Retirement and Taxes for 2025

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Paul F

Veteran
Here is my annual update to show you what retirement is like. Normally, the wife and I take social security ($60k) and $20,000 from our IRAs to live on (Total, $80K). What we did differently this year is that instead of taking money from the IRA, I took money from a savings account. So our 'income' was $20k less than usual at about $60k. Of that $60k of SS, only $17,000 has to be reported. So for an operating income of $80,000, we only reported an income of about $17k.

Additionally, the wife's first RMD was taken this year. It was only about $500, so no big deal. Next year, when I take my first RMD, that will have a substantial impact. More on that next year.

The big news is that the standard deduction for seniors, filing jointly, has jumped up from $27,400 to $47,000! So with an adjusted gross income of $17K, and a deduction of $47K, we have no taxes. With the $47k deduction, a retired person could have $100,000 of income and pay no taxes.

That $47k deduction will come in mighty handy next year when we will have a significant RMD withdrawal. I wish we could stop our SS payments as we won't need it next year.

Inflation has not been a problem. The Social Security increases have dealt with it just fine. We still see no need to withdraw any additional funds above the $20k. we have been withdrawing for the last 9 years. Our operating income started at about $63k 9 years ago and due to SS increases, we are now at about $80k.

For reference, we live in Sonoma county. One of the more expensive places to live in the country.

Questions?
 
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Required Minimum Distribution from retirement accounts like IRA, 401(k), etc.

Paul, thanks for your post. My wife will retire soon so we're trying to learn about all this stuff.
 
RMD - You are required to pull a percentage of your IRA and 401k out every year once you reach 73. The first year, you get leeway to pull it as late as April the following year as you may not be aware of the rule. But after that, you have to pull it out in the tax year. There is a 25% penalty for not doing it. Your financial institution will supposedly send a letter showing how much your RMD is for each year (I have yet to see mine, which are due to be sent by April). You can calculate it yourself, but it's nice to have the document that the institutions send to the IRS so the numbers match. Of course, you can pull more.

What you don't want to do is wait until April of the following year for your first withdrawal because then you will have two withdrawals in one year and that may mean a higher tax rate. I'm estimating my first year RMD will be about $98,000. I have my money spread out at 7 financial institutions, so that makes it a bit more work. I spread it out to ensure we will have money in the case of a financial institution failure such as Silicon Valley Bank, Bernie Madoff, Lehman Brothers, the Savings and Loans bank failures (30% went bust in that crisis), the list goes on.

I'll repeat what I said last year. The growth of the retirement money has been spectacular. Since we draw such a small percentage of the funds, it keeps compounding its value.

As you know, the message I am trying to spread is that retirement and retirement investments are different than what financial experts tell you.

Make a spreadsheet of expenses, remember that you will no longer be paying in for your retirement, Social Security, and other payroll taxes. All the money is yours to spend. You will find the money you need is not as much as you anticipate. Fill out a 1040 form as if you are retired. See how much your Social Security money is taxed.

I had an income of $170,000 when I was working 10 years ago. We were surprised that we weren't feeling rich on that kind of money. It seemed we were doing ok, but not wealthy. Back then, I thought I would need $120k to have the same lifestyle. Today, we live on $80k and nothing has changed regarding lifestyle. Not that we live a grand lifestyle. We live a very simple life.

Jim, the best advice I have is to talk to retired people. They have the facts. Financial advisors are not retired, so they don't really know. Feel free to ask questions.
 
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Paul,

Congrats on living well in retirement. How are you able to receive $60k in Social Security income but only have to report $17k?. I don't understand that one.

THANKS!
 
When you fill out the 1040 form, Social Security has it's own line item, which reports what amount of the Social Security is taxable. The 1040 instructions provides a worksheet to determine what amount of the SS is taxable. You do a bunch of mumbo-jumbo on the worksheet that I never really sorted out as to what it is actually doing (enter this, subtract that, kind of stuff). But at the bottom of the worksheet, I end up with having to only report $17k of the Social Security income. Isn't that a nice loophole? That, along with the senior's standard deduction; they shelter a lot of your income.

Note that I have no tricks or special situation. We just have the Social Security and the $20k withdrawal as income and take the standard deduction for our deduction. No additional tax credits or deductions. All I fill out is the 1040 form and a schedule B for interest and dividends, which in my case is small beans.
 
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Have always enjoyed your posts on this Paul. If your "growth on retirement money has been spectacular", how is your interest and dividends "small beans"? All capital gains?
My wife just retired last year - and I'm just starting on my taxes for 2025, so I'm interested and learning all the time.

And funny - I wasn't aware of the age 73 RMD "rule" - so maybe I still have lots to learn
 
My interest and dividends is small beans because 95%? of my money is in IRAs and 401k. The interest and dividends for those accounts are not taxed until withdrawn.
 
Correction - The standard deduction for seniors filing jointly is $34,700, not $47,000. However, due to the OBBBA, there is an additional $12,000 deduction that will apparently be automatically applied by commercial tax software to those seniors that qualify (earn less than $150,000 jointly). I've read about it on several sites and I'm still confused as to how it works. It is supposedly added automatically by the tax software even though it is mentioned nowhere in the 1040 form instructions nor the senior 1040-SR form which has the tax chart for seniors. Even the FreeFillableForms.com site, which is a free tax return software provided by the federal government, did not add this deduction to my form. When I tried to claim it manually, the IRS rejected my filing.

