How To Meet Your Retirement Goals In 3 Easy Steps
Updated: Mar 21
In order to talk practically about retirement, you need to start with a realistic idea of how much money you'll need to live on and where that income will be coming from.
Imagine yourself on the first day of retirement. How old are you? Where are you living? How much will you be spending on housing, transportation, food, health care etc.
If you're like most people, these essentials alone will account for over 80% of your retirement spending and that's before the fun stuff like travel, leisure and entertainment.
Mitigating the Tax Torpedo
The decision of when to take Social Security versus retirement plan benefits might change significantly if taxes are considered. A result known as the “tax torpedo” may occur, which refers to a high marginal tax rate that is potentially triggered when retirees take Social Security payments in the same year they receive income from IRAs and other taxable sources. The term “tax torpedo” alludes to the apparent unfairness of such a high tax being imposed on retirees with moderate incomes who are dependent on Social Security benefits for much of their retirement income.
The Social Security taxation formula can cause a taxpayer’s marginal income tax rate to exceed the top rate applicable to the highest income earners. Two conditions create the tax torpedo:
Income thresholds applicable to tax on Social Security benefits have not been indexed to inflation or changed since the initial laws authorizing income tax on Social Security payments over 20 years ago were enacted. Inflation has reduced these formerly high income levels to moderate income levels, thereby exposing many middle income retirees to a high marginal tax rate.
Combining taxable IRA and retirement plan income with Social Security income in the same year triggers the torpedo, causing retirees’ effective tax rates to soar.
State income taxes can also amplify the tax torpedo effect. However, the effect can be reduced or avoided by taking IRA or other retirement plan distributions first and claiming Social Security retirement benefits later. This tactic gives the Social Security benefit time to “mature,” resulting in a higher benefit later and ultimately reducing the amount of taxable income that a person will need to withdraw from IRAs and other taxable accounts during their retirement years.
Taking smaller IRA and other plan withdrawals will result in a lower adjusted gross income, which may increase the possibility that Social Security benefits will remain tax free.
Things To Remember:
IRA withdrawals can create capital gains tax
IRA withdrawals can create taxable Social Security benefits
IRA tax complications for the surviving spouse
IRA tax complications for next generation beneficiaries
The More You Have In Your 401(K) Or IRA, The More You'll Lose To Taxes. AND The More Money You Receive From Your 401(K) or IRA, The More Of Your Social Security You'll Lose To Taxes. Watch the video below and compare the tax strategy of The Browns vs. The Smiths
Once you have a fairly accurate idea of what your life in retirement will look like, the next step is to take a look at your retirement income. Let's get started with the video below.
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Don't go broke in a nursing home. Learn how to protect your retirement from rising health care costs, not covered by Medicare.
Still have a few questions?
Here are the answers to some questions we’re frequently asked by people.
What Is Financial Planning?
A financial plan shows you the absolute best thing to do with your money every month so you can enjoy the highest possible standard of living for the rest of your life.
Is This About Budgeting?
Not exactly. We won’t tell you to spend less on the things you enjoy. You can save as much or as little as you wish, and we’re like a crystal ball that shows you exactly what that means in terms of when you can retire and how much income you can expect in retirement. We hope you’ll take advantage of this rare insight to make the financial decisions that will make you happiest.
How Often Do I Update My Plan?
We recommend updating your plan every six months to make sure it’s still consistent with you and your goals. However, you may want to update it more often if there’s something new going on, such as a change in your work, finances or family.
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