A retired couple with a taxable income of $5,000 per month ends up, after federal taxes, with net income of about $4,119. (Massachusetts imposes an additional 5.15% state income tax, leaving only about $3,865 in actual, spendable money.) Once our retired couple pays for routine expenses, such as groceries, utility and phone bills, property taxes, car payments, gasoline, and healthcare costs, that $3,865 is gone. (For this reason, taxing Social Security income can seem especially maddening.)
When planning for retirement, you must factor in taxes. Many economists expect that savers will be penalized in the coming years, because excessive government borrowing and spending (e.g., for military operations, Medicare, and Medicaid) will lead to giant debts (currently over $18 trillion federally, or more than $150,000 per taxpayer) that will be passed down from one generation to the next.
Do not assume you’ll be paying less in taxes when you retire. (Even if you start off paying less, keep in mind that it is possible to migrate into a higher bracket as you withdraw untaxed portions of your retirement portfolio.) Smart planning for retirement, which should be done with a trusted accountant or tax attorney, will help minimize your tax burden.