InflationOne of the biggest income challenges for retirees is keeping up with inflation. As prices rise, it can be difficult, if not impossible, to continue purchasing items and services that you need – especially if the amount of your incoming cash flow remains the same. It is estimated that over a 20-year period of time, income would need to double in order to just keep pace with the same lifestyle you have now. So, if you are generating $4,000 per month in income today, that would have to grow to $8,000. During your working years, it is likely that you received regular raises from your employer and/or increased the price of items or services that you offered through a business. So, it only makes sense that your income must continue to rise after you retire.
TaxesAnother big income-related challenge that retirees face – many unexpectedly – is taxes. While you are likely familiar with paying income tax, as well as tax on items and services that you purchase, and possibly even annual real estate and personal property taxes, people sometimes forget about this in retirement. Depending on where you generate your retirement income and withdrawals from, you could face some significant taxation – which in turn can lessen the amount of money that you actually have available to spend on your living expenses. For instance, funds that are inside of a traditional IRA (Individual Retirement Account) and traditional employer-sponsored retirement plans (such as a 401k) typically go into the account(s) pre-tax. Likewise, the funds in these types of accounts grow tax-deferred. Therefore, none of the money in traditional retirement accounts has yet been subject to taxes… but it will be! So, 100% of withdrawals from these accounts are usually taxable to you. Today (in 2022), the top federal income tax rate is relatively low, standing at 37%. But this could change – and in the future, this rate is expected to go up. Over the past century or so, the top federal rate has fluctuated from a low of just 7% to a high of 94%, with forty-nine years being 70% or higher. With that in mind, it is essential to have a tax-reduction or elimination plan in place.
Top Federal Income Tax Rates 1913 – 2022
Source: Inside Gov (http://federal-tax-rates.insidegov.com/)