How's it going, everybody? It's Ryan here. Okay, so here's the question. How much after tax income are you going to have in retirement? Now, I want to say that if that's the question that you're asking yourself, you're asking yourself the absolute right question. Because it's not about gross income or pre-tax income, it's all about the after tax, the net, how much is actually going to be available for you to spend. So here's the thing. So often I find that people aren't familiar how it works from a tax standpoint, both before retirement and also after retirement.
So I want to show you a comparison here, and really what brought along the idea for me to even do this video is that the other day I was talking to a guy and I asked him, I said, "Well, when you retire, what's the goal? How much income would you really like to be able to live on?" And he said, "Well, I guess about $80,000." And I said, "Okay, is that a pretax, or is that after tax?" And he said, "Well, I guess pretax." He said, "I'm making $80,000 right now, that's my salary. My wife is not working right now, so it's just my income, and if we can maintain our standard of living, then I think that would be just fine." And I said, "Okay. So, I think you're going to find this interesting," I told him, and I think you're going to find this interesting too.
Let me go ahead and share my screen here with you, and what I'm going to pull up is, this is just on a public website. I think it's a pretty good calculator, it's just on IRScalculators.com. Anybody can go to it. I can't guarantee you all the information is correct. I believe that it is, I have no reason to believe that that it's not, but it's not something that I put together here. There's a lot of ads and things on here, so just be aware of that, but it's a good calculator. So let's take a look at this.
So the year right now is 2020, they are married. So again, he's 58, she's 57. His income is $80,000. He wants to retire around 65 to 67, probably 67 he's leaning towards, more closer to full retirement age for Social Security. And so he's got a little ways until retirement, but anyways... So they have no kids, or no dependents, they're grown. And his wages, $80,000. And we're not going to put anything else in here. I just want to keep this real simple, especially for this video. But there is no self-employment income for them, no other unearned income, certainly no Social Security, none of these other things for right now. Actually, I'm going to get down to this box in a second, because he is contributing to a 401(k), but first let's take a look over here on the right and let's look how it looks from a tax standpoint.
So when you add up the federal income tax, and they do live in California, the California tax, the Social Security and Medicare, the payroll taxes. So those total for them about $14,000. So after taxes, they would keep $65,712, which I'm writing down right here. Now, in actuality, he's contributing to his 401(k) on a pre-tax basis. And he's putting in, he said 5% for that, so 5% of $80,000 is $4,000, so we put that in right there. And so really at the end of the day, they're living on $62,832. 832. Okay, so really that's the goal. So that's why it's so important when you're trying to figure out, how much income do you actually need in retirement? Again, it's not the gross that matters, it's the after tax. So if what he's saying is that, "I want to be able to live on this amount of income here today, that I am right now," well, after taxes, they're at $62,832. Now, certainly we need to factor in cost of living, inflation over time, that sort of thing. But let's just keep this very, very simple.
So when he retires, they both retire, wages are going to go down to zero. The other thing that's going to change, let's say that they... Because right now, the standard deduction for them is $24,800, but chances are also, they're both going to retire after the age of 65, so the standard deduction actually goes up a little bit. It goes up 2,600 bucks, goes up $1,300 per person. So their standard deduction is going to go up to $27,400. And let's just say that Social Security, they're going to get $40,000 from that. And let's say the other part of the income is going to come from a IRA withdrawal, it could be a 401(k), any type of a retirement plan that they funded on a pretax basis and they pull it out, and they'll have to pay income taxes on it.
So look over here on the right and take a look at what's what's happening here. The total that they end up keeping... Oh, I've got to keep, he's not going to fund his 401(k) when he retires, so that's actually done. Okay, so we look good there. All right, so the total that they end up keeping is $76,376. So, do you see what I mean here? It's the same $80,000 gross, but instead of it being wages, this is $40,000 from an IRA withdrawal, or 401(k), let's say, and $40,000 from Social Security benefits. So their total tax is only about 3,600 bucks. So let me write this number down, $76,376. And let me get my calculator. 76, 376 minus 62, 832. That's an additional $13,544 of after tax income.
Why is that? Well, I don't want to get into a lot of detail on that right now, but a big part of it has to do with Social Security, because Social Security in and of itself is not taxable, and what's happening here is that the income from, let's just call it the IRA withdrawal, is making some of the Social Security benefits taxable, not all of it. Remember, at the maximum, you're not going to pay taxes on more than 85% of your Social Security benefits. But there's a thing called the provisional income formula. In fact, I've done a whole other video about that, which if you're not familiar with that, watch that, it explains how that works. But the way the calculation works here is that $19,600 of their Social Security is subject to taxation in this case.
What also is happening here on the tax side is that payroll taxes are now gone. All you're seeing here is the federal, California. There's nothing for Social Security tax and nothing for the Medicare tax. They're retired, so they get all this other additional income. So let's say again, the amount that they were actually living on today while working and funding his 401(k) is $62,832. So let me just kind of hunt and peck, let's just say instead of $40,000, well, we'll keep the $40,000 from the Social Security, but what happens if you just took out $20,000 from the IRA? What's happening now? Well, interesting, now he's actually keeping, or they're keeping $60,000 and not having to pay any taxes on it whatsoever, but again, they were at $62,832. So let's make that 22, or let's say 2,300. Yeah, so even making that 20... Or not 23, $23,000. There we go.
So they were living on $62,832, now we're only taking out $23,000 from the IRA instead of $40,000, and now they're living on $62,890. So about a hundred dollars more, roughly. So, essentially here's the bottom line. Their gross income, if you will, $67,000. $23,000 coming from the IRA withdrawal, $40,000 coming from Social Security. And now also notice what's happening is that a lot less of that Social Security ends up becoming taxable. So the income sources that they will have, and chances are I don't know you, but chances are that you will have when you retire as well, probably going to be a lot more favorable as well. So even though they're only living on $63,000 of income, all that really matters is the after tax. So their total tax now is only $110 at that time.
So it's very important to understand how this works in comparison, both before retirement and after retirement. Now, one obvious thing that I haven't spoken about here is healthcare, so in retirement, there's the cost for Medicare, and then right now there's the cost for health insurance that he's probably having to pay through his employer. Chances are his employer's not paying for all his health insurance costs, so there's probably at least some sort of cost sharing there. So that would be the next step that we would also want to consider here as well. But hopefully that gives you a general idea on the difference between taxes in retirement versus before retirement. If you found it helpful, let me know. If you have questions, let me know. Until next time, talk to you soon.