October 28, 2025 • 19 mins
Early retirement income can feel complicated, but a steady paycheck from savings starts with a simple framework. This episode reframes withdrawal decisions, explains why a fixed 4 percent rule can be too conservative in some cases, and shows when a 5 percent starting point may fit with the right allocation and ongoing adjustments. A million dollar case study turns rates into an annual paycheck while addressing sequence risk and flexible spending guardrails.
Taxes do the heavy lifting. Retirement income is taxed differently than wages, with no FICA on non wage income, only up to 85 percent of Social Security taxable, and long term capital gains often taxed at 0 or 15 percent. Blending IRA withdrawals, brokerage draws, and Social Security can produce the same 100,000 dollars of cash flow with a lower tax bill than a 100,000 dollar salary. The discussion covers thresholds, brackets, the higher standard deduction after age 65, and tactics to keep more of the portfolio working.
The episode finishes by assembling the paycheck. IRA, brokerage, Roth, Social Security, and pension income are coordinated so deposits match spending rhythms, with room for the retirement spending smile, one time costs, healthcare, and annual tune ups as markets and laws evolve.
-
Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.
The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.
Create Your Custom Strategy ⬇️
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:00):
You've saved for decades, but here's the
(00:01):
challenge.
Your 401k plan does notautomatically turn into a
paycheck for you.
You have to create one yourself.
And if you don't do itcorrectly, you're either going
to outspend your portfolio, runout of money, or you're going to
spend far too little and notfully enjoy what you've worked
so hard for.
So in today's video, I'm goingto show you three simple steps
that will allow you to takethose retirement savings and
turn that into a paycheck thatwill support your retirement
(00:23):
needs.
Now the steps themselves aresimple.
It's the nuance within thesesteps is what gets people
tripped up.
So the steps here are numberone, understand your portfolios,
sustainable withdrawal rate.
Number two, factor in taxes.
And then number three,coordinate with other income
sources.
Now the steps themselves aresimple.
It's the nuance.
That's where people get trippedup.
(00:44):
It's a nuance in here thatallows you to optimize this
paycheck.
And if you don't factor it incorrectly, it could be the thing
that caused you to run out ofmoney.
So to make this video as helpfulto you as it can possibly be,
let's not just look at thesteps, but let's apply it to a
real example or a sampleexample.
Let's take Mary and let's assumethat Mary is 65 years old and
she has$1 million in herportfolio,$700,000 of which is
(01:06):
in her traditional IRA,$300,000is in a brokerage account.
And of that$300,000, let'sassume it's all in an S P 500
index fund.
Let's make the assumption thatshe purchased that for$150,000
years ago and it's now worth$300,000.
So as we go through these steps,let's actually apply it to her
situation so you can see wherethe nuance comes into play.
So number one, start withunderstanding your portfolio's
(01:28):
sustainable withdrawal rate.
Why do I say your portfolio?
There's all kinds of rules ofthumb or research that shows how
much you can spend from yourportfolio without running out of
money in retirement.
But here's the thing (01:39):
not all scenarios are created equal.
This largely depends upon howare you invested and how long
are you planning your retirementto be.
Someone who's already 90 yearsold can spend a whole lot more
from their portfolio thansomeone who's 50 years old,
simply due to how long they needthat money to last for them.
So in Mary's case, let's assumeshe has 30 years, traditional
(01:59):
research, you might have heardof the 4% rule.
The 4% rule says that if youhave 30 years of retirement in
front of you, 4% is the amountyou can take out of your
portfolio.
And even if you retire into someof the worst time periods that
we've ever had here in the US,your portfolio would last for
those 30 years.
We're talking about periods likethe Great Depression, we're
talking about time periods likethe 70s when you had horrible
(02:20):
inflation combined with seriousdown markets.
That 4% rule became somethingthat a lot of people adopted and
use it for their retirementneeds.
Here's the interesting thingthough.
For most people, that 4% ends upbeing far too conservative.
In fact, I had a conversation onthis channel with Bill Bangin
not too long ago, and BillBangin is the initial author of
that 4% rule research.
(02:42):
He did this way back in the 90s,and that 4% rule is where that
started.
But in his words, that 4% rulefor most people is far too
conservative.
In fact, most people would bewell served by taking 6-7% plus
from their portfolio each yearif they had the benefit of
hindsight.
I say if they have the benefitof hindsight because the problem
as retirees is we just don'tknow what 30-year time period
(03:05):
we're going to retire into.
If we knew that it was going tobe an average time period, even,
we could spend a lot more.
But the thing is we don't know.
Are we going to retire and haveanother 2008 type event?
Or are we going to retire andhave wonderful markets in front
of us?
Because we don't know that, wehave to lower at least our
initial withdrawal rates to makesure we're not pulling too much
(03:25):
money out too soon, especiallyif you combine that with a big
bear market.
But here's what Bill himselfsaid.
He said that a sustainablewithdrawal rate today, if you
invest your portfolio correctlyand if you account for certain
things along the way, isprobably closer to 5%.
Could be much higher, dependingon how the market does, but
something closer to 5% might bemore realistic for most people.
