do it for you. Either way, the cost of the analysis (in time and money), is going to pay dividends in piece of mind and help in planning your retirement finances.

Although it is generally the case that people spend more on income taxes while they are working than when they are retired, I've not found it to be as much less as I thought it would be. The things that raised my tax bill more than I expected before retiring are:
1) Exercising RSU's. If you have any of these or stock options, your company will set a time limit on how long you can wait after retirement before you exercise them. Because of this, your income doesn't necessarily drop to 0 upon retirement if your are blessed with this perq.
2) Rebalancing: Stocks tend to grow faster than bonds and standard advice is to put the bonds in your tax advantaged accounts (IRAs & 401K). Standard advice is also to decrease your stock allocation as you age. For both of these reasons, you are likely going to consider selling some of your stock assets to buy bonds and they are more likely going to be in a taxable account. If this happens, you'll probably have some capital gains that you will have to pay taxes on.
3) RMD's and taking social security will cause your income to jump. If you elect to defer social security to full retirement age, the period of time between retirement and about age 70 will be your period of minimum income. (Except for those years you rebalance or exercise RSUs). Then, your income and possibly your taxes.

To feel comfortable with your retirement plan, I suggest modeling the low income years and also the high income years to get an idea of the range of taxes you will have to pay and your marginal tax rates. Of course the good news is that the high tax years will also be just after the high income years. Just make sure that when you do something that drives higher taxes that you set aside some cash to pay them. Don't be like a buddy of mine who exercised some RSUs in the spring of 2008 and planned to sell more stock in 2009 to pay the taxes on the sale. Come 2009, the market had tanked, he didn't have the cash on hand, and he had to sell 5X as many shares of stock to get the cash as he would have if he'd sold it earlier.
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Archimedes
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Re: How can I get a handle on income taxes in retirement?

Post by Archimedes » Mon Apr 01, 2019 4:44 am

TomatoTomahto wrote:
Sun Mar 31, 2019 10:03 am
I would model your numbers in https://maxifiplanner.com. It will give you a good idea about taxes, RMDs, SS, etc.

It’s a fine line between financial disclosure and inleashing the class warfare dogs here, so I don’t blame you. Do you have bequest motivations?
In answer to your question, we don’t have bequest motivations. However, we do assume that it will be quite likely that our heirs will receive a large bequest, simply because when we plan for the possibility of poor market performance and longevity, there is a high likelihood that the market performance will be more median and that we won’t live as long as we had planned for, financially speaking.

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Archimedes
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Re: How can I get a handle on income taxes in retirement?

Post by Archimedes » Mon Apr 01, 2019 4:50 am

Artful Dodger wrote:
Sun Mar 31, 2019 1:01 pm
In an attempt to be more succinct, let me restate my actionable question:

As a high income earner, the current breakdown of our spending is 20% on living expenses and 80% on income taxes.

I’m having a hard time understanding the above.

Federal tax rate on joint income above $612k is 37%. Even if you live in a state with ridiculously high taxes, it’s hard to imagine a rate over 50%. And most states exclude some income (SS income, some pensions, retirement income), and several states have no state income tax.

What am I misreading?
I excluded income directed to savings and investment. I am only discussing what we spend. Of the money we spend, 20% is for housing, food, utilities, household help, travel, home projects, health care, etc. The other 80% of what we spend is for income and property taxes.

We live in a high tax state, and our state has an income tax cliff for high earners. When you cross the tax cliff, the state marginal rate goes up to 80%, for a combined marginal rate of 117% on each additional dollar earned. If you make it past the cliff with even more income, the state marginal rate goes back down again.

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Archimedes
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Re: How can I get a handle on income taxes in retirement?

Post by Archimedes » Mon Apr 01, 2019 5:15 am

KlangFool wrote:
Sun Mar 31, 2019 10:10 pm
Archimedes wrote:
Sun Mar 31, 2019 9:56 am
TomatoTomahto wrote:
Sun Mar 31, 2019 7:15 am
If you want some help, please stop being coy about your assets and give real numbers....
My apologies if my post was somewhat obtuse. I know I am theoretically anonymous on this board, but still... And it doesn't feel right to post big numbers as I have seen that interfere with the conversation.

In an attempt to be more succinct, let me restate my actionable question:

As a high income earner, the current breakdown of our spending is 20% on living expenses and 80% on income taxes. We cannot afford to retire at our current spend level due to the high annual income tax burden. Does anyone have advice about how to figure out how much our income tax bill will go down in retirement? That would allow us to figure out how much we need in assets to retire.
Archimedes,

<< We cannot afford to retire at our current spend level due to the high annual income tax burden. >>

In order for someone to help you, we need to understand the breakdown of your income.

