Where will your money come from?

Income during retirement comes in many forms; Social Security, Pensions, Annuities, IRAs, Roth, Investments, etc. Some of your income is Guaranteed and some is subject to Market Risk. Some of it is Taxable while some is Tax Free. Planning for the proper balance of these income sources can take a lot of pre-retirement planning.

Tax Delayed Max Taxable Income Tax Free
Long Term Capital
Gains & Dividends
Guaranteed Market Risk Guaranteed
PensionsAnnuitiesIRA RMDOther RothAnnuities
What is your maximum taxable income before entering
Your Personal Tax Hump?
Tax Delayed Income
Social Security
Your personal sweet spots and the size of your personal tax hump are defined by your personal Social Security benefit and your marital status.
Tax Free
$20,000$13,850 $37,418 $1,287
$30,000$12,567 $35,121 $8,584
$40,000$10,900 $32,824 $15,881
Tax Free
$60,000$17,784 $60,458 $6,483
$70,000$15,487 $58,162 $13,779
$80,000$13,190 $55,864 $21,077
There are two personal sweet spots, the taxable income level where you pay zero taxes and the taxable income level just before your personal tax hump starts.
Long Term Capital Gains
Long Term Capital Gains are also tax delayed income so they do increase the amount of tax free income you can create but they do not significantly change the width or position of your personal tax hump.
The Government's Tax Math for this example is relatively complex, BUT, all you really need to know is that if you can also have some Long Term Capital Gains, and you can keep them Tax Free, you will save even more tax dollars which will improve your personal retirement lifestyle!
Maximum Taxable Income

A pension is basically a Lifetime Contract. You will receive a fixed monthly income for the rest of your life, and some pensions also included cost of living increases!


In many ways, an Annuity could be considered a self-funded Pension. It is a CONTRACT with an insurance company and the payments are guaranteed for life and there is no Stock Market Risk. If your Annuity was purchased with untaxed funds from an IRA, your entire annuity income will be taxable. If it was purchased with after-tax funds, taxation of your annuity income will be determined by an exclusion ratio. If it was purchased with Roth IRA funds, your annuity income will be completely tax free.

Market Risk
401Ks and IRAs

Pensions today are being replaced by 401Ks and IRAs. These are merely different methods of saving money for retirement, but there is NO CONTRACT and when the money runs out, the income stops, and stock market volatility and taxes can play significant roles in how long your savings will last.

Required Minimum Distributions (RMDs)

When you reach age 70, you are required to start withdrawing a certain amount of money from your IRAs and 401Ks each year. The percentage that you must withdraw increases each year which could eventually push you into your Personal Tax Hump!

Other Taxable Income

There are many other sources of taxable income durings retirement; part time jobs, pension increases, sale of posessioins, etc. Just be careful that none of this income will be taxed at 40.7% or higher!

Tax Free

Your Roth account is your biggest defense against Your Personal Tax Hump. Start doing Roth Conversions as soon as possible and don't forget to create Back Door Contributions by paying your taxes from other funds, not from the sale of the converted assets.

Note: If you are under 59 and you pay the taxes from the converted funds, the IRS will consider the Tax dollars taken from your IRA as an early withdrawal and charge you a 10% tax penalty!


Annuity income is normally taxable, but it will be Tax Free if you purchase your Annuity within your Roth Account!


To see the results of inflation on the Personal Sweet Spots that were create in the
Tax Delayed Income section above, we increased the 2019 tax brackets, deductions, and Social Security benefit level by 10% and used the spreadsheet that is downloadable for you at the end of this discussion to find the inflated max taxable and hump size values.

SingleSSB22% Tax Bracket Max Pre-HumpEnd of Hump Hump Size
2019$30,000$39,475$3,947.50 $35,121$2,193 $43,705$1,500$8,584 ($693)
+10%$33,000$43,422$37,314 $45,201$7,891

In the previous table larger SSB levels decreased our pre-hump taxable income level. In this example it actually increased our pre-hump taxable income level because the start of the 22% tax bracket which is also the start of the Tax Hump also increased by 10%. The pre-hump max income level only increased by 6.24%, not 10%, because the taxability factors for our Social Security benefits that were established in 1983 and 1993 were specifically designed not to increase with inflation. It should also be noted that the size of the Tax Hump decreased by a small amount.

Caution! Yes it is true that Married couples can have more taxable income than Single individuals, but they should also consider what will happen to their surviving spouse. If their additional income is Guaranteed or Required IRA RMDs, as this income is transferred to the surviving spouse, it could force the surviving spouse into their Personal Tax Hump which could cost them thousands of extra tax dollars each year.

Married couples should also look at the Single Max Taxable income table when planning their retirement income sources. The surviving spouse will inherit their larger Social Security benefit and, assuming that all of their combined Guaranteed income will continue for the survivor, the Single Max Pre-Hump income level has to be considered. They should start doing maximum 22.2% Roth Conversions every year if a large portion of their Taxable income is coming from required IRA RMDs.

During retirement, where your income is coming from is almost as important as how much income you will receive. In some cases it can actually be more important, so let's start looking at those income sources!

Next - Pensions are being replaced with 401Ks!