(03:48):
So let's go back to Mary'sexample.
She has a million dollars in herportfolio.
We simply apply a 5% withdrawalrate to that.
What that means is Mary, asyou're looking to create your
paycheck,$50,000 of thatpaycheck can be thought of as
coming from that portfolio.
But before we start thinkingthat that's it, there's two more
things that we need to consider.
It's not as simple for Mary tojust say, I'm going to take
$50,000 and that's what I cannow live on for the rest of my
(04:10):
life.
The second thing you need to dois factor in taxes.
Taxes are a huge one.
When you take that$50,000, that$50,000 isn't yours free and
clear.
This is where tax strategy andtax planning and just general
tax awareness comes into play inretirement.
Because here's the thing (04:25):
when you are working, your taxes are
much different than when you'reretired.
At the federal level, the sametax rates still apply, but the
makeup of your income and theway that it's taxed is
significantly different inretirement.
Now I'm going to show you realnumbers with real tax planning
software so you can see howdramatically different it has
the opportunity to be.
But to start, just understand afew different things.
(04:47):
Number one, in your workingyears, you are paying payroll
taxes, FICA taxes.
This is up to 7.65% of everydollar that you earn, you are
paying into Social Security andMedicare.
That's what your payroll taxesfund.
Now, in addition to this, whenyou retire, Social Security
tends to be a big portion ofyour paycheck.
Social Security, a maximum of85% of it, will be included in
(05:08):
the amount that you pay federaltaxes on.
At the state level, depending onwhat state you're in, most
states don't actually tax SocialSecurity at all.
So when you look at thedifference between where your
income's coming from, that is abig difference.
Now your standard deduction.
Once you're 65 or older, you getan enhanced standard deduction,
which means you can deduct moreof the income coming in, which
(05:30):
means you have less of taxableincome.
Then if you look at things likebrokerage accounts, if you're
starting to live on a brokerageaccount, the long-term gains on
an account are taxed morepreferentially than are ordinary
income rates, things like wages,IRA distributions, et cetera.
Or you might be pulling some ofyour money from Roth IRAs.
And Roth IRAs, of course, arecompletely tax-free.
Same with HSAs, if you're usingthat money for qualified medical
(05:53):
expenses.
So when you look at just thegeneral changes, you can start
to see that there's thepotential for your tax situation
in retirement to looksignificantly different than
your tax situation when you'reworking.
Let's actually look at anexample right now.
So what I'm doing in this firstscenario is I'm looking at this
for Mary last year.
So I'm making the assumptionthat last year she was still
working and she earned$100,000,just to use super simple
(06:13):
numbers.
What would her tax situation be?
And then let's compare that towhat would her tax situation be
if she earned$100,000 inretirement.
Well, if this$100,000 is justwages, all of it is included in
her adjusted gross income.
She would have a standarddeduction for 2024.
That number is$14,600.
Once you back out the standarddeduction from her total income
(06:33):
or her total adjusted grossincome, her taxable income is
$85,400.
That's the amount she's actuallypaying taxes on.
So if we scroll down here, whatwe can start to see is some of
that$85,000 and change is taxedat 10%.
The first$11,600 is taxed at10%.
Then the next amount from$11,600to$47,150 is taxed at 12%.
(06:55):
Then the remaining amount istaxed here at the 22% tax
bracket.
If we look at all of this, hertotal federal tax is$13,841.
That's not the entirety of hertax picture.
That's just federal incometaxes.
She also is paying 7.65% forFICA taxes on the entirety of
this$100,000.
So that's an additional$7,650that she's paying in FICA taxes.
(07:19):
Now let's just assume that shedoesn't have any state income
taxes to keep this as simple aspossible.
But the reality is if she livesin a state where there are
income taxes, she would owe evenmore.
But if we add up Mary's payrolltaxes plus her federal income
taxes, she's paying just under$21,500 in taxes if she earns
$100,000.
So an effective tax rate ofabout 21.5% when you include
(07:42):
federal and payroll taxes.
So keep that percentage in mind,about 21.5%.
Now let's assume that this yearMary retires.
And this year Mary retires andher income sources are as
follows.
She receives$2,500 per monthfrom Social Security, which is
$30,000 per year.
She takes$40,000 from her IRAthis year.
So so far we're at$70,000, 30from Social Security,$40,000
(08:05):
from her IRA.
The remaining$30,000, let'sassume she takes that from her
brokerage account.
Like I said, her brokerageaccount, she put money in, she
acquired her investments at$150,000.
They're now worth$300,000.
So half of what she pulls out ofthat account is a return of what
she already put in and what wasalready been taxed, and half of
it is a long-term capital gain.
(08:26):
So the tax impact of pullingthat$30,000 is$15,000 of it is
tax-free.
She's already paid taxes on it.
There's not an additional tax.
But the$15,000 of gains, that istaxed, but it's taxed at
long-term capital gain rates,which are lower than ordinary
income rates.
Using those assumptions, let meshow you how dramatically
different her tax situation isgoing to be with those numbers
(08:48):
in her retirement years than itwould have been earning$100,000
in ordinary income in wagesprior to retiring.