Anyway, it doesn't affect our return.
 
Let's talk. I would have retired at least two years earlier if I knew what I know in retirement. Stepping off the income cliff into the oblivion of retirement is a bit scary.

I talked to a few retirees before I did it. They all said two things: It will cost less than you expect and you will be so busy, you will wonder how you had time for work.

Both came true.

My wife tucks away all of her social security into a fund for emergencies. Not that we need it. We have plenty of money in IRA/401k for big expenses. So if we want to repair the well with a new pump or fix the roof, there is plenty of money sitting around. It's actually quite ridiculous to have that kind of money sitting in the bank.

The point is that we are actually living on just my Social Security and the 20k for the day-to-day expenses.
 
Paul F said:
Let's talk. I would have retired at least two years earlier if I knew what I know in retirement. Stepping off the income cliff into the oblivion of retirement is a bit scary.

I talked to a few retirees before I did it. They all said two things: It will cost less than you expect and you will be so busy, you will wonder how you had time for work.

Both came true.

My wife tucks away all of her social security into a fund for emergencies. Not that we need it. We have plenty of money in IRA/401k for big expenses. So if we want to repair the well with a new pump or fix the roof, there is plenty of money sitting around. It's actually quite ridiculous to have that kind of money sitting in the bank.

The point is that we are actually living on just my Social Security and the 20k for the day-to-day expenses.
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Thanks for sharing this Paul. I love to hear stories of people who have planned well and are doing well.

I've still got a good chunk of time before my retirement. But keeping an eye on these yearly posts and what's working for others is extremely helpful.

I'd love to know how things stood for you personally when you were in your mid 40's for example? Did you feel like you were on track? Did you push hard to catch up towards the end of your career, etc.?

Appreciate you sharing your perspective here.
 
Throughout my life, I wondered exactly that; am I on track? It wasn't clear to me at all that I was. For most of my 40 or so years of work, I was worried about having a job and wondered how I would make it all come together. We lived simply and saved, saved, saved. Not that we didn't have a good time. We had vacations and went out to dinners, etc. But we didn't buy RVs, new cars, or the latest gizmo. I owned my cars for 20 years or more.

We always pushed hard. Savings for retirement was a priority for my wife and I. From my first job to my last, I put away 10% of my income. The savings effort did not change over time. We did not push any harder in the later years than we did in the early years. I was never really sure it was going to work until the last few years. The compounding of the savings makes the difference. Now, without any contributions, the retirement fund is growing at a remarkable rate.

Here is something that may help. https://www.nerdwallet.com/investing/calculators/retirement-calculator
 
The calculator I linked to, while helpful, is one more example of how bad the advice from financial advisors can be. Look at that graph. It goes up while working and you see that exponential growth. Then the graph craters to zero once you retire. It's complete nonsense. I mean, I suppose you could draw off all the money and have it drop to zero. But, as I have said, you end up spending much less than you anticipate. So the retirement money, rather than cratering as they show, keeps growing at an exponential rate.

As I said, I earned $170,000 in 2016, I retired on $43k of Social Security and $20k of IRA. for a starting retirement of $63k. That has now risen to about $80k. With such a small draw off the retirement kitty, the retirement funds keep piling on top of each other and the exponential growth gets to a sort of spectacular level.

Who could have guessed that in one of the most expensive cost of living areas, I could retire on 37% of my pre-retirement income? But the spreadsheets told me that this was true. I was skeptical because, as I said earlier, we sort of wondered where all the money was going and how is it we can retire on such a reduction in income. I was fed up with my job and I couldn't take another day. I was ready to eat rice and beans if that's what it took to retire. To my surprise, nothing changed.
 
Paul F said:
The calculator I linked to, while helpful, is one more example of how bad the advice from financial advisors can be. Look at that graph. It goes up while working and you see that exponential growth. Then the graph craters to zero once you retire. It's complete nonsense. I mean, I suppose you could draw off all the money and have it drop to zero. But, as I have said, you end up spending much less than you anticipate. So the retirement money, rather than cratering as they show, keeps growing at an exponential rate.

As I said, I earned $170,000 in 2016, I retired on $43k of Social Security and $20k of IRA. for a starting retirement of $63k. That has now risen to about $80k. With such a small draw off the retirement kitty, the retirement funds keep piling on top of each other and the exponential growth gets to a sort of spectacular level.

Who could have guessed that in one of the most expensive cost of living areas, I could retire on 37% of my pre-retirement income? But the spreadsheets told me that this was true. I was skeptical because, as I said earlier, we sort of wondered where all the money was going and how is it we can retire on such a reduction in income. I was fed up with my job and I couldn't take another day. I was ready to eat rice and beans if that's what it took to retire. To my surprise, nothing changed.
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You make good points Paul. I would think that my current expenses will most likely not be the same as my expenses in retirement.

It's good to hear your experience regarding the percentage of income you're currently operating from. That type of context is pretty helpful!
 
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