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Will Taxes Be Higher or Lower When I Retire?

Retirement Funding

One of the hardest parts about saving for retirement is calculating your future tax burden. Your taxes could either go up or down, depending on the changes that occur in your career, income bracket, marital status, number of dependents, and so on. Additionally, tax laws are always liable to change between now and retirement.

So, what should you expect to pay on your earned income when you retire? How will tax laws change in the years to come? Most importantly, what steps can you take to prepare for your future tax burden?

We will answer all of these questions and more, but first, let’s see what your taxes and income will likely look like by the time you retire:

How Much Will I Pay in Taxes When I Retire?

The answer – it’s complicated. While we believe taxable income for most families will be a little lower, we also firmly believe tax rates in our country will be higher in the future than they are today. 

However, there’s no need to panic. 

You can still get a general idea of how much you’ll need to pay by examining your current and anticipated income going forward.

It’s true that you will likely have less W-2 income when you retire, but let’s check out the tax tables. Once your taxable income crosses $80,250 (for married couples filing jointly), your next dollars are already taxed in the 22% bracket. This may be where you sit today. 

So, what counts as earned income once you retire? 85% of your social security checks do (assuming your taxable income is over $34,000 jointly). Additionally, pension incomes, taxable interest earned from investments, and possibly even rental income count as earned income. 

This means that you may be over the threshold without even realizing it!

Tax Rates

Now, let’s talk about tax rates. While no one knows for sure how (or if) tax rates will change, all signs point to higher taxes in the years to come. Let’s look at the reasons why that will probably be the case:

  • The Trump tax cuts have created a temporarily low tax environment, but eventually, rates will need to return to their previous level (at the very least).

  • The national debt currently sits at about $23 trillion. This number has been increasing rapidly, but that can’t go on forever.

  • Social security and medicare costs are rising due to longer life expectancies and a large number of baby boomers hitting retirement age.

  • Most Americans have not saved properly for retirement, which will put greater strain on public services and social safety nets funded by tax dollars.

How are we going to take care of these issues? Increased taxes seem like the likeliest answer.

What should we do?

Though tax rates are, by and large, outside of your control, there are some actions you can take to prepare for higher taxes. There’s no time like the present, so the sooner you get started, the better. Here are a few of the most important things you can do:

  • Know the tax brackets - If you don’t know which tax bracket you currently fall in, you can see the latest IRS tax code updates right here. However, you should also stay updated on how all incomes are taxed. After all, it’s very possible that your income will change by the time you’re ready to retire.

  • Look for “tax-free” money - Some of the easiest ways to build tax-free income are Roth IRA conversions, Roth 401(k) contributions, and long-term capital gains. These can help you alleviate your tax burden while also setting aside funds for retirement.

  • Be proactive about paying taxes - You should keep the perspective that paying taxes today will help deal with these issues down the road. This is especially important in the likely event that your income is lower in the future than it is today. You won’t want to pay high taxes when you have a low income.

  • Consider a Financial Advisor - If you’re still worried about your future tax liability, you should reach out to our firm for a comprehensive analysis of your current retirement plan and things you may be able to do differently to prepare for these changes. At Afton Advisors, we have the expertise to help you navigate complex tax laws and maximize your retirement savings!