So here's that same tax reportfor Mary, but it's now using her
retirement numbers.
Right off the bat, we seesomething that looks much
different.
Previously, her total income was$100,000.
It's still$100,000 if we'reincluding her cash flow, the
(09:08):
income to her.
So why is it that that shows$80,500 and not$100,000?
Well, number one, SocialSecurity.
As I mentioned, some of SocialSecurity is not going to be
taxable.
$30,000 is her total benefit,but$25,500 of that.
So this is that 85% of hersocial security benefit.
(09:29):
That is the portion that shepays taxes on.
So$4,500 is tax-free, is anotherway of thinking about that.
That doesn't account foreverything.
There's another$15,000 that'snot included here.
Well, that$15,000 is when shepulled money from her brokerage
account.
Keep in mind,$15,000 of that wasa return of principal.
She's already paid taxes onthat.
She's not doing it again.
So she's now living on that$15,000, which means that
(09:51):
$80,500.
We're not including$15,000,that's a return of principal,
and we're not including$4,500 ofSocial Security, that's
completely tax-free.
That is why adjusted grossincome here is$80,500 instead of
$100,000.
That's not the only difference.
Here's some other differences.
Her deduction is now higher.
Last year it was lower, partlybecause every year the standard
(10:13):
deduction does go up a littlebit.
But also, once you're 65 orolder, you get an extra senior
deduction.
Not just that, but for the nextfew years, as part of the most
recent tax legislation, there'san additional senior deduction.
And you can see that amount forher is$5,670.
This amount does start to phaseout as your income goes up, but
(10:33):
this is an additional deductionamount.
Going back to what I said, ofyour tax situation in retirement
can look dramatically differentdue to a number of factors.
Some is assets or income sourcesbeing taxed less, others is
having more deductions than youotherwise would have in your
working years.
So this deduction, when we startto look at this, if we take the
80,500 of adjusted gross income,back out her normal deduction,
(10:56):
back out her enhanced seniordeduction, what we get is a
taxable income of$57,080.
Now, if we look at that, some istaxed at ordinary income rates.
So the portion of SocialSecurity that is taxable, her
IRA distributions, those aresubject to ordinary income
rates.
But the$15,000 of long-termgains, that is subject to
(11:16):
long-term capital gains rates.
So we have to look at what's acombined tax when we look at
some of her income on thisschedule and some of her income
on that schedule, we can do sohere.
What we can start to see is$4,811 of taxes that she owes is
based upon the income she hasthat's subject to ordinary
income rates.
These ordinary income rates goup to 37%.
(11:39):
Now, one more thing to note herebefore we look at what taxes she
pays on the capital gain side,and this is crucially important
for those of you who areretiring.
$42,080 is the amount ofordinary income she has before
we factor in capital gains.
Let's take a look at that next.
Capital gains, you can see ifyour taxable income is under
$48,350, you pay a 0% capitalgain tax on any capital gain
(12:06):
income, long-term capital gainincome, up until that threshold.
Meaning the difference between$42,080 here and$48,350, that is
subject to a 0% long-termcapital gain tax.
Meaning of the$30,000 pulledfrom her brokerage account, half
of it was already tax-freebecause that was the amount she
put in.
Another approximately half ofthe gains are tax free because
(12:29):
she's under this threshold, andthat means they're subject to a
0% capital gain tax bracket.
It's only the excess.
So the approximately$8,700 abovethat, above this threshold of
her long-term capital gains thatshe pays a 15% tax on.
But when we look at her capitalgains tax of$1,300 and her
ordinary income tax rate of justover$4,800, her total tax is
(12:52):
$6,121.
So that's her total federal tax.
Plus, as I mentioned, there isno more payroll taxes.
When you're retired, if there'sno wages, you're not continuing
to pay into Social Security andMedicare via payroll taxes.
So if we looked at her previousyear's tax bill, it was about
21.5% total that was paid intotaxes of the$100,000 that she
(13:14):
took out.
This year, in her retirementyears, still taking out$100,000,
but the total tax liability isabout 6.1% of that.
So by the way, this strategythat Mary's employing isn't
necessarily the most optimizedstrategy.
There are ways to improve it andlower her lifetime tax
liability.
This is just trying toillustrate how taxes are going
to be different in yourretirement years than they are
(13:36):
in your working years.
But an awareness of tax planningand a general awareness of how
are different things taxed isgoing to make a huge difference
when it comes to step two, whichis understanding how much of the
income that you're pulling outto create that retirement
paycheck is going to be subjectto taxes.
And then finally, the third stepin creating your own paycheck in
retirement is coordinate yourportfolio income sources with
(13:56):
other income sources.
This is typically things likeSocial Security or pension or
rental income.
When you look at your portfolio,don't just think of that as a
big number.
Think of that as one componentof the income that you can
create, the paycheck that youcan create.
The difference betweenretirement and your working
years is typically in yourretirement, your paycheck is
going to be a combination ofsmaller amounts of income that
(14:18):
make up one bigger paycheck foryou as a whole.
