The New Reality of Taxes and Forced Income in Retirement

One of the foundational concepts in my practice is future tax planning.

To understand why I believe this should be a core component of financial planning today, let’s take a step back and look at a few assumptions many of us have been taught over the years.

For decades, Americans have been told to save for retirement, which usually means contributing to a 401(k), 403(b), or another tax-deferred retirement account. The logic is straightforward: receive a tax deduction today, allow your investments to grow tax-deferred, and ultimately accumulate a larger pool of assets for retirement.

It’s a sound philosophy, but only under certain circumstances.

Many people are still doing exactly what they’ve been taught: maximize tax-deferred contributions, reduce current taxes, and save aggressively for retirement. Add employer matching contributions and decades of investment growth, and it’s not uncommon for successful savers to accumulate several million dollars in tax-deferred retirement accounts.

I’ve always been interested in where commonly accepted financial principles come from, and it’s easy to see why tax-deferred investing became such a popular strategy. The primary benefit comes when you’re in a higher tax bracket during your working years than you will be in retirement. If that’s the case, you receive a tax deduction when your tax rate is high and pay taxes later when your rate is lower.

For many members of the Baby Boomer generation, that was often true.

During their working years, some households found themselves in tax brackets of 50%, 60%, or even higher. In retirement, however, Social Security benefits were relatively modest, pensions were common, and taxable income often dropped significantly. As a result, many retirees found themselves paying taxes at rates in the 20% range or even lower.

But tax brackets have changed dramatically over time.

Today, many families spend their working years in the 22% to 24% tax brackets and may find themselves in very similar brackets during retirement. That doesn’t mean people shouldn’t save for retirement—far from it. Instead, I see it as an opportunity to look beyond today’s tax situation and consider what retirement may actually look like decades down the road. When we understand both our current and future tax picture, we can make more informed planning decisions today.

A critical, yet often overlooked, piece of that future picture is a concept known as forced income.

What Is Forced Income?

Forced income is simply the income you’ll receive whether you want it or not.

Social Security is the most obvious example, but for many retirees, there’s another major source of forced income: Required Minimum Distributions, or RMDs.

Under current rules, most owners of tax-deferred retirement accounts must begin taking annual distributions at age 73. In 2025, the first-year RMD percentage was approximately 3.77% of the prior year’s account balance.

A Hypothetical Example

So what does that mean in practice?

Let’s look at a hypothetical example. Suppose a higher-earning couple retires with $3 million in tax-deferred retirement assets. At age 73, their first-year RMD would be approximately $113,100. If we add a maximum family Social Security benefit of roughly $107,260, their total forced income becomes approximately $220,360.

At that point, they’re firmly back in the 32% tax bracket—the same bracket they occupied during their working years. And that’s before considering pensions, rental income, brokerage account income, part-time work, or any future increases in tax rates.

Now, it’s important to remember that this is a simplified example. Real-world tax planning involves many moving parts. Deductions matter. Effective tax rates matter. Individual circumstances matter. Tax planning is far more nuanced than simply comparing tax brackets.

My goal here isn’t to build a perfect tax projection. It’s to illustrate a broader concept: the decisions we make today can create tax consequences decades into the future.

Why Future Tax Planning Matters

When we begin planning around future forced income rather than focusing solely on today’s tax deductions, the conversation often changes dramatically.

That’s why I believe retirement income tax planning deserves a larger role in the financial planning process. The retirement landscape has evolved. Tax rates have changed. Social Security benefits have increased. Retirement account balances have grown. And the assumptions that worked well for previous generations don’t always translate neatly into today’s environment.

The key is to evaluate today’s decisions through the lens of tomorrow’s tax reality—and to be willing to challenge conventional wisdom when the numbers point in a different direction.

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