How do retirement calculators handle taxes?

[Jerry1]

When I'm running numbers through a retirement calculator, how are taxes handled? If I'm drawing down $75,000 per year, after taxes I'll have less to spend. So when I put in a spending amount, is there a tax assumption? Or, do I have to put in a larger amount for taxes. For example, let's say I want to spend $75,000 per year. To do that, I'm going to have to draw down about $88,000 assuming a 15% tax rate. Does that mean I should put $88,000 in the calculator or does it somehow account for taxes?

 

[pb4uski]

It depends. Most expect you to include taxes in your expenses/withdrawals. For others, there is a separate tax assumption.

One thing to keep in mind is that it is likely that your tax rate will be much lower in retirement than while you are working, depending on the sources of your cash flow. Mine went from 28% marginal to zero.

If you're living off of taxable savings it is likely that your taxes will be low.

 

[skibum]

The tax situation in retirement and ER is much different than working years, there are some great opportunities.

The first article below illustrates how income and capital gains are handled at the top of the 15% bracket, the effective tax rate can be very low or zero for many retirees.

Of the many posts here and on Bogleheads for maximizing the 15% bracket in ER, the second post below opened my eyes to the opportunities to withdrawal tax deferred savings with near zero federal tax.

https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

Bogleheads • View topic - How to pay ZERO taxes in retirement with 6-figure expenses

 

[pb4uski]

What you can do is enter you expected income sources in retirement into Taxcaster to get an idea of how your taxes will change. Or take a copy of last years tax return if you did it using software, take out the earnings since you won't be working, and make any appropriate adjustments if you have pensions starting or whatever.

Also, be aware of state income taxes if you live in a state that taxes income.