Tag: retirement income

Are Social Security Benefits Taxed?

Yes, but with a nod to Paul Harvey, there is a “rest of the story”. It isn’t as simple as adding your benefit check to your taxable income and paying taxes at your marginal rate.

Social Security retirement benefits are an important part of retirement. For about 62% of retirees, Social Security represents at least half of their total retirement income. That is a significant amount. Further, the demise of Social Security is largely over-hyped.

Clearly, it is important to understand how Social Security benefits are taxed.

Some retirees are surprised to learn that Social Security benefits are taxed in the first place. Even for those who aren’t surprised, understanding how they are taxed is a separate matter.

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Efficient Withdrawals to Maximize Retirement Income

The purpose of accumulating retirement savings with tax-advantaged retirement accounts is to withdraw an income that will last for the duration of your retired lifetime. Considering this could be thirty or forty years, it’s important to get this right. Efficient retirement account withdrawals can help stretch your savings and achieve this goal.

Clearly then, you should consider efficient retirement account withdrawal strategies that maximize the after-tax value of retirement income. In order to maximize the value of withdrawals from a retirement account, you have a number of options.

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The 4% Rule of Retirement Income

The most commonly cited method of withdrawing retirement income from an investment portfolio is “the 4% rule”.

This rule comes from a very popular study conducted by William Bengen and published in The Journal of Financial Planning in 1994 as Determining Withdrawal Rates Using Historical Data.

The short-hand version of the rule, and the basic conclusion of the study that is tossed around financial planning circles, is that a retiree can withdraw 4% of their portfolio each year in retirement. This rate would prevent you from depleting your retirement savings before the end of retirement.

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Sequence of Returns Risk in Retirement

What is sequence of returns risk? We often think of investment return as an average rate over some period, such as 10, 15, or 20 years. This is especially true regarding investment returns within a retirement planning context where the investment horizon is often very long.  

Anyone interested enough to be reading this knows that investments are volatile and do not generate returns in a strict, consistent, uniform manner. Instead, investment returns fluctuate. In some periods an investment (or portfolio of investments) may return much more than it’s average. In other periods, the investment may produce a return that is very near, or much less than, it’s average.

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