EngineeringYourFI

How to Pay No Taxes on Social Security Income

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In the previous post, I discussed how to compute the taxable amount of your social security income (SSI). Which is unfortunately a bit complicated, but we got it done.

The next step is to figure out how to pay no (or minimal) taxes on that taxable amount of your social security, which is vital for the Tax and Penalty Minimization (TPM) method described in the Withdrawing Money After FIRE post.

You’re probably thinking “uh… doesn’t the definition of taxable mean you’ll pay taxes on it?”

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How Much of My Social Security Income Will Be Taxed?

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Social security income (SSI) is a bit tricky when it comes to taxes. Though “a bit” might be an understatement for many folks.

Now you may be wondering why I’m talking about social security income on a blog about FIRE. Isn’t social security going to be gone by the time any of today’s early retirees reach their 60’s?

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Withdrawing Money After FIRE

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At one point in our journey to Financial Independence (FI), I thought to myself, “How are we going to withdraw from all these different accounts we have? Especially once we’re FIRE, versus just FI (and still working). Is there some kind of best order? How much will taxes affect things?” 

I pretty quickly found a lot of info online, but I was far from convinced that any of the methods I found were really optimal. Especially since we have some less common asset classes, like a 457(b) account. 

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Time to FI, Starting Below $0

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We’ve previously discussed how long it takes to get to Financial Independence (FI) starting with a net worth of $0, and starting with more than $0. But what if you have a NEGATIVE net worth? In other words, what if you have significant debt (e.g. credit card debt or student loans)?

First off, unless you took on student loans to obtain a degree that will power a high paying career, you need to recognize that YOUR HAIR IS ON FIRE! Action must be taken immediately!

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Time to FI, Starting Above $0

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In the last article, I described how the time it takes to achieve Financial Independence is based on three factors: 1. Your savings rate (by far the most important factor), 2. the assumed investment ROI (usually something conservative like 5% to 7%), and 3. the withdrawal rate assumed (usually around 3.5 to 4%).

BUT, I used a big assumption: starting with $0.

But really, nobody has a net worth of exactly $0.00 (well, I’m sure there might be a handful of exceptions at any one time on a planet of 7.9 Billion).

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