What tax rate to use in estimating needs for FIRE?

[urn2bfree]

What do you think is a good number to use in estimating tax burden in retirement? I hear repeatedly that taxes go down significantly with retirement. I think I have a good idea of our spending of after tax money as far as one can estimate such things, but when using any calculation of SWR you have to estimate the PRE tax amount of money. SO what is a fair number to use? Feel free to give ranges, as in --If your expenses are between $XX and $YY USE z% and use w% if some other range, etc.

 

[harley]

It would all depend on how you're getting the money. If pensions and SS, it will be pretty much a match to the tax tables. But if you are drawing down from cash you could be in the 0% bracket no matter how much you spend. If you are drawing down by selling stocks, 15% or less is a fair bet (as things stand right now). It shouldn't be too hard to estimate a good bracket to use. Of course, if you're a while away from ER and just looking for a number to be safe, I'd use whatever tax bracket you'd be in based on the amount you are withdrawing - ie. $100k I'd use 25%. It's a significant overestimate, but that's how I like to do things during calculations. Be ridiculously conservative and you're fairly sure to be safe.

 

[Midpack]

My goal is to stay below the income level that would push us beyond the 15% bracket. I assume you realize effective tax rates are always lower than your marginal rate. We paid a ridiculous 4% in taxes for 2012 because about half our income was dividends and LTCG taxed at 0%. There is no stock answer, depends not only how much you take as income each year but what your income sources are (fully taxable to not taxable at all, like Roth IRAs) and what deductions you'll have (if not standard).

 

[ducky911]

My goal is to stay below the income level that would push us beyond the 15% bracket. I assume you realize effective tax rates are always lower than your marginal rate. We paid a ridiculous 4% in taxes for 2012 because about half our income was dividends and LTCG taxed at 0%. There is no stock answer, depends not only how much you take as income each year but what your income sources are and what deductions you'll have (if not standard).

Me too midpack.......after years of being ....on taxes .I hit a magic spot and paid only 2 percent feds and 2.7 percent state.

zero percent on qualified dividends is cool. Looks like I will have the same thing for a year or two more. I was so happy I prepaid all of 2013.

 

[RunningBum]

It would all depend on how you're getting the money.

This is it in a nutshell. You should have an idea of where your income will come from. Plug your pensions, tIRA withdrawals, dividends, stock sales, Roth conversions, etc into a tax program like turbo tax and see what it says.

 

[heeyy_joe]

18% seems to be good for a fair share.

 

[W2R]

You are smart to be looking into this carefully. When I was planning for retirement, I felt overwhelmed by this problem. I used 25% in my computations because that sounded safe, but really did not know.

In my first three years of retirement my state+federal income taxes turned out to be 9.7% - 10.6% of my AGI. My income is from several sources, including dividends from my taxable account, equal monthly withdrawals from the TSP, and a tiny pension.

 

[obgyn65]

I am planning on 28% average tax rate after I FIRE.

 

[Svensk Anga]

I find Turbo Tax's quickie estimator good for questions like this. See:

TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator

It is much less cumbersome than using the full tax prep software. You can plug in your rough numbers according to source and get a tax calculation in a minute. You can quickly change a number and see how it impacts the bottom line. This is the way to get a quick read on your personal circumstances.

 

[Brett_Cameron]

I modeled the federal income tax calculations in my projection spreadsheets. I included escalation of the various tax parameters including bracket boundaries using the appropriate version of cpi and rounding rules.

 

[Katsmeow]

I use Turbo Tax so I just created dummy returns for several future years to see how changing things would affect things. Basically for the next few years we will be in the 25% tax bracket. For this I mostly said the income, except for DH's SS, came from the IRA so tax would need to be paid on the money. When all was said and done then during that period the total tax ranged between 9% and 10% of the total income.

After I turn 62, I modeled me taking SS as well so our withdrawals from the IRA would go way down (I may or may not actually take it then). I found that the tax ended up being lower then more around 5% or so.

For me in doing projections I'm using 10% since that seems safe enough. It may end up being less as we may spend some from taxable accounts so that would reduce the IRA withdrawals.

 

[HillCountry]

Some of the numbers make me laugh, because they are way off.

You just filed you tax return, so you know what is you average, just use that as good bet.

