What is the Equation for Pre-Tax Income Requirement?
 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. __________________ __________________
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 01-02-2011, 08:16 AM #2 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   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!
 01-02-2011, 08:17 AM #3 Thinks s/he gets paid by the post   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
 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. __________________
 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. __________________
 01-02-2011, 09:07 AM #6 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   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!
01-02-2011, 11:21 AM   #7
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Quote:
 Originally Posted by audreyh1 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!
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01-02-2011, 12:07 PM   #8
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Quote:
 Originally Posted by Nords As long as you don't trigger AMT!
You're generally safe there if your total annual income is under about \$72K (filing jointly).
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01-02-2011, 12:21 PM   #9
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Quote:
 Originally Posted by midnighter777 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
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 01-02-2011, 12:31 PM #10 Thinks s/he gets paid by the post   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.
01-02-2011, 12:42 PM   #11
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Quote:
 Originally Posted by Nords 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.
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 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... __________________ __________________

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