So if I go back to Mary'sexample, if$50,000 is the amount
she can pull out of herportfolio, and let's assume that
there's a 6% effective tax rateon that,$47,000 of that, more or
less, is actually going to hither bank account after taxes are
accounted for.
Now, just a big disclosure here,that's not going to be the same
(14:39):
tax rate every year.
That was very much based uponhow much she was taken from her
IRA this year and from herbrokerage account this year.
That was also based upon anenhanced senior deduction that's
only going to last for the nextfew years.
So this is where tax planningreally strongly comes into play
to say what's the right order totake things out in.
So when I say a 6% tax, that'sno indication that's going to be
your tax rate forever.
That's just this single yearlooking at the tax projection we
(15:02):
ran.
But she now needs to coordinatethat with Social Security, with
pension, if there's rentalincome.
So that when it comes time tosay, how much can I spend?
How much can Mary spend, it'sgoing to be a combination of all
those sources.
Here's the cool thing.
You get complete control, well,mostly complete control over the
timing of when that happens.
Unlike your paycheck, that'smaybe the first and the 15th or
(15:24):
every other Friday, you get todecide when do you want your
income in retirement.
I have some clients, let's saythey want$8,000 per month.
They say, send me that$8,000 permonth on the first.
I want it, I'll allocate it,I'll spend it throughout the
month, and then I automaticallyget another$8,000 on the first
of the next month.
I have others that like feelinglike they're continuing to get a
paycheck.
They say, no, continue on thefirst and 15th schedule.
(15:47):
Send me$4,000 per month everysingle month on the first of the
month, and$4,000 every singlemonth on the 15th of the month.
They then use that to recreatethe paycheck that they had on an
ongoing basis.
Then finally I'll have otherswho say, you know what?
Of that$8,000 per month,$1,500of it I'm putting into a
vacation fund so that we cantake a great vacation every four
(16:08):
months, every six months, everyeight months, whatever it is.
So you know what, James,actually of the$8,000, send
$1,500 to the separate savingsaccount and$6,500 to my core
checking account to be used fornormal everyday expenses.
You have flexibility in yourretirement to create the type of
paycheck that supports yourlifestyle.
Then finally, something to notewith Social Security is you
don't actually have control overthat.
(16:30):
The thing that you don't fullyhave control over is the timing
of when you receive SocialSecurity.
You have total control over whenyou file for benefits, but the
actual monthly income, you can'ttell Social Security you want
that in the first of the monthor the 15th of the month.
If your birthday is between thefirst and the 10th of a month,
you're gonna receive your socialsecurity check on the second
Wednesday of each month.
If your birthday is between the11th and the 20th of a month,
(16:53):
you're gonna receive your socialsecurity check on the third
Wednesday of each month.
And finally, if your birthday isbetween the 21st and the 31st of
the month, then you're gonnareceive your social security
check on the fourth Wednesday ofthe month.
So you don't have control overthat, but you do have control
over the timing of when you pullyour income from your portfolio.
So those three simple steps willhelp you to create your own
(17:14):
paycheck in retirement.
Now there are some nuances,things I'd be remiss not to
mention here.
A big one is what about thoseother expenses?
Whether that's a long-term careevent, whether that's a cost of
a big renovation, whether that'sthe cost of supporting a family
member temporarily, or maybedoing a big family vacation
every once in a while.
Your retirement paycheck istypically not just gonna be
(17:34):
consistent across the board.
Along those lines, researchactually shows you're gonna
spend a lot more money in thefirst several years of
retirement, and that's gonnastart to dwindle over time.
In your latter 70s and 80s, evenyou're probably not spending as
much as you were in your earlyand mid-60s.
Now, towards the end of yourlife, you might be spending more
due to enhanced or increasedmedical expenses, but there's
(17:54):
something called the retirementspending smile, where your
spending starts higher, itstarts to diminish in the
latter, the medium parts ofretirement, and then it
increases again towards thelater stages as you incur more
medical expenses.
And then finally, you shouldalso factor in things like home
equity.
To what extent you're gonna stayin your home?
Are you ever gonna sell?
Are you gonna downsize?
What other things might beunlocked, whether it's home
(18:15):
equity, inheritance, things ofthat nature, that could enhance
or increase what you're able todo with your retirement
portfolio.
So I hope this helps.
I hope this is something you'redoing as you create your
paycheck for your retirement.
If you need help with this, thisis what we do at Root Financial
all day, every day for ourclients.
You can reach out to us.
A link to our website is in theshow notes and the resources
(18:37):
below.
If you need help with us, reachout.
But at a minimum, make sure thatyou understand the process by
which you can create thatpaycheck, which is understand
what a sustainable withdrawalrate is for your portfolio,
understand the impact of taxeson that, and then make sure
you're coordinating yourportfolio withdrawals with other
income sources.
You've saved for decades, but here's the
(00:01):
challenge.
Your 401k plan does notautomatically turn into a
paycheck for you.
You have to create one yourself.
