Monthly Budget and Tax

[topdawg4ever]

So as I prepare for my retirement, I am starting to dive into Firecalc. Firecalc has no clear way to include taxable income, so I assume my spending value must include taxes?

 

[Gumby]

So as I prepare for my retirement, I am starting to dive into Firecalc. Firecalc has no clear way to include taxable income, so I assume my spending value must include taxes?

Yes, you must gross up spending for the taxes you will have to pay.

 

[FlaMariner]

We learned rather quickly that taxes (by far) is our largest expense category in retirement.

Plan accordingly.

 

[brett]

I do not use Firecalc. I have not used any retirement ss for the last 20 years or so.

Having said that, ALL of our retirement calculations are done on an after tax spend basis. I estimate our respective average tax rates based on the the current year performance and the prior years average rates. Our spend is based on a tape from our current account that captures spend for the year, previous year, etc. Fairly straightforward plus any adjustments for increased travel or capital items.

I take our investment return estimates to Nov. 30 and do pro forma tax returns in order to get a firm handle on what our respective income tax liability will be for the current year and what our quarterly tax installment payments will be set at for the upcoming year.

 

[pb4uski]

We learned rather quickly that taxes (by far) is our largest expense category in retirement.

Plan accordingly.

I assume that you are referring to income taxes?

If so, not for us and I don't think that is common. I guess that it might vary depending on how narrow or broad your spending categories are.

Without Roth conversions our taxes would be negligible and even with Roth conversions our federal income taxes are less than 10% of our annual spending. We spent as much on travel in 2024.

 

[pb4uski]

So as I prepare for my retirement, I am starting to dive into Firecalc. Firecalc has no clear way to include taxable income, so I assume my spending value must include taxes?

Yes. You can use https://www.irscalculators.com/tax-calculator to do an estimate of your taxes in a "typical" year and use the result as a starting point for what to include. Of course, it will vary as your income varies, you get additional deductions for over 65, etc.

 

[Jeffman52]

We learned rather quickly that taxes (by far) is our largest expense category in retirement.

Plan accordingly.

Ain't that the truth! Ive been working my retirement budget and DW and I are living on that budget now in preparation to our retirement in May. I set up an auto transfer at the bank to move money to a separate account to pay taxes and insurance out of. Its not unexpected but you do have to plan for it.

 

[pb4uski]

^^^ You might be surprised to learn that a married couple over 65 with $125k of income in 2024 can have federal income tax of 0% to 8.54% of income depending on how their income is structured. I don't view that is large given that at points when I was working my federal tax was ~18% of my income when I was working since I was in the 28% tax bracket.

 

[audreyh1]

So as I prepare for my retirement, I am starting to dive into Firecalc. Firecalc has no clear way to include taxable income, so I assume my spending value must include taxes?

Yes, absolutely. It’s one of your expenses.

Fortunately income taxes often drop quite a bit after retirement depending on how you are invested and other income sources such as pension. Also you stop paying the charges for SS and Medicare that came out of your paycheck.

 

[topdawg4ever]

Really appreciate all the responses. For summary:
$700k In Stocks and Bonds
$1.6m in IRA tax deffered
$730k in 401k tax deferred
$1.3m in tax deferred.

So.....I am assuming I will get nailed with taxes, as most my $$ is sitting in tax deferred accounts?

 

[Flyfish1]

I also used https://smartasset.com/retirement/retirement-taxes before I retired to help get an estimate of taxes.

 

[Flyfish1]

Really appreciate all the responses. For summary:
$700k In Stocks and Bonds
$1.6m in IRA tax deffered
$730k in 401k tax deferred
$1.3m in tax deferred.

So.....I am assuming I will get nailed with taxes, as most my $$ is sitting in tax deferred accounts?

Depends how much you intend to draw down per year. But, yes you will be taxed on those withdrawals. Good numbers though

 

[pb4uski]

...So.....I am assuming I will get nailed with taxes, as most my $$ is sitting in tax deferred accounts?

Probably, but tax brackets are historically low so you'll probably still pay less taxes on withdrawals than the taxes avoided when you deferred that income. If so, you still come out ahead.

 

[topdawg4ever]

Preliminary numbers indicate as low as $37k per year.

 

[pb4uski]

If you are in good health and have decent family longevity you might want to consider deferring SS so that between when you retire and when RMDs are required you can do withdrawals and/ot Roth conversions at more favorable tax rates. But don't forget that you balances will also be growing.