A) X% on salary income

B) Y% on capital gain

C) Z% on dividend

D) N% on interest income

E) O% on Busines income

Some of that will be gone when you retire.

I do not understand why you need to generate more income in order to be taxed. Especially your annual expense is low. Can you stop generating or deferred some of that income?

KlangFool

While it is wonderful to be well paid, my primary motivation for working at this point is because of my commitment to what I am building. The team that I have created over time is highly compensated, we have a great culture, and we are making the world a better place in our own small way. The profits of the business are spread far and wide to all of the employees. However, there is still too much left over for me.

I spent almost 2 hours with my tax accountant on Saturday going over my 2018 return page by page in an attempt to understand some of the complexity of the tax laws. The return is well over 100 pages and I do understand some of it, but it is complex even for the CPAs who prepare it and who dedicate their professional lives to understanding it.

It is annoying to have to make peace with the tax tail wagging the dog. I can easily control my own spending, so much of what we spend is optional and not necessary. However, the taxes are 4 times the other spending, and they are also confusing and not fully under my control. It is annoying to have to deal with all of the complexity when I have better things to do with my time, but I do need to understand taxes in retirement for my own peace of mind.

In answer to your question about current income breakdown, about 12% is W2, a relatively small percentage is interest and dividends, and perhaps 80% is K1 income from my 2 S-corps and pass through (not sure if pass through is the right term) income from my LLC. I also have real estate related income, but the depreciation deductions on the real estate bring that down significantly.

My tax accountant talked about how I could consider selling the business to private equity for a large one time capital gain, and we would be set for life, but I don’t want to give up control or abandon my team. Lots to think about.

Bacchus01
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Re: How can I get a handle on income taxes in retirement?

Post by Bacchus01 » Mon Apr 01, 2019 5:24 am

You don’t want to sell the business but you want to retire?

This is an entirely different scenario and one that is critical to the discussion. And one that now, without seeing a lot more detail, we can’t help you with. This is too complex a scenario.

FWIW, I’ve seen a lot of good intentioned business owners say “I’ll retire and let the team run it” only to either a)not retire and still run it, albeit in effectively, or b) watch it go down the tubes as the passion of the owner is gone and not replaced by another passionate manager.

I’d strongly suggest that if you don’t have a very strong succession plan, sell it. You don’t need to sell to PE. Sell it to the employees.

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Archimedes
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Re: How can I get a handle on income taxes in retirement?

Post by Archimedes » Mon Apr 01, 2019 5:41 am

Bacchus01 wrote:
Mon Apr 01, 2019 5:24 am
You don’t want to sell the business but you want to retire?
I simply want to begin planning for retirement. I am not ready to retire. But I do feel an obligation to understand my options going forward.

If I had to put my nickel down at this moment, I am planning to retire in 8 years. However, I have been around long enough to know that plans change.

MathWizard
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Re: How can I get a handle on income taxes in retirement?

Post by MathWizard » Mon Apr 01, 2019 6:26 am

I doubt that RMDs alone will put you in the top bracket.

This would mean RMDs above $600k for a couple.
Initial RMDs are less than 4% of the portfolio, which would mean you'd have to have more than $15 million in tax deferred.

Is this the case?

indexonlyplease
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Re: How can I get a handle on income taxes in retirement?

Post by indexonlyplease » Mon Apr 01, 2019 6:35 am

You are making this difficult.

What you spend now to live on is what you will spend in the future. Munis any debt you have. If you can afford to live the lifestyle you have now why not continue this same lifestyle in retirment. Why does it have to change if you can afford it.

I retired with the same income plus my investments. My idea was to retire with the same lifestyle and zero debt.

Bacchus01
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Re: How can I get a handle on income taxes in retirement?

Post by Bacchus01 » Mon Apr 01, 2019 6:50 am

Archimedes wrote:
Mon Apr 01, 2019 5:41 am
Bacchus01 wrote:
Mon Apr 01, 2019 5:24 am
You don’t want to sell the business but you want to retire?
I simply want to begin planning for retirement. I am not ready to retire. But I do feel an obligation to understand my options going forward.

If I had to put my nickel down at this moment, I am planning to retire in 8 years. However, I have been around long enough to know that plans change.
Sorry, but this is confusing. When you retire, are you planning to sell the business or not?

22twain
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Re: How can I get a handle on income taxes in retirement?

Post by 22twain » Mon Apr 01, 2019 7:17 am

If you plan to continue owning the business after retirement, I expect that your accountant is in the best position to advise you on your tax situation after retirement.
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GrowthSeeker
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Re: How can I get a handle on income taxes in retirement?