And if you don't do itcorrectly, you're either going
to outspend your portfolio, runout of money, or you're going to
spend far too little and notfully enjoy what you've worked
so hard for.
So in today's video, I'm goingto show you three simple steps
that will allow you to takethose retirement savings and
turn that into a paycheck thatwill support your retirement
(00:23):
needs.
Now the steps themselves aresimple.
It's the nuance within thesesteps is what gets people
tripped up.
So the steps here are numberone, understand your portfolios,
sustainable withdrawal rate.
Number two, factor in taxes.
And then number three,coordinate with other income
sources.
Now the steps themselves aresimple.
It's the nuance.
That's where people get trippedup.
(00:44):
It's a nuance in here thatallows you to optimize this
paycheck.
And if you don't factor it incorrectly, it could be the thing
that caused you to run out ofmoney.
So to make this video as helpfulto you as it can possibly be,
let's not just look at thesteps, but let's apply it to a
real example or a sampleexample.
Let's take Mary and let's assumethat Mary is 65 years old and
she has$1 million in herportfolio,$700,000 of which is
(01:06):
in her traditional IRA,$300,000is in a brokerage account.
And of that$300,000, let'sassume it's all in an S P 500
index fund.
Let's make the assumption thatshe purchased that for$150,000
years ago and it's now worth$300,000.
So as we go through these steps,let's actually apply it to her
situation so you can see wherethe nuance comes into play.
So number one, start withunderstanding your portfolio's
(01:28):
sustainable withdrawal rate.
Why do I say your portfolio?
There's all kinds of rules ofthumb or research that shows how
much you can spend from yourportfolio without running out of
money in retirement.
But here's the thing (01:39):
not all scenarios are created equal.
This largely depends upon howare you invested and how long
are you planning your retirementto be.
Someone who's already 90 yearsold can spend a whole lot more
from their portfolio thansomeone who's 50 years old,
simply due to how long they needthat money to last for them.
So in Mary's case, let's assumeshe has 30 years, traditional
(01:59):
research, you might have heardof the 4% rule.
The 4% rule says that if youhave 30 years of retirement in
front of you, 4% is the amountyou can take out of your
portfolio.
And even if you retire into someof the worst time periods that
we've ever had here in the US,your portfolio would last for
those 30 years.
We're talking about periods likethe Great Depression, we're
talking about time periods likethe 70s when you had horrible
(02:20):
inflation combined with seriousdown markets.
That 4% rule became somethingthat a lot of people adopted and
use it for their retirementneeds.
Here's the interesting thingthough.
For most people, that 4% ends upbeing far too conservative.
In fact, I had a conversation onthis channel with Bill Bangin
not too long ago, and BillBangin is the initial author of
that 4% rule research.
(02:42):
He did this way back in the 90s,and that 4% rule is where that
started.
But in his words, that 4% rulefor most people is far too
conservative.
In fact, most people would bewell served by taking 6-7% plus
from their portfolio each yearif they had the benefit of
hindsight.
I say if they have the benefitof hindsight because the problem
as retirees is we just don'tknow what 30-year time period
(03:05):
we're going to retire into.
If we knew that it was going tobe an average time period, even,
we could spend a lot more.
But the thing is we don't know.
Are we going to retire and haveanother 2008 type event?
Or are we going to retire andhave wonderful markets in front
of us?
Because we don't know that, wehave to lower at least our
initial withdrawal rates to makesure we're not pulling too much
(03:25):
money out too soon, especiallyif you combine that with a big
bear market.
But here's what Bill himselfsaid.
He said that a sustainablewithdrawal rate today, if you
invest your portfolio correctlyand if you account for certain
things along the way, isprobably closer to 5%.
Could be much higher, dependingon how the market does, but
something closer to 5% might bemore realistic for most people.
(03:48):
So let's go back to Mary'sexample.
She has a million dollars in herportfolio.
We simply apply a 5% withdrawalrate to that.
What that means is Mary, asyou're looking to create your
paycheck,$50,000 of thatpaycheck can be thought of as
coming from that portfolio.
But before we start thinkingthat that's it, there's two more
things that we need to consider.
It's not as simple for Mary tojust say, I'm going to take
$50,000 and that's what I cannow live on for the rest of my
(04:10):
life.
The second thing you need to dois factor in taxes.
Taxes are a huge one.
When you take that$50,000, that$50,000 isn't yours free and
clear.
This is where tax strategy andtax planning and just general
tax awareness comes into play inretirement.
Because here's the thing (04:25):
when you are working, your taxes are
much different than when you'reretired.
At the federal level, the sametax rates still apply, but the
makeup of your income and theway that it's taxed is
significantly different inretirement.
Now I'm going to show you realnumbers with real tax planning
software so you can see howdramatically different it has
the opportunity to be.
But to start, just understand afew different things.
(04:47):
Number one, in your workingyears, you are paying payroll
taxes, FICA taxes.
This is up to 7.65% of everydollar that you earn, you are
paying into Social Security andMedicare.
That's what your payroll taxesfund.
Now, in addition to this, whenyou retire, Social Security
tends to be a big portion ofyour paycheck.