 

[REWahoo]

You just filed you tax return, so you know what is you average, just use that as good bet.

You are overlooking the fact many LBYM people spend far less than they earn in their working years and will have significantly lower incomes in retirement. Our federal taxes declined by 45% after we retired.

Those who suggest using something like TurboTax to estimate future income and income sources are providing some good advice.

 

[Gumby]

I use an average rate of 15% in my spreadsheets.

 

[Calico]

I find Turbo Tax's quickie estimator good for questions like this. See:

TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator

It is much less cumbersome than using the full tax prep software. You can plug in your rough numbers according to source and get a tax calculation in a minute. You can quickly change a number and see how it impacts the bottom line. This is the way to get a quick read on your personal circumstances.

Thank you for posting this. I have been wondering how best to estimate what I will pay in taxes in retirement, and Taxcaster will be a helpful tool. My income will be very straightforward - pension, social security, and Roth withdrawals, so this tool should do the trick.

 

[scrabbler1]

Part of my ER spreadsheet when I running the numbers in the years before I actually ERed included a projected income tax spreadsheet so I had good idea how much to include in the projected budget. Besides having less income, I also had added itemized deductions due to health insurance being partly deductible. Also, some of my investment income became taxable at 0% (federal) because it was Qualified Dividends and LTCG. Income taxes (federal plus state) are about 9% of my budget, not a huge portion but not trivial, either.

 

[sanfanciscotreat]

We have practically no earned income. Sold a lot of stock for CG's last year; that plus dividends and qualified dividends and other income was well over 100K and paid 10% Fed taxes

 

[HighRoller]

15%

 

[Midpack]

I am planning on 28% average tax rate after I FIRE.

You might want to explain further for the OP, that implies a stratospheric annual income/spending level. That's higher than the infamous rich "1%" - and more than Warren Buffett's widely publicized effective FIT rate! Almost no individual pays that much in FIT.

And I thought you were living on a relatively modest annual spending by choice?

 

[Midpack]

Some of the numbers make me laugh, because they are way off.

You just filed you tax return, so you know what is you average, just use that as good bet.

+1. Indeed...

 

[Independent]

What do you think is a good number to use in estimating tax burden in retirement? I hear repeatedly that taxes go down significantly with retirement. I think I have a good idea of our spending of after tax money as far as one can estimate such things, but when using any calculation of SWR you have to estimate the PRE tax amount of money. SO what is a fair number to use? Feel free to give ranges, as in --If your expenses are between $XX and $YY USE z% and use w% if some other range, etc.

I've burned off most of our after-tax savings, so our remaining income will come from a DB pension, IRA withdrawals, and Social Security.

The first two are taxed as ordinary income. For planning purposes, I assume that 85% of SS will be taxed as ordinary income.

So I just fill out a sample, very simple, 1040 with my planned income, and read the dollar amount of taxes from the tax tables. I can also get my marginal tax rate that way, if I have any use for it.

Early in retirement I was in a 15% bracket, I could see from the above that I was likely to get into a 25% bracket eventually, so I did some Roth conversions. But I didn't get a lot of money moved, so the Roth isn't in my plan.

 

[obgyn65]

A while ago, a colleague of mine sent me a link to a retirement planning engine. The default tax rate was 28%, so I have kept this number in my excel file since then. Happy to read that the rate when I retire may not be as high.

You might want to explain further for the OP, that implies a stratospheric annual income/spending level. That's higher than the infamous rich "1%" - and more than Warren Buffett's widely publicized effective FIT rate! Almost no individual pays that much in FIT.

And I thought you were living on a relatively modest annual spending by choice?

 

[REWahoo]

A while ago, a colleague of mine sent me a link to a retirement planning engine. The default tax rate was 28%...

Probably designed by the same folks who say you'll need 80% of your working income in retirement - so you better keep paying our high fees and investing with us or you'll be living in a cardboard box when you're forced to retire at age 75...

 

[obgyn65]

Yes I am. Sorry for any confusion.

As mentioned in the past, my posts tend to be short because of lack of time and interruptions, but have always been truthful.

And I thought you were living on a relatively modest annual spending by choice?

 

[pb4uski]

I would take last year's return and adjust it as needed. Take out wages, etc

In my case I went from 15% to 0% since most of my income is now qualified dividends.