I ENJOY WRITING for HumbleDollar—but I often feel I get more from the thoughtful reader comments than whatever insights I provided. For instance, in a recent article, I discussed some year-end financial decisions I was considering. Two readers made comments that caused me to review my decisions, while also delivering a few dollars’ worth of humility.
The first comment identified an error in my spreadsheet analysis. I noted that my marginal New Jersey state income-tax rate was 8.97%. A reader questioned that number. When I reviewed my analysis, I discovered an error in my spreadsheet. A single cell had been deleted in copying the sheet from 2021 to 2022. The tax rate should have been 6.37%.
I hate making mistakes. My engineering mentors consistently encouraged me to perform “sanity checks.” I usually hand-check my spreadsheet calculations, but I missed this one. I decided to do a thorough check of everything. To my chagrin, I found another error, this time regarding the amount of state tax withholding from my pension. The amount assumed in the spreadsheet was thousands of dollars too high. Where did that error come from? I have no idea.
We moved from Pennsylvania to New Jersey in 2021. The errors are all associated with state income-tax calculations. New Jersey’s state income tax is far more complicated than Pennsylvania’s. The silver lining is it gave me a chance to fix my spreadsheet for 2022 and beyond—and reassess my conclusions.
Since my original, flawed calculations indicated a fairly sizable tax refund, I thought we’d use that amount to offset the taxes generated by a Roth conversion. But when my initial analysis also showed an incorrectly high combined marginal tax rate, I thought we’d forgo a Roth conversion in 2022.
Correcting the errors showed that we’ll get a significantly smaller refund but also pay a lower marginal tax rate. With these updates, I decided to go ahead and make a smaller Roth conversion.
The second comment mentioned two issues that my article didn’t specifically address. The first concerned providing for a surviving spouse. When one spouse dies, the surviving spouse typically inherits the deceased spouse’s retirement accounts. The surviving spouse will then be responsible for required minimum distributions from the couple’s combined retirement account balances, but the survivor will be paying taxes as a single filer and probably at a higher marginal tax rate.
Longevity in my wife’s family is greater than mine. Her grandmother lived to age 97 and her mother to 88. Vicky is healthy and takes good care of herself. We have taken several steps to make sure she’s well taken care of should I die first. For my company pension, I selected a joint-and-survivor option. Vicky will receive 75% of the current amount if I die before her. We’re also planning to wait till I’m 70 to claim my Social Security retirement benefit. I have the higher lifetime earnings and waiting will maximize her survivor benefit. With the pension and Social Security, plus our retirement savings, Vicky should have enough to live comfortably after I’m gone.
The second part of the comment addressed the sunsetting of today’s relatively low federal income-tax rates. Today’s tax rates were set as part of 2017’s Tax Cuts and Jobs Act (TCJA). The TCJA made significant changes to the tax code, but many of its provisions will expire in 2026. Barring further legislation, tax rates will return to their 2017 levels. It’s been reported that extending the TCJA tax law changes would cost more than $2 trillion through 2033.
To assess complicated decisions and their financial impact over—I hope—decades of retirement, I use a retirement planning tool called MAXIFI. The tool has a detailed tax model that incorporates both the federal and state tax codes. The default federal tax model assumes that the changes from the TCJA sunset in 2026, and return to pre-2018 levels. When I reviewed the analysis of our retirement plan, I noticed that for 2026 and beyond our marginal federal tax rate goes from 24% to 28%.
The tool also enables users to explore “what if” scenarios, including what happens when one spouse dies. The base case assumes we’ll both live to 100. After running the base case, you can run a “survivor case” where you pick which spouse is the survivor and at what age the other spouse dies. I’m currently 65. I ran a series of cases where I died at 66, 70, 80, and 90. That’s hardly a pleasant thought. Still, everything ought to be fine financially: In each case, my wife should have sufficient income and assets.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.
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I too enjoy reading your articles.
An excellent FREE source for contemplating when to claim Social Security is:
I paid for Larry Kotlikoff’s MAXIFI Planner last February and used his calculator. He has a different twist to how to spend down your assets (as he is an economist), which is consider the couple will live to 100, and figure out how much you can spend per year assuming conservative returns.
One component of his software calculates your taxes as noted below, but also shows you on a yearly basis where is the most tax efficient place to take portfolio withdrawals from.
I am not following the withdrawal suggestions to the T as there is no way to take into account that my wife is still using ACA for medical insurance as we are continuing to control our MAGA (ie taxable income) so we continue to avoid paying any premiums for her coverage, as we have done since 2020. After she turns 65 next year (as I did last month) and we are both on Medicare will follow the withdrawal plan more closely.
Your comment about spousal inheritance of retirement accounts doesn’t necessarily work for merged families. My wife and I both have kids from a previous marriage, but we did not have kids as a married couple. We have created wills and trusts that hopefully take care of the surviving spouse and leaves our respective kids with an inheritance, but nothing transfers in total to the surviving spouse.
Thanks for another great article. Like you, I often learn a lot from the comments.