Social Security, a maximum of85% of it, will be included in
(05:08):
the amount that you pay federaltaxes on.
At the state level, depending onwhat state you're in, most
states don't actually tax SocialSecurity at all.
So when you look at thedifference between where your
income's coming from, that is abig difference.
Now your standard deduction.
Once you're 65 or older, you getan enhanced standard deduction,
which means you can deduct moreof the income coming in, which
(05:30):
means you have less of taxableincome.
Then if you look at things likebrokerage accounts, if you're
starting to live on a brokerageaccount, the long-term gains on
an account are taxed morepreferentially than are ordinary
income rates, things like wages,IRA distributions, et cetera.
Or you might be pulling some ofyour money from Roth IRAs.
And Roth IRAs, of course, arecompletely tax-free.
Same with HSAs, if you're usingthat money for qualified medical
(05:53):
expenses.
So when you look at just thegeneral changes, you can start
to see that there's thepotential for your tax situation
in retirement to looksignificantly different than
your tax situation when you'reworking.
Let's actually look at anexample right now.
So what I'm doing in this firstscenario is I'm looking at this
for Mary last year.
So I'm making the assumptionthat last year she was still
working and she earned$100,000,just to use super simple
(06:13):
numbers.
What would her tax situation be?
And then let's compare that towhat would her tax situation be
if she earned$100,000 inretirement.
Well, if this$100,000 is justwages, all of it is included in
her adjusted gross income.
She would have a standarddeduction for 2024.
That number is$14,600.
Once you back out the standarddeduction from her total income
(06:33):
or her total adjusted grossincome, her taxable income is
$85,400.
That's the amount she's actuallypaying taxes on.
So if we scroll down here, whatwe can start to see is some of
that$85,000 and change is taxedat 10%.
The first$11,600 is taxed at10%.
Then the next amount from$11,600to$47,150 is taxed at 12%.
(06:55):
Then the remaining amount istaxed here at the 22% tax
bracket.
If we look at all of this, hertotal federal tax is$13,841.
That's not the entirety of hertax picture.
That's just federal incometaxes.
She also is paying 7.65% forFICA taxes on the entirety of
this$100,000.
So that's an additional$7,650that she's paying in FICA taxes.
(07:19):
Now let's just assume that shedoesn't have any state income
taxes to keep this as simple aspossible.
But the reality is if she livesin a state where there are
income taxes, she would owe evenmore.
But if we add up Mary's payrolltaxes plus her federal income
taxes, she's paying just under$21,500 in taxes if she earns
$100,000.
So an effective tax rate ofabout 21.5% when you include
(07:42):
federal and payroll taxes.
So keep that percentage in mind,about 21.5%.
Now let's assume that this yearMary retires.
And this year Mary retires andher income sources are as
follows.
She receives$2,500 per monthfrom Social Security, which is
$30,000 per year.
She takes$40,000 from her IRAthis year.
So so far we're at$70,000, 30from Social Security,$40,000
(08:05):
from her IRA.
The remaining$30,000, let'sassume she takes that from her
brokerage account.
Like I said, her brokerageaccount, she put money in, she
acquired her investments at$150,000.
They're now worth$300,000.
So half of what she pulls out ofthat account is a return of what
she already put in and what wasalready been taxed, and half of
it is a long-term capital gain.
(08:26):
So the tax impact of pullingthat$30,000 is$15,000 of it is
tax-free.
She's already paid taxes on it.
There's not an additional tax.
But the$15,000 of gains, that istaxed, but it's taxed at
long-term capital gain rates,which are lower than ordinary
income rates.
Using those assumptions, let meshow you how dramatically
different her tax situation isgoing to be with those numbers
(08:48):
in her retirement years than itwould have been earning$100,000
in ordinary income in wagesprior to retiring.
So here's that same tax reportfor Mary, but it's now using her
retirement numbers.
Right off the bat, we seesomething that looks much
different.
Previously, her total income was$100,000.
It's still$100,000 if we'reincluding her cash flow, the
(09:08):
income to her.
So why is it that that shows$80,500 and not$100,000?
Well, number one, SocialSecurity.
As I mentioned, some of SocialSecurity is not going to be
taxable.
$30,000 is her total benefit,but$25,500 of that.
So this is that 85% of hersocial security benefit.
(09:29):
That is the portion that shepays taxes on.
So$4,500 is tax-free, is anotherway of thinking about that.
That doesn't account foreverything.
There's another$15,000 that'snot included here.
Well, that$15,000 is when shepulled money from her brokerage
account.
Keep in mind,$15,000 of that wasa return of principal.
She's already paid taxes onthat.
She's not doing it again.
So she's now living on that$15,000, which means that
(09:51):
$80,500.
We're not including$15,000,that's a return of principal,
and we're not including$4,500 ofSocial Security, that's
completely tax-free.
That is why adjusted grossincome here is$80,500 instead of
$100,000.
That's not the only difference.
Here's some other differences.
Her deduction is now higher.
Last year it was lower, partlybecause every year the standard
(10:13):
deduction does go up a littlebit.
