Planning to work in retirement?

Two-thirds of workers plan to work in retirement, mostly because they know they haven’t saved enough to support their current standard of living. In reality, less than one-quarter of those in retirement work for pay (WSJ, no subscription required). 

There is a big disconnect between those who think they can work in retirement and those who actually succeed in doing so.

Why? The three big reasons are health crises, layoffs and ageism. If you are unhealthy, you can’t work. If you get fired and can’t get a new job, then there’s no paycheck. If you are too old to do the job or employers simply won’t hire someone your age, then employment won’t fill your spending gap.

Working in retirement seems like a great idea. It keeps you mentally and physically active. The evidence shows that those who keep working show less cognitive decline. Most who work in retirement do it because they enjoy it, not because they need it to cover their spending.

The bad news is that retirees find it hard to find employment or remain employed.

The good news is that most retirees learn to get by on a lower standard of living. Studies show that such retirees are happier and less stressed than they expected to be.

If you’d prefer to avoid the “getting by” solution, then the best thing to do is save more for retirement rather than planning to work.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Planning to work in retirement?

Income inequality…tax inequality

Income inequality has become a big political topic recently. Unfortunately, the debate is filled with more emotions than facts.

What shouldn’t be surprising is that those who make more also pay more in taxes–a lot more (especially with our progressive tax system).

Anyone who wants to understand the income inequality debate should probably become acquainted with some of the facts about how much tax inequality comes with income inequality.

A recent article in the Wall Street Journal (subscription required), with data from the Tax Policy Center, highlights this issue.

The bottom 20% in the U.S. makes $0 to $24,200 a year, earns 4.5% of total U.S. income, and gets paid 2.2% from income tax.  

The next 20% makes $24,200 to $47,300, earning 9.3% of U.S. income, and gets paid 1% from income tax.

The middle 20% makes $47,300 to $79,500 a year, earns 14.8% of total U.S. income and pays 5.9% of total income tax.

The next 20% makes $79,500 to $134,300, earning 20% of total U.S. income and paying 13.4% of total income tax.

The top 20% makes more than $134,300 a year, earns 51.3% of total U.S. income and pays 83.9% of the total income tax.

Breaking down the top 20%, the first 10% (those making the top 80% to 90% of income) makes $134,300 to $180,500, earns 13.1% of U.S. income and pays 10.8% of the income tax.

The next 5% (top 90% to 95%) makes $180,500 to $261,500 a year, earning 9% of all income, and pays 9.1% of the income tax.

The next 4% (top 95% to 99%) makes $261,500 to $615,000, earns 12.1% of all U.S. income, and pays 18.3% of income tax.

The top 1% makes over $615,000, earning 17.1% of all income and paying 45.7% of all income tax.

Yes, income in the U.S. is unequal, and that is because native ability, work ethic, and knowledge are unequal. 

It should be acknowledged, too, that those who make so much also pay MUCH more than those who earn less.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Income inequality…tax inequality

How should you pull your money in retirement?

How you withdraw your money in retirement can have a big impact on how long your money lasts (or how much you can withdraw each year).

The conventional wisdom espoused by Vanguard, Fidelity, etc. is to pull the money from your taxable account first, then from tax deferred accounts (Roth IRA, traditional IRA).

Unfortunately, things aren’t that simple. By withdrawing your money in a more tax-efficient manner, the money can last 4, 5, even 6 years longer (or last the same amount of time with higher withdrawals).

This issue has been highlighted by many, but in particular in a recent article in the Financial Analysts Journal (subscription required).

Instead of pulling all your money from your taxable account first and then moving on to tax-deferred accounts after the taxable account is depleted, the money will last longer if you withdraw money from a traditional IRA up to the 15% tax bracket limit, then pull the rest from you taxable account each year. 

Even more time can be gained by transferring dollars from your tax deferred account (traditional IRA) to your Roth IRA each year to generate not too much taxes while also maximizing  tax exempt benefits of the Roth IRA.

More time still can be gained by transferring dollars from your tax deferred account to two Roth accounts and then recharacterizing the one that has lower gains (or greater loses) each year back to the tax deferred account.

These strategies are too complex to explain here in detail (I’d be happy to send the article to anyone who requests it, but I must warn you it is a technical and dry academic paper). Also, some of these strategies may seem too complex or troublesome to implement, but that does not diminish their benefits.

It is vitally important to save enough for retirement, but it is also important to consider how you will withdraw your money in retirement to make sure the money serves you best.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

How should you pull your money in retirement?