Planning a budget on anticipated local government pension and social security leveling

[DanitaB908937]

I have 30 years in with local Dept. of Social Services and want to retire. I need to calculate / anticipate the amount of state and federal taxes that would come out of retirement pension and the social security leveling amount. So far the county HR  , Orbit, and NC retirement systems have been little to no help. I have come up with the estimated gross pension amount and the estimated gross social security leveling amount, but I live month to month and need to calculate the net retirement amount that I will receive before making the decision to retire. I have to make sure I will be able to pay my bills. I am single and have a lot of responsibilities so if anyone can help or has any suggestions please let me know. PS - I don't have extra money to pay a CPA or consultant 

[Tonster521]

@DanitaB908937 

I am familiar with the concept of having a Social Security Leveling (SSL) provision in a pension plan. Generally, the SSL provision becomes available when other factors such as downsizing are being implemented by the employer. SSL is a provision that is available to edge folks into early retirement before eligibility for SS benefits at age 62 or later. Many Plans will reduce the SSL to zero at age 62. However, many government pension plans (aka gold plated pensions) have benefit provisions that allow early retirement at the employee/participant's election and may pay SSL to Full Retirement Age (ages 66 to 67). So, a word of caution, you need to read your plan document or the Summary Plan Description (SPD) to find out if the SSL provision is available at your election and how long will it be paid. Also, is the SSL provision reduced or stopped should you obtain other employment? Assuming you may elect early retirement and receive the SSL benefit provision, some pension plans no longer offer FIT and SIT withholding inasmuch as those courtesies are an added cost to the administration of the Plan. If that is the case, you need to address submitting quarterly tax payments based on your estimated tax liabilities which will include any other taxable income such as interest, dividends, capital gains/losses, etc. Having said all this, your pension becomes taxable along with any other taxable income after a standard deduction of $12,550 for 2021. Thereafter, taxable income up to $9,875 is taxed at 10%. Taxable income from $9,876 to $40,125 is taxed at 12%. And, taxable income from $40,126 to $85,525 is taxed at 22%. Here is an example for $52,550 of pension income: $52,550 - $12,550 = $40,000. Of this amount, $9,875 is taxed at 10% or $987.50 (which rounds up to $988.00) and $30,125 is taxed at 12% or $3,615. Your total FIT is $988 plus $3,615 or $4,603. Divide that amount by 12 if the pension plan offers FIT withholding or $384.00 per month. If not, submit quarterly estimates of $1,152 (3 X $384). This example assumes you have no other taxable income. You may adjust the numbers to fit your taxable pension income. I do not know your State tax provisions. Hope this helps.

[fffred]

@DanitaB908937 

wow, you are of a like mind to me! I like to plan out my finances the way you have described. I do not want any surprises (never did). So I totally and completely understand what you want. I also think that it is entirely a reasonable and realistic desire to do what you described, and is certainly possible. It just takes some work for research and understanding, and then crunching some numbers.

I learned over my long working career to do things for myself, and for learning purposes, such as deciphering things like the tax withholding on my payroll checks, doing my own income tax returns (until about 15 years ago), and other basic personal finance tasks, and then got into more complex issues. Are you familiar with spreadsheets? (such as Microsoft Excel, QuattroPro, etc, or the free options, like Open Office, Google Sheets, etc) If so, you will find these make your work so much easier.

Are you going to be covered under Medicare? If so, are you younger than 65? The answers to these are big ones and may affect your considerations. If you won't be, or are too young, you may want to review the rules for the ACA refundable tax credit for your health insurance.

As mentioned, I have spreadsheets covering all my personal financial planning and I use them to project my future income considering my pension, Social Security retirement benefits (for me, and my wife's spousal), RMDs on IRA's, expected returns on other investments, etc. The counterpoint to this is I also have spreadsheets to determine my expected future income tax, considering how much of the Social Security benefit may be (will be) taxed. And these are combined in my mega-budget spreadsheet that extends out for our projected lifetimes. We use this to determine what we can afford each year now that we are in "spend down" mode. (What can I say? I have an engineer's mind for 'ciphering' and this is my hobby. haha) I know others who do this same sort of thing. So it it possible and practical and certainly you can do this.

Fortunately, you know what your pension and Social Security (will you get SS?) will be. You mentioned the SS offset, is this the WEP and/or the GPO? I'm sure you should be able to get a clear answer on your state/local pension on the benefit amount. You can review the WEP and GOP, if applicable, starting with these SS documents:

https://www.ssa.gov/pubs/EN-05-10045.pdf

https://www.ssa.gov/pubs/EN-05-10007.pdf

Once you know your income you can work on your income tax liability. One guide for you are your previous income tax returns. Of course, these are based on your working income so that is a difference. But I would review them and see how the instructions cover your income in your newly retired situation: Social Security, pensions, etc. You may have to search through the IRS website (which is really quite helpful) and the North Carolina state site for information on rules and for tax forms. I would fill out some "trial" returns, even if they're for 2020 rather than later years, and see what rules apply to your income and what the taxes should be.

If you have questions on that process I'm sure you can come back here and ask for further help on this project. 

I wonder if you can contact any of your working colleagues who are now retired and ask for their input on how to work through the rules of all these bureaucracies?

Good luck!

[Anonymous]

I am impressed with your knowledge and suggestions @fffred 🙂

[Anonymous]

Hi @DanitaB908937 I see you have the AARP newbie title, welcome 🙂 Hmmm, way over my head. Have you done any ONLINE research? Maybe AARP may have info or volunteers who can help. Hope someone responds that can help.