But also, once you're 65 orolder, you get an extra senior
deduction.
Not just that, but for the nextfew years, as part of the most
recent tax legislation, there'san additional senior deduction.
And you can see that amount forher is$5,670.
This amount does start to phaseout as your income goes up, but
(10:33):
this is an additional deductionamount.
Going back to what I said, ofyour tax situation in retirement
can look dramatically differentdue to a number of factors.
Some is assets or income sourcesbeing taxed less, others is
having more deductions than youotherwise would have in your
working years.
So this deduction, when we startto look at this, if we take the
80,500 of adjusted gross income,back out her normal deduction,
(10:56):
back out her enhanced seniordeduction, what we get is a
taxable income of$57,080.
Now, if we look at that, some istaxed at ordinary income rates.
So the portion of SocialSecurity that is taxable, her
IRA distributions, those aresubject to ordinary income
rates.
But the$15,000 of long-termgains, that is subject to
(11:16):
long-term capital gains rates.
So we have to look at what's acombined tax when we look at
some of her income on thisschedule and some of her income
on that schedule, we can do sohere.
What we can start to see is$4,811 of taxes that she owes is
based upon the income she hasthat's subject to ordinary
income rates.
These ordinary income rates goup to 37%.
(11:39):
Now, one more thing to note herebefore we look at what taxes she
pays on the capital gain side,and this is crucially important
for those of you who areretiring.
$42,080 is the amount ofordinary income she has before
we factor in capital gains.
Let's take a look at that next.
Capital gains, you can see ifyour taxable income is under
$48,350, you pay a 0% capitalgain tax on any capital gain
(12:06):
income, long-term capital gainincome, up until that threshold.
Meaning the difference between$42,080 here and$48,350, that is
subject to a 0% long-termcapital gain tax.
Meaning of the$30,000 pulledfrom her brokerage account, half
of it was already tax-freebecause that was the amount she
put in.
Another approximately half ofthe gains are tax free because
(12:29):
she's under this threshold, andthat means they're subject to a
0% capital gain tax bracket.
It's only the excess.
So the approximately$8,700 abovethat, above this threshold of
her long-term capital gains thatshe pays a 15% tax on.
But when we look at her capitalgains tax of$1,300 and her
ordinary income tax rate of justover$4,800, her total tax is
(12:52):
$6,121.
So that's her total federal tax.
Plus, as I mentioned, there isno more payroll taxes.
When you're retired, if there'sno wages, you're not continuing
to pay into Social Security andMedicare via payroll taxes.
So if we looked at her previousyear's tax bill, it was about
21.5% total that was paid intotaxes of the$100,000 that she
(13:14):
took out.
This year, in her retirementyears, still taking out$100,000,
but the total tax liability isabout 6.1% of that.
So by the way, this strategythat Mary's employing isn't
necessarily the most optimizedstrategy.
There are ways to improve it andlower her lifetime tax
liability.
This is just trying toillustrate how taxes are going
to be different in yourretirement years than they are
(13:36):
in your working years.
But an awareness of tax planningand a general awareness of how
are different things taxed isgoing to make a huge difference
when it comes to step two, whichis understanding how much of the
income that you're pulling outto create that retirement
paycheck is going to be subjectto taxes.
And then finally, the third stepin creating your own paycheck in
retirement is coordinate yourportfolio income sources with
(13:56):
other income sources.
This is typically things likeSocial Security or pension or
rental income.
When you look at your portfolio,don't just think of that as a
big number.
Think of that as one componentof the income that you can
create, the paycheck that youcan create.
The difference betweenretirement and your working
years is typically in yourretirement, your paycheck is
going to be a combination ofsmaller amounts of income that
(14:18):
make up one bigger paycheck foryou as a whole.
So if I go back to Mary'sexample, if$50,000 is the amount
she can pull out of herportfolio, and let's assume that
there's a 6% effective tax rateon that,$47,000 of that, more or
less, is actually going to hither bank account after taxes are
accounted for.
Now, just a big disclosure here,that's not going to be the same
(14:39):
tax rate every year.
That was very much based uponhow much she was taken from her
IRA this year and from herbrokerage account this year.
That was also based upon anenhanced senior deduction that's
only going to last for the nextfew years.
So this is where tax planningreally strongly comes into play
to say what's the right order totake things out in.
So when I say a 6% tax, that'sno indication that's going to be
your tax rate forever.
That's just this single yearlooking at the tax projection we
(15:02):
ran.
But she now needs to coordinatethat with Social Security, with
pension, if there's rentalincome.
So that when it comes time tosay, how much can I spend?
How much can Mary spend, it'sgoing to be a combination of all
those sources.
Here's the cool thing.
You get complete control, well,mostly complete control over the
timing of when that happens.
Unlike your paycheck, that'smaybe the first and the 15th or
(15:24):
every other Friday, you get todecide when do you want your
income in retirement.
I have some clients, let's saythey want$8,000 per month.
They say, send me that$8,000 permonth on the first.
I want it, I'll allocate it,I'll spend it throughout the
month, and then I automaticallyget another$8,000 on the first
of the next month.
