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Cost of working, tax brackets, and living off income
Old 05-11-2007, 03:15 PM   #1
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Cost of working, tax brackets, and living off income

I was doing some "retirement" adjustment calculations... based on feedback to not base planning off current income, but instead to base it off current expenses.

Here is something I am chewing on:

Wife and I both work and file taxes as married filing jointly. 2007 tax brackets suggest 64k is "over/under" between 25% and 15% tax bracket.

My gross income alone is over 64k. Meaning I have taxes withheld at 25% level.

Based on our take home pay (which drives our expenses), we spend less than 48k per year (of my salary), the 48k is in lower-15%- tax bracket if it is coming from "investments" as opposed to an employer. The difference between Gross and take home accounts for FICA, 401k contributions and taxes paid.

The adjustment changed many of my "charts" I use to track early retirement by at least 8 years (Meaning I can retire at least 8 years earlier than expected based on these projections).

This also blows the Roth assumptions out the window. At one point I was thinking because we are in 25% bracket now, and getting close to 28% bracket (wife works a good job too) we would be in high bracket in retirement. Now I look at "spending" and the income we need is barely above 15% bracket now (we take home only 2/3 of our gross based on 401k deductions and taxes).

This also shows me the cost of working for us is close to 40k, even before we consider travel costs/ clothing costs/ business costs. If we "gross" close to 120k and take home less than 80k, 40k is going somewhere which is not to us.

Curious- Taxes are based on AGI... and I assume AGI figures in gross pay minus deductions and taxes paid... is the assumption to amount needed closer to "take home" pay (which drives spending) or gross pay (which determines tax bracket) to you out there in internet land?
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Re: Cost of working, tax brackets, and living off income
Old 05-11-2007, 03:32 PM   #2
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Re: Cost of working, tax brackets, and living off income

You must be including federal, state, FICA, medicare taxes in your discussion to get such a high tax rate for you.

Don't forget about the 0% income tax bracket. You can make a lot of money and not pay any taxes. Get out your copy of TurboTax and run the numbers. If you have kids, you might be able to make $100K and pay no income taxes.

I think I figured once that our investments could pay us $100K a year and we would pay only about $3K a year in taxes.

Anyways, do the TurboTax thing and see what happens.
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Re: Cost of working, tax brackets, and living off income
Old 05-11-2007, 04:01 PM   #3
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Re: Cost of working, tax brackets, and living off income

My post retirement expenses include living expenses, playing expenses, and extras for future big ticket items. The rest is an estimate of Fed. and State income taxes based on my sources of retirement income.

Your ER expenses need to account for taxes. You should determine the source of your income to determine roughly the amount of taxes you can expect from this income stream without Medicare, SS, and retirement savings (and without income reductions due to pre-tax contributions).

Some retirement income can still generate SS and Medicare taxes (stock options for example). Most will be taxed at the regular income rate for your income level. Pensions are income and are taxed much like a wage (without SS and Medicare).
Dividends are taxed at a much lower rate (rate is related to your income level)
Capital gains are taxed at their respective rates.
Deductions to income may actually increase since your income may be lower than while working.

Lots to consider if you are that close in your nest egg. The more complex your income stream in ER the more complex the calculation for true expenses.

Always have a cushion in your nest egg (income stream) to cover unexpected or miscalculated expenses.
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Re: Cost of working, tax brackets, and living off income
Old 05-13-2007, 08:10 PM   #4
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Re: Cost of working, tax brackets, and living off income

Assuming your home is paid off, your deductions in ER will not be over the standard deduction of $10,700. So add your two $3400 exemptions to that. Then add that $17.5K to all of those AGI tax bracket numbers for Married Filing Jointly. Now the 15% bracket for gross income, not AGI, goes from $63150 to $81200. To me, looking at tax tables without adding back the $17.5K of exemptions and deductions, is deceptive for planning purposes.
For those who are making over $7K a month in retirement, ignore this prattle about the 15% bracket.
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Re: Cost of working, tax brackets, and living off income
Old 05-13-2007, 09:56 PM   #5
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Re: Cost of working, tax brackets, and living off income

Quote:
Always have a cushion in your nest egg (income stream) to cover unexpected or miscalculated expenses.
Remember also that you will hopefully have a long retirement and that current tax rates are very low historically. A miscalculated expense could be increased taxes or a reduction in benefits. (something will have to be done eventually for Medicare, SS, smaller workforce etc).

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