In Retirement, More Spending Leads to Higher Taxes

**Robert Brokamp** (0:03)
When you are tired, spending this year could affect your tax bill for years to come. I explain why in this Saturday personal finance edition of The Motley Fool Hidden Gems Investing podcast.
I'm Robert Brokamp, and before we dig into this week's topic, I'd like to highlight a new foolish resource. One of my earliest educational experiences about investing came during the literature of the American South class in college, believe it or not. And the lesson didn't come from the professor, but from one of my fellow students, Dads, who was a financial advisor, and asked the professor if he could talk for 15 minutes about the importance of starting investing early. He showed how much we could accumulate 20, 30, 40 years down the road if we just started investing, even a little bit, at our young ages. That lesson stuck with me and was one of the reasons why I opened an IRA in my early 20s.
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**SPEAKER_2** (1:31)
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**Robert Brokamp** (2:13)
Of course, the number one reason people accumulate wealth is to retire, which brings us to the main topic of today's show.
Many factors will determine your ability to retire, but there's one that is at the heart of your money destiny. It's also the one over which you have the most control, and that is your spending. While working, the more you spend, the less you have leftover to save. Once you've retired, the more you spend, the higher withdrawal rate and the higher the chances that you'll deplete your portfolio. Now, that's all common sense, but there's one aspect about spending in retirement that is generally less appreciated. The higher your expenses, the more you have to withdraw from your investment accounts. This often results in higher taxes, which in itself is another expense that necessitates even more withdrawals, which then results in even more taxes and so on. To illustrate this, let's consider a hypothetical couple with the following particulars. So each spouse is 66 years old. They receive $40,000 a year from Social Security. They claim the standard deduction for 2026, which is $32,200 for married folks, plus an additional $1,650 a piece for couples 65 and older. They each also claim the $6,000 bonus senior deduction available to citizens 65 and older, created by the one big beautiful bill. However, as a married couple, it does begin to phase out at an adjusted gross income above $150,000, and that figure is $75,000 for single filers. The rest of their income that they're going to need is going to be withdrawn from traditional retirement accounts, which will be taxed as ordinary income. So using the 1040 calculator at dinkytown.net, which is an excellent resource for all kinds of financial calculators, here are this couple's estimated 2026 federal taxes based on different levels of annual income. So first off, if they keep their spending below $73,500 or so, their federal tax bill is zero. That's thanks to a higher standard deduction and bonus, that bonus senior deduction for the 65 and older crowd, the partially tax-free nature of Social Security, and historically low tax rates in general. However, once their spending goes above that level, additional withdrawals could result in higher taxes. So just to give you an idea, at spending of $80,000 a year, their taxes would be more than $1,200. If their spending were $100,000, that would drive up their tax bill to more than $5,000. If their annual spending were $150,000, their taxes would be more than $11,000. And if they're well off retirees and they're spending $200,000 a year, their tax bill jumps to almost $23,000.