I have others that like feelinglike they're continuing to get a
paycheck.
They say, no, continue on thefirst and 15th schedule.
(15:47):
Send me$4,000 per month everysingle month on the first of the
month, and$4,000 every singlemonth on the 15th of the month.
They then use that to recreatethe paycheck that they had on an
ongoing basis.
Then finally I'll have otherswho say, you know what?
Of that$8,000 per month,$1,500of it I'm putting into a
vacation fund so that we cantake a great vacation every four
(16:08):
months, every six months, everyeight months, whatever it is.
So you know what, James,actually of the$8,000, send
$1,500 to the separate savingsaccount and$6,500 to my core
checking account to be used fornormal everyday expenses.
You have flexibility in yourretirement to create the type of
paycheck that supports yourlifestyle.
Then finally, something to notewith Social Security is you
don't actually have control overthat.
(16:30):
The thing that you don't fullyhave control over is the timing
of when you receive SocialSecurity.
You have total control over whenyou file for benefits, but the
actual monthly income, you can'ttell Social Security you want
that in the first of the monthor the 15th of the month.
If your birthday is between thefirst and the 10th of a month,
you're gonna receive your socialsecurity check on the second
Wednesday of each month.
If your birthday is between the11th and the 20th of a month,
(16:53):
you're gonna receive your socialsecurity check on the third
Wednesday of each month.
And finally, if your birthday isbetween the 21st and the 31st of
the month, then you're gonnareceive your social security
check on the fourth Wednesday ofthe month.
So you don't have control overthat, but you do have control
over the timing of when you pullyour income from your portfolio.
So those three simple steps willhelp you to create your own
(17:14):
paycheck in retirement.
Now there are some nuances,things I'd be remiss not to
mention here.
A big one is what about thoseother expenses?
Whether that's a long-term careevent, whether that's a cost of
a big renovation, whether that'sthe cost of supporting a family
member temporarily, or maybedoing a big family vacation
every once in a while.
Your retirement paycheck istypically not just gonna be
(17:34):
consistent across the board.
Along those lines, researchactually shows you're gonna
spend a lot more money in thefirst several years of
retirement, and that's gonnastart to dwindle over time.
In your latter 70s and 80s, evenyou're probably not spending as
much as you were in your earlyand mid-60s.
Now, towards the end of yourlife, you might be spending more
due to enhanced or increasedmedical expenses, but there's
(17:54):
something called the retirementspending smile, where your
spending starts higher, itstarts to diminish in the
latter, the medium parts ofretirement, and then it
increases again towards thelater stages as you incur more
medical expenses.
And then finally, you shouldalso factor in things like home
equity.
To what extent you're gonna stayin your home?
Are you ever gonna sell?
Are you gonna downsize?
What other things might beunlocked, whether it's home
(18:15):
equity, inheritance, things ofthat nature, that could enhance
or increase what you're able todo with your retirement
portfolio.
So I hope this helps.
I hope this is something you'redoing as you create your
paycheck for your retirement.
If you need help with this, thisis what we do at Root Financial
all day, every day for ourclients.
You can reach out to us.
A link to our website is in theshow notes and the resources
(18:37):
below.
If you need help with us, reachout.
But at a minimum, make sure thatyou understand the process by
which you can create thatpaycheck, which is understand
what a sustainable withdrawalrate is for your portfolio,
understand the impact of taxeson that, and then make sure
you're coordinating yourportfolio withdrawals with other
income sources.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Ruthie's Table 4
For more than 30 years The River Cafe in London, has been the home-from-home of artists, architects, designers, actors, collectors, writers, activists, and politicians. Michael Caine, Glenn Close, JJ Abrams, Steve McQueen, Victoria and David Beckham, and Lily Allen, are just some of the people who love to call The River Cafe home. On River Cafe Table 4, Rogers sits down with her customers—who have become friends—to talk about food memories. Table 4 explores how food impacts every aspect of our lives. “Foods is politics, food is cultural, food is how you express love, food is about your heritage, it defines who you and who you want to be,” says Rogers. Each week, Rogers invites her guest to reminisce about family suppers and first dates, what they cook, how they eat when performing, the restaurants they choose, and what food they seek when they need comfort. And to punctuate each episode of Table 4, guests such as Ralph Fiennes, Emily Blunt, and Alfonso Cuarón, read their favourite recipe from one of the best-selling River Cafe cookbooks. Table 4 itself, is situated near The River Cafe’s open kitchen, close to the bright pink wood-fired oven and next to the glossy yellow pass, where Ruthie oversees the restaurant. You are invited to take a seat at this intimate table and join the conversation. For more information, recipes, and ingredients, go to https://shoptherivercafe.co.uk/ Web: https://rivercafe.co.uk/ Instagram: www.instagram.com/therivercafelondon/ Facebook: https://en-gb.facebook.com/therivercafelondon/ For more podcasts from iHeartRadio, visit the iheartradio app, apple podcasts, or wherever you listen to your favorite shows. Learn more about your ad-choices at https://www.iheartpodcastnetwork.com
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com