But I think you are likely to be paying substantial taxes but still probably less than what you avoided when you deferred that income.

 

[MarieIG]

I consider taxes as part of my expenses. We pay federal, state and property.

It was somewhat easier while working, as I always claimed no dependents and had extra withheld.

 

[2017ish]

You definitely should look at Roth conversions, particularly if you can do it before (if?) tax rates snap back for 2026.

Your numbers aren't that different than what we had at retirement. Via conversions and investing Roths 100% in equities, we've gone from roughly 4mill TIRA and 300K Roth at year end 2017 to 2 3/4 million in each as of year end 2023. (Our taxable funds ran out in 2020, so we've also been spending TIRA funds.)

 

[FLSUnFIRE]

I track income taxes as an expense but manage them as part of my income stream. Property and sales taxes are rolled into my regular expense planning. I know I need X dollars to fund my life and then figure out how I'll raise the income to net, after taxes, that amount. I'm currently paying little in income taxes and likely will until I start SEPs which will provide a higher baseline of taxable income making it harder to play limbo under thresholds. When putting in expenses for FIREcalc, I use a WAG over my existing spending to account for income taxes.

 

[kgtest]

We learned rather quickly that taxes (by far) is our largest expense category in retirement.

Plan accordingly.

Great perspective! I've had to plan to reduce the size of the tax torpedo's coming at our investments...will likely have sizable inheritence with some inherited RMD's...perhaps even during when our OWN RMDs come along.

So I managed to move 50% of that torpedo away from the ship of my ole man...and so far DW and I have only a 33% taxable liability that as we continue to stuff Roth, and do backdoor conversions as we have... SHOULD reduce that down to less than 10% by the time we FIRE and RMD comes due

 

[marko]

We learned rather quickly that taxes (by far) is our largest expense category in retirement.

Plan accordingly.

Made me look. Fed, State and Property Taxes make up 50% of our expenses.

 

[Koolau]

We learned rather quickly that taxes (by far) is our largest expense category in retirement.

Plan accordingly.

That surprises me (not that I doubt you in the least.) I pay considerably less in taxes than I had planned for in retirement. We have lots of deductions which reduce the tax hit. Also, state taxes are structured differently than we had planned on when we moved. Thus the tax hit (state) is also smaller.

Maybe you could revisit your tax situation. Maybe even hire a tax person to help reduce taxes if possible. As always, YMMV.

 

[FLSUnFIRE]

50% of expenses when I do back of envelope:


Non-tax Spending is X
Taxes is X
Assuming 100% of spending is funded by taxable income (no principle) is 2X or a 50% tax rate (a bit less if backing out property/other taxes). If any principle is spent it would be even higher.



Unless there are huge RMDs, an insane pension, or some other firehose of taxable income far in excess of need that can't be shut off (or the person is extremely thrifty and only spends a small fraction of realized income) how does one have a 50% of their spending be taxes after retiring? I have trouble wrapping my head around it. Sounds like a BTD situation.



Over my working career when I was saving for FI, taxes (including SS) were about 1/2 of what I spent on non-tax expenses (33% of "spending"). I never made a lot but did ok. Now my taxes (other than property) are negligible.

 

[pb4uski]

We learned rather quickly that taxes (by far) is our largest expense category in retirement.

Plan accordingly.

Not for us in retirement but taxes were by far and away our largest expense category while working... more than our mortgage and property taxes combined.

 

[dunkelblau]

Yes, you must gross up spending for the taxes you will have to pay.

Not sure about lumping income taxes with living expenses. Perhaps not a realistic scenario, but if someone is returning say 15%/yr on their stash and paying a third of that in income taxes, then income taxes alone would be a 5% WR, which sounds "above SWR" even though their stash is growing rapidly. Would it be more appropriate to charge income taxes against projected investment returns instead of adding them to living expenses?

 

[pb4uski]

Not sure about lumping income taxes with living expenses. Perhaps not a realistic scenario, but if someone is returning say 15%/yr on their stash and paying a third of that in income taxes, then income taxes alone would be a 5% WR, which sounds "above SWR" even though their stash is growing rapidly. Would it be more appropriate to charge income taxes against projected investment returns instead of adding them to living expenses?

Totally silly.

First, even if someone was getting 15% it doesn't mean that the entire 15% would be taxable. Might be in tax-deferred or tax-free accounts like a Roth IRA. Could be entirely tax-free depensing on tax placement of assets.

Second, 33% tax rate is unlikely.

Overall, hogwash.