Could the National Debt Affect Your Retirement Taxes?
I once asked for a manager at the Columbus airport over four cents. Kristin had asked me to break a hundred dollar bill so we’d have cash for tips. When the cashier handed me $75 instead of $75.04 and said they were out of pennies, I asked for a nickel. It was the principal, and yes, I got my nickel! Kristin would have preferred I keep that little victory to myself when I got back to the gate.
Four cents made for a funny story. But when we turned to the national debt, the question got a lot bigger. Could rising federal debt affect what you get to keep in retirement? It could if lawmakers change tax rules that apply to your income. I’d build room for that possibility into a retirement plan.
Why does interest on the national debt matter to retirees?
The Congressional Budget Office projects that federal debt held by the public and net interest costs will both rise relative to the economy through 2036 under the laws in place when it made its forecast. As interest takes up more of the federal budget, lawmakers must decide how to raise revenue and where to spend it. Their choices could affect the taxes retirees pay.
When someone asks me what to do with that information, I bring the conversation back to their own numbers. Say you’ve spent decades saving in a traditional 401(k). When you retire and start drawing from it, withdrawals of money you contributed before taxes generally count as taxable income. That matters when you’re figuring out how much is available to cover the mortgage, visit the grandkids, or take the trip you’ve been putting off.
How can you plan for tax uncertainty?
I like to start with a simple question. How much do you want to have available to spend each month after taxes? From there, you can list what you expect from Social Security, a pension, or other income and see how much your savings need to provide.
Then I’d run the numbers with more than one tax assumption. If your effective tax rate is higher than you expected, can you still cover the essentials and do the things you were looking forward to? If the answer depends on which accounts you draw from, that’s worth knowing while you still have time to think through the order of those withdrawals.
If you’d like a second set of eyes on what your savings could provide after taxes, you can reach our Columbus team atLegacyRetirementGroup.com.