Post by GrowthSeeker » Mon Apr 01, 2019 8:05 am

To oversimplify: you want to know how much tax you'll be paying, in the steady state, in your golden years long after retirement.
There are some key events, such as whenever you sell a business or your interest in an LLC or maybe real estate; and these events will have a big tax effect that year: in that year you'll get a chunk of cash, pay a chunk of cash in tax, you net worth will be adjusted a little but mostly instead of owning $X of business, you'll own $X (+/-) worth of stocks and bonds.

But all that matters to your tax bill at age 80 is what will be your taxable income in the year that you are 80. [I submit that these "key events", once completed, will not have much effect on your future tax bill once the dust has settled.]

So make a list of numbers, each to be a component of your golden year income back-of-the-envelope calculation:
- SS * 85%
- Pension income
- Annuity income
- RMD income (just figure 4% of total non-ROTH IRAs, 401k's etc)
- taxable income from portfolio in taxable accounts (aye there's the rub, this can vary a lot depending on what you are invested in, some may be taxed at LTCG rates and some at ordinary income rates)
- Continued income from any business or real estate you'll still own (this is a big part we don't know)

(btw, for the above list, estimate your taxable and non-taxable account values as what they will be after 8 more years of investing 44% of your current income, and after selling whatever businesses you're going to sell and investing the proceeds.)
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Topic Author
Archimedes
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Re: How can I get a handle on income taxes in retirement?

Post by Archimedes » Tue Apr 02, 2019 8:14 am

I ran some of the calculators I was referred to. It seems I may pay somewhere in the range of 25% effective federal taxes and 6% state taxes in retirement. That knowledge is quite helpful.

So if I want to theoretically spend perhaps 300k per year on life, I should plan on 450k in income, and plan on having sufficient assets to fund that level of spending and taxes.

Spending 67% of income and paying 33% taxes in retirement sounds way better than my current breakdown spending 20% of annual expenses on living and sending 80% to taxes. For now I plan to continue working, but it feels much better having a bit of a roadmap of what tax expenses might be should I choose to retire sooner rather than later.

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Quirkz
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Re: How can I get a handle on income taxes in retirement?

Post by Quirkz » Tue Apr 02, 2019 9:26 am

Archimedes wrote:
Tue Apr 02, 2019 8:14 am
Spending 67% of income and paying 33% taxes in retirement sounds way better than my current breakdown spending 20% of annual expenses on living and sending 80% to taxes.
I think you may be making this issue more complicated for yourself by doing this comparison. "Expenses that go toward living versus expenses that go to taxes" is a comparison I almost never see. It may be an interesting curiosity, but it's a really sideways sort of view for managing finances. Especially when looking at a transition to retirement, your current numbers probably don't apply at all.
Archimedes wrote:
Tue Apr 02, 2019 8:14 am
I ran some of the calculators I was referred to. It seems I may pay somewhere in the range of 25% effective federal taxes and 6% state taxes in retirement. That knowledge is quite helpful. So if I want to theoretically spend perhaps 300k per year on life, I should plan on 450k in income, and plan on having sufficient assets to fund that level of spending and taxes.
This is a lot more "normal" of a way to look at things, and it seems to be giving you good usable info, so I'd continue to approach it from this angle. But keep in mind in retirement even this is likely to change. If you have money in Roth-style accounts, or even outside of retirement accounts, you may be living off investments/income that aren't even taxable, or are taxable at a lower rate. You may want to dig deeper into these things. But that said, for a first pass going with "earn 450k, spend the 300k remaining after taxes" sounds like a totally reasonable starting place.

Topic Author
Archimedes
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Re: How can I get a handle on income taxes in retirement?

Post by Archimedes » Tue Apr 02, 2019 5:21 pm

The reason I got twisted up in this mess was as a result of the advice, “Look at your spending to figure out what you need to retire.” Then there was the added suggestion that when looking at spending, you have to include what you spend for taxes.

Relatively recently my income shot up by a large multiple along with my taxes. My spending also went up, but by a much smaller multiple. The amount of tax I pay is mind boggling for someone who was a bit on the conservative side with spending for many years. I simply cannot wrap my head around it, so I try not to think about it. But when trying to map out a plan for retirement, I do have to consider taxes.

Many thanks to those who weighed in. I am much clearer on the path ahead than I was before I posted my silly question.

livesoft
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Re: How can I get a handle on income taxes in retirement?

Post by livesoft » Tue Apr 02, 2019 5:23 pm

And don't forget that charitable giving is also spending. :)
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