Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
What is the Equation for Pre-Tax Income Requirement?
Old 01-02-2011, 08:07 AM   #1
Recycles dryer sheets
 
Join Date: Feb 2010
Posts: 396
What is the Equation for Pre-Tax Income Requirement?

How do I figure out how much pre-tax income I will need in retirement? For example, say I estimated $Y in annual living expenses (post-tax) while retired. And say I am using a 15% tax bracket.

Initially, I was using this equation- $Y x 1.15. But when I subtract 15 percent of that I don't get back to the sum I need to cover my annual living expenses.

Can you please provide me with the basic equation to get my pre-tax income requirement when I know my annual living expenses and income tax rate.

Thank you for your advice.
__________________

__________________
nico08 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-02-2011, 08:16 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Try using 1/0.85 as your multiplier. 1 / 0.85 = 1.17647059

Or simply divide by 0.85 since that is the remaining income after 15% is taken off the top.

I think that is what you are trying to do.
__________________

__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 01-02-2011, 08:17 AM   #3
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
The formula is 50K / (1-T) where T is your effective tax rate, not your marginal rate. So if your effective rate were 15%, the formula gives 50,000 / 0.85 = 58,823.53. 15% of 58,823.53 = 8,823.53
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Old 01-02-2011, 08:37 AM   #4
Recycles dryer sheets
 
Join Date: Feb 2010
Posts: 396
My pre-tax required annual living expense amount is higher based on the formula you suggested compared to the (incorrect) formula that I was using. :-( But I will go with the higher amount, because I want to be as accurate as possible.

Thank you.
__________________
nico08 is offline   Reply With Quote
Old 01-02-2011, 08:58 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,619
Why not use the Intuit taxcaster calculator: TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator

Just plug in numbers until you have $52,000 left to spend. It really is easy.

So what number did you get?

I'll give you an example: I cashed in $52,000 of stock with a basis of $52,000. I pay no tax. OK, that's too simple, so I converted some IRA money to a Roth IRA. I still pay no tax. Later on withdrew $52,000 from my Roth IRA, so I still pay no tax. Etc.

The problem with formulas is that many things are not taxed since there is the 0% tax bracket. Also if you are getting SS, then how much of that is taxed depends on a few things. In any event, you do not want to use your marginal rate as discussed by FIRE'd@51.
__________________
LOL! is offline   Reply With Quote
Old 01-02-2011, 09:07 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Yes - but by assuming he is paying 15% from dollar 0, he is giving himself a nice margin for error.

Audrey
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 01-02-2011, 11:21 AM   #7
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Quote:
Originally Posted by audreyh1 View Post
Yes - but by assuming he is paying 15% from dollar 0, he is giving himself a nice margin for error.
Not to mention avoiding the hassle factor of having to apply the correct tax rate for the 10%/15% income brackets (assuming you have any "income" in "retirement"), the correct brackets for short/long term cap gains (assuming no carryover cap losses or foreign tax credits), the correct brackets for qualified/unqualified dividends, and the calculated taxable/non-taxable ratios for Roth IRA conversions.

Don't get me started on options taxation.

As long as you don't trigger AMT!
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 01-02-2011, 12:07 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Quote:
Originally Posted by Nords View Post
As long as you don't trigger AMT!
You're generally safe there if your total annual income is under about $72K (filing jointly).
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 01-02-2011, 12:21 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,385
Quote:
Originally Posted by midnighter777 View Post
How do I figure out how much pre-tax income I will need in retirement? For example, say I estimated $Y in annual living expenses (post-tax) while retired. And say I am using a 15% tax bracket.

Initially, I was using this equation- $Y x 1.15. But when I subtract 15 percent of that I don't get back to the sum I need to cover my annual living expenses.

Can you please provide me with the basic equation to get my pre-tax income requirement when I know my annual living expenses and income tax rate.

Thank you for your advice.
Don't forget tht a 15% marginal rate does not mean that all your income will be taxed at 15%, only that the last dollar will be taxed at that rate. Your overall blended rate will be lower. Of course by using 15% you dial in a bit of margin for error.


Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 01-02-2011, 12:31 PM   #10
Thinks s/he gets paid by the post
Koolau's Avatar
 
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 3,244
It's complicated!

As Nords points out, you can't simply apply a 15% number to the whole thing and get very close. Still, as Audrey points out, that will give you an added margin of safety.

If you've never done your own taxes before (I have not!) you might ask your usual tax preparer for a "freebee" estimate on this. It should take him/her a couple of minutes to do a back-of-the-envelope estimate over the phone.

If you have previously been living on earned income and now will soon be living on pension, not too much will change, but if you have a complicated source of non-earned, non-pension income, you may have to do quarterly estimated taxes (a real pain without a preparer IMHO). In that case, you'll have to pay a preparer anyway if you don't want to do it yourself. That would be a good time to ask your original question - at no additional charge, hopefully.

Oh, by the way. What about your STATE taxes?? As I said, it's complicated.
__________________
Ko'olau's Law -

Anything which can be used can be misused. Anything which can be misused will be.
Koolau is offline   Reply With Quote
Old 01-02-2011, 12:42 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,974
Quote:
Originally Posted by Nords View Post
Not to mention avoiding the hassle factor of having to apply the correct tax rate for the 10%/15% income brackets (assuming you have any "income" in "retirement"), the correct brackets for short/long term cap gains (assuming no carryover cap losses or foreign tax credits), the correct brackets for qualified/unqualified dividends, and the calculated taxable/non-taxable ratios for Roth IRA conversions.
These can make it a lot more complicated - I believe they will for many of us. Despite the income required to cover projected spending, actual income will hopefully be higher which could easily push you into a higher effective bracket...the [marginal] 25% bracket starts at 34.5K if you're single in 2011.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 01-02-2011, 12:49 PM   #12
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
I pay my FIT monthly, when I do my monthly withdrawl from my IRA. I also have an SPIA, which I do not have FIT withheld on monthly income. I don't pay any state nor local income tax on my retiement income.

As far as the IRA withdrawl, I'll have 15% taken out and FIT paid by the account holder, either FIDO or VG (don't have to file quarterly), and use the x/.85 computation to compute the breakdown of estimated taxes due.

In December (after I have received my latest TT download for the current year). I'll plug in the YTD income numbers, along with anticipated December SPIA and IRA income/withdrawls. I have yet to pay any FIT for December, since that 15% has covered my YTD and December income (actual overall FIT rate is right around 10%), but if I had to adjust FIT, I would do it with the December withdrawl.

You could say that I overpay FIT during the year, but I would rather get a few dollars back (and not pay in December) than have it taken at a lower rate and have to pay in, which I had to do other years.

Just an example of how I do it...
__________________

__________________
rescueme is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Pre Poll - Retirement Income Midpack FIRE and Money 20 12-05-2010 03:21 PM
Poll:What Amount of Your Pre-retirement Income are You Living On? tgotch FIRE and Money 25 12-03-2010 03:39 AM
When are post-tax savings better than pre-tax? RockMiner FIRE and Money 30 03-21-2009 01:56 PM
Vanguard tax-exempt MM at 2.6% pre-tax soupcxan FIRE and Money 17 12-28-2005 10:13 AM

 

 
All times are GMT -6. The time now is 04:50 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.