1. One couple is stuck in their tax bracket
2. Another couple has a tax-sensitive distribution strategy
Each couple puts away the same amount for retirement, but they allocate assets differently among the tools. Some contributions were made to qualified plans.
Couple 1: Stuck in their tax bracket
The first couple chooses to protect their family’s dreams, aspirations and accumulated wealth with term life insurance until it runs out. They focus solely on capital assets and retirement income assets to fund their retirement.
- Desired income: $100,000
- Required income: $78,950; required income includes income this couple are obligated to receive due to automatic payments, like pensions, or tax law (e.g., Required Minimum Distributions – RMDs, starting at age 70½)
- Retirement income gap: $21,050; which will be filled using their capital asset or retirement income toolbox
- Net worth: Includes only capital assets (e.g., investments and real estate) and retirement income assets, or qualified assets
Achieving desired income
The taxpayers stuck in their tax bracket decide to take dollars out of their retirement income toolbox to cover their income gap.
Taxes for “stuck” married couple
This couple will pay taxes on the first two tax brackets and some ($21,050) in the 22 percent brackets. Their total taxes due will be $13,717 and effective tax rate is 13.7 percent.
In our next blogpost, we will show you how the second couple use life insurance to lower taxes.