tj wrote: Sun Sep 21, 2025 7:18 pm
If 90% of the income is just going towards taxes, why is so much income even needed in the first place?Why not leave the deferred compensation plans to continue to defer and just live on the investment dividends?
This is my last post on the high taxes in retirement, which is frankly tangential to the RH card but whatever, for completeness.
Hi tj I already answered your question about pre-retirement side and why taxes are >95% of my expenses pre-retirement, here I address post-retirement. Ideally, in retirement, one should want income = 0 at least < = expenses. Higher than that just leads to sub-optimal taxes. My post here is more as a heads up advice that frugal retirees like me may end up with tax bombs in early retirement.
There is much written about the potential RMD tax bomb in early-mid 70s if a person saves a lot in retirement accounts and then doesn’t do ROTH conversions. For early retirees like me, a similar but much worse tax bomb can happen in early-mid 50s due to the way deferred compensation plans work.
In my case, I reached the max tax backet in the 90s and continued in that bracket for whole career. I always maximized 401K and later HSA/back door roth..so what else? I worked for multiple employers during my career but was never laid off so didn’t have any lean years to use for ROTH conversion. The only tool a W2 employee has left is deferred compensation so I contributed a lot. The problem is invested assets keep up or exceed inflation while tax brackets IMO haven’t really kept up with (actual ) inflation. Further, new taxes like NIIT have been introduced that have NO inflation indexing/ tracking.
As a result, in retirement, I will continue in the max tax bracket for at least 10 more years. I have 2 separate deferred compensation plans with 2 employers that are getting stacked so I am still looking at retirement “minimum payout income” well into seven figures per year, before even considering my investment income. My investment dividends are also FAR higher than my retirement expenses, so ideally I would want both dividends and deferred comp to be 0 and just use least appreciated share sales = my expenses, but can’t make it happen.
Unlike IRA or 401K plans which can be combined into just one retirement account and payout postponed to age 75, deferred comp plans are very inflexible. They can’t be combined, each is administered independently and they have strict limits on max deferment and min payout. I already chose max deferment and minimum payout when making my elections a long time back: that’s the most optimal tax strategy but it is still quite bad. Both my plans are from two completely different companies but the terms are remarkably similar. It is possible the same/small number of tax lawyers created both silicon valley company plans but I have no idea. It is also possible that these plans all are administered by some federal laws but again I don’t know. What I DO know is that it is IMPOSSIBLE to defer them the way you suggest, otherwise obviously every well off retiree would do so..
The same is true for investment income. Ideally I want 0 dividends in retirement. There are two lines of thought on asset allocation: you focus on tax efficiency and let go of diversification. One example is say just Berskshire in taxable. You get no dividends, so no “income” but may not be as diversified as VTI. The other approach is to not let the tax tail wag the dog and invest normally. I have always focused on diversification. My asset allocation throughout my working career and now in retirement has been the same: 100% equities, globally market weighted, passive index funds, no individual stocks, no factor tilts, no home country bias.
That asset allocation, while very diverse, is fairly tax inefficient. VTI itself is not so bad but if one invests internationally at full market weight (like I do), the dividend yields have been historically 2-3X of US and much of it is non-qualified so overall “income” end up being high. It all then stacks up on top of 2 deferred compensation plans.
You get the drift of how an early retiree ends up with > 90% expenses going to taxes even in retirement One can wish for 0 income in retirement, but very difficult with W2 employment, deferred comp and diversified investments.
