If You Retire Well, It’s Not Likely Your Income Tax Rate Will Fall.


There’s so much out there to ‘help’ folks plan for retirement. Yet what’s one of the common denominators almost universally mentioned? They tell you when you retire, your tax bracket will very likely be much lower. Not so fast tax breath. There’s a question beggin’ to be asked.

‘What’s the most common reason anyone’s tax rate dips?’

We’ll let that question simmer a bit, OK? There could be a quiz later.

Let’s say the biggest paycheck you earned while working full time was around $80,000 or so. You probably owned a home, with a mortgage. That home offered (at least last time I checked) a deduction on the interest you paid. Then there was the deduction for the real estate taxes.

For maybe 20-30 years you also had 1-5 or more deductions for your progeny. Most of us then took other various deductions. Thing is, when you retire, your kids are gone. You most likely paid off your mortgage (with great glee). The expense of kids and a mortgage is gone. Surely, that’s a good thing. But since you’re in retirement, you hit April 15th, in the context of attending IRS’s annual tax party, naked as the proverbial jaybird.

So, if you managed to secure an $80,000 a year retirement income, you’ll no doubt be payin’ more taxes than you used to. But, that’s not the real gotcha. When it comes to the advice about your taxes being lower in retirement, ask yourself the premise of the statement.

What’s the most common underlying reason causing one person to pay less income tax than their neighbor?

Their income was LESS. Duh

The assertion your taxes will be lower in retirement is based on the premise that your income will be significantly decreased. Let that sink in for a moment. The same folks wanting to guide you to retirement, are tellin’ you — in advance, mind you — that you’ll need to brace yourself for living on a reduced budget — probably notably reduced.

Yeah, that’s the ticket. Where do I sign up for that plan?!

When I talk to readers on the phone, I almost always ask them to challenge any bold statement I might make. Doesn’t it bug ya when somebody says something striking without backin’ it up? Sure bugs me. Don’t let me get away with it either. 🙂

BawldGuy Bold Statement: Within the boundaries of your age when starting, how many years ’til retirement, your beginning capital, your comfort zone, and a few other factors, you should retire with a boatload of retirement income. That income should be relatively stable, reliable, and secure. It should also allow for the extraction of cash, if necessary, without tax consequences. Further more, it should NOT rely upon any of their investments increasing in value, or original income growing.

Let’s talk about a real plan for a real life couple.

Ronnie and Karen are in their early 30s. Been together about eight years now. Between ’em they earn about $175,000 a year. Ronnie sells high tech to large firms, while Karen teaches. They live on the west coast in SoCal, in a fourplex they bought below market, that needed some TLC. When the smoke clears on rent day, they’re ‘paid’ about $500 to live there. Sweet, eh?

They’d both like to retire sometime around 4:30 yesterday afternoon, if you would please. Can do, right Jeff? Sure, no problem. Now where did I put that dang magic wand?

Anywho, their Purposeful Plan calls for the following.

They’d like to retire in 10 years, sooner if possible. They won’t whine if it takes 12 — 8 would be much mo betta. They had around $300,000 built up in their retirement ‘war chest’ to get things rolling. In other words, Ron and Karen are pretty serious campers. That left a generous Sominex Account. (That’s cash reserves for new readers.)

They acquired four small income properties right off the bat. Well, two anyway, the other two should close in a week or so.

• Invest in 4 income properties — roughly $1 million.
• 30/yr fixed rate financing. (Below 5%)
• Depending on Murphy, total annual cash flow of $15-25,000.

Since they live well below their means, they can easily afford to contribute around $3,500 a month towards the elimination of these loans. They’ll wipe out the first one in less than three years. 🙂 Lord willin’ and the creek don’t rise, all four could be debt free in a decade — very possibly sooner. Again, it depends upon Murphy. He knows where we live, and sooner or later we all get a turn in his barrel. Just sayin’.


Though we’ve yet to determine how long they’ll contribute to an EIUL, or how much, I’ll be using very conservative figures here.

I’ll use my own daughter as an example — a benchmark if you will.

She and my son-in-law are both in their late 20s. Beginning the end of this year they’ll begin contributing to their own EIUL. Their premium will be $500/each, adjusted for inflation annually. (somewhere around 2%) The numbers have already been calculated by the expert, based on their age and gender. In 30 years, just before they turn 60, they’ll have the option of triggering the income stream. It’ll be approximately $100,000 a year — tax free — virtually for life. This will be in addition to any income they may’ve generated from investing in real estate. I’ve heard they’re well connected. 🙂

Let’s say Ron and Karen do half that, ending up in their early 60s with $50,000 a year. Again, it’s completely tax free, and virtually impossible to outlive, if structured professionally.

Selling their fourplex is now on the table.

The net proceeds from this sale, should they go that way, will be roughly $350,000 or so. This will mean a few serious sessions spent updating their Purposeful Plan.

Next, we’ll take a look at how they’ll wind up 8-12 years from now. So far they’re looking at around $8-10,000 a month in retirement income. They can do better. Much better.

Hoping to see you in Denver this weekend.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


    • Jeff Brown

      Hey Greg — Since it’s not realized for 25 years, it’s definitely not present value. A fair analogy would be those who use present dollars to buy real estate, borrowing more present dollars to finalize the acquisition. They plan to retire after slowly but surely paying the loan off with future cash flow + future job income, resulting in future debt free cash flow.

      Much like the EIUL, real estate cash flow in retirement is, necessarily not ‘present value’.

      Your question points out a downside to all cash flow generated by long term investment. We can never really know/understand the present value of future cash flow — at least until we’ve arrive at a particular point in that future. Will it be worth more or less? The normal answer is that with assumed inflation, future dollars will be less valuable. The thing is, though, the question you’d really like answered, is this.

      How, given the aforementioned inflation assumption, do we protect ourselves from less valuable future dollars? Real estate values have, historically, pretty much tracked with inflation. The same is true of rents, more or less. Add the second retirement income basket that generates tax free income, and you’ve successfully, at least to a great extent, insulated yourself from the dollar’s erosion.

      The reason tax free income from the EIUL helps fight inflation, is more practical in nature. If your state/fed combined tax bracket is around 30%, this means the $100,000 represents the equivalent of around $143,000. (just under) ‘Course, all that means to the real estate investor who also sports an EIUL, is that over a period of 15-35 years, retirement cash flows subject to taxes must be higher to produce the same income as those cash flows which escape taxation.

      And the congregation replied, Duh!.

      Excellent question, Greg.

      • Thanks for the explanation Jeff. Many folks we starting working 40 years ago for a 30k retirement per year thought at the time that was a pretty good deal.

        I like the idea of having a fixed debt on an asset that is appreciating. Sure, we can’t predict the future, but we can look at the past trends as an indicator of what the future might hold. Few will argue that inflation is coming. A property value and rents that tracks with inflation, but a debt that stays constant. Works for me.


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