Our taxes are complete and in the mail as of yesterday! I am so thankful because even though we use an accountant, getting our taxes done feels like a part-time job for the months of February and March.
Related: Income Taxes Not A DIY Project
This was the first year we got a good look at what our post-working tax rate might look like. Because we’ve been exercising a lot of stock options each year, our taxable income has stayed very high over the past few years. A drop in the MegaCorp stock price in 2018 meant we held off exercising a lot of options and lived mostly off cash savings.
This strategy meant our taxable income went way down. We still ended up itemizing our return, but our actual Federal tax rate dropped an amazing 20 points! It was much lower than the tax rate I had built into our overall retirement plan.
It was hard for me to assess what our tax rate would look like in retirement when we put together our overall plan and projected out our finances over the next 35+ years. I kept our inputs as conservative as possible and kept the tax rate very high. Our financial planner used a lower, but still conservative tax rate in his model.
With our 2018 taxes now complete, I am seeing that our assumed tax rate in retirement represents a significantly bigger than expected financial buffer built into our plan. I’m not sure what it represents over the next few decades, but I see now that it will be tremendously positive.
With MegaCorp stock back on the upswing (+30%) in early 2019, I am again exercising a lot of options. That means our tax rate will jump up again this year and stay relatively high until I turn 55 in a few years and our stock options are all exercised. Then our tax rate will then drop permanently. That gives me a few years to size up the value of a a much lower tax rate in our retirement model. Unless the government radically changes things in the meanwhile!
What tax assumptions have you made in your retirement planning financial model?
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