At age 61 (me) and 60 (my husband), we are looking at his retirement in just a few months; I am already retired. Since we will wait until 70 to collect SS and have only a very small non-COLA pension and no employer-provided health insurance, we need to hoard cash to live off of for the next 9 years. I am contemplating Roth conversions but need to understand if selling investments to cover the tax bill is worthwhile. I am hoping the MAXFI software can help with this decision.
Jackie, thanks for reading and commenting. Integrating numerous, complicated retirement strategies can be quite a challenge. MAXIFI provides a tool to compare scenarios based on a logical and consistent approach. It isn’t perfect, and leaves room for personal and non-economic considerations. But I’m unaware of a more comprehensive approach. Best of luck
Great article as usual Richard, Thanks.
My dad was a chemical engineer and was fond of sanity checks and simple solutions when possible. The engineering group he worked with had a multi million dollar project design error in building a plant expansion that resulted in the plant having 10X refrigeration capacity than needed for the planned production. The solution for the excess capacity was to ramp up the other elements of the production at that location rather than waste the excess refrigeration capacity at that facility. That thinking in dealing with the error has influenced my thinking on how to deal with past errors when making current decisions.
Dr. Laurence Kotlikoff is a Boston University professor of economics who founded and is president of Economic Security Planning, Inc who developed MAXIFI. I have bought and read Get What’s Yours: The Secrets to Maxing Out Your Social Security which Dr. Kotlikoff co-authored and his recent book Money Magic. The Secrets book helped me decide the timing of my Social Security claiming decision (I waited until age 70 to claim) and recommend to others to read to help make an informed social security claiming decision. His Magic book covers many personal economic topics beyond SS claiming. The chapter Give Yourself a Tax Cut – Top Tax-Saving, Retirement-Account Moves is my favorite chapter of the book. I would buy Magic again even though some of his pure economic thinking about marriage, divorce and borrowing for your kids college are different from the choices I made for me.
Bill, thanks for your kind words. I enjoyed the story about your dad’s engineering group’s design error. I’ll bet there were some exciting conversations at his company.
I first became aware of Dr. Kotlikoff’s company and MAXIFI (previously called ES Planner) when I read an earlier book entitled “Spend Til the End. It covered similar topics such as those you mentioned. It made me aware and interested in the economic thinking on consumption smoothing and maximizing utility. I resonate with your comment about his economic being at odds with the choices many of us make. I think it is still useful as a guide to thinking about our choices.
I’m in a similar situation regarding spousal annuities, but what i don’t get is it really worth it to delay SS for five or more years thereby missing all that cash on a gamble?
I know that’s conventional wisdom, but in the big picture with a 75% J&S and more, perhaps some insurance is the potential higher SS benefit worth the delay. Of course, the age difference between spouses is also a factor.
Thanks for reading and taking the time to comment. I have to admit I’m a little confused, but i’ll take a shot at it.
It seems to me the SS claiming decision involves one’s thinking about longevity vs. “breaking even”. I have had many conversations with friends and colleagues who are concerned with leaving money on the table and want to claim as early as possible to make sure they got back what they put in. Many of them were single and the decision was easier.
I’m a big believer in “hoping for the best and planning for the worst”. I therefore tend to worry more about the other end. I think that outliving one’s assets is the gamble with the greatest downside. Delaying the SS of the higher earner ensures the maximum survivor benefit for the surviving spouse.
Rick, as I tried to explain to Jonathan, my comment related to delaying to age 70 in the context of providing the highest survivor benefit.
If a surviving spouse is much younger, then the delay may be a good thing assume inadequate other assets. If spouses are the same age then the probability is the women will live about two years longer and less as they both age.
In my case my wife is four years older so data is in my favor.
So, in some scenarios would it be better to have a $100,000 in cash by not delaying as opposed to having the higher surviving benefit paid for two years or so – at least on an actuarial basis?
Like you, my wife will receive survivor annuities, has her own annuity while my group life insurance will cover all her expenses for at least two years.
Meanwhile, the SS I started at NRA was invested and now churns out interest income.
Clearly there are different ways at looking at this with no control over the future for any of the assumptions.
What’s the gamble? If you had delayed Social Security and died relatively early in retirement, Connie would have received a larger survivor benefit. As it is, should you predecease her, she’ll receive less. Thanks to your pension, I have no doubt Connie will be fine. But that’s not the situation for most people — so encouraging others to claim early, because that happens to be what you did, strikes me as a little reckless.
Arguably, with single individuals, who aren’t dealing with two tickets to the life-expectancy lottery, postponing Social Security is more of a gamble. Still, I can’t imagine that the dying words of many 68-year-olds are, “I shouldn’t have delayed Social Security.”
My comment related to Rick having a 75% J&S for his wife. Did i misread?
What you wrote is: “is it really worth it to delay SS for five or more years thereby missing all that cash on a gamble?” That suggests you think delaying Social Security is a “gamble” that’s not worth taking. Or were you trying to say something different?
Thanks for the article Rick! You raise many questions in my mind as I’m always in search of a source locally who can guide me to better tweak my financial future and to verify if I’m on the right path. I briefly browsed the MAXIFI website before commenting, and will check it out further.
Olin, thanks for reading and commenting. Best of luck in your financial future.