Deductions in retirement
When people get close to retirement, they often wonder how much money they’ll get to take home. This means they want to understand the difference between their gross pay (total earnings before deductions) and their net pay (the amount that goes into their bank account).
If you want to see how much might be taken out, use the tax calculator in your online account.
While you’re working, your paycheck has many deductions, like Social Security (FICA), Medicare, union dues, retirement savings, paid family leave, and workers’ compensation. These take out a chunk of your earnings, usually between 25% and 30%, though it depends on your personal situation.
The good news is, most of those deductions don’t apply once you retire. After retirement, you might have money taken out for things like federal income tax, health insurance, or donations to a charity through the Washington State Combined Fund Drive. But for most retirees, these deductions only end up taking 10% to 15% out of their pension. This is far less than when they were working, so, they’re surprised to learn they get to enjoy more of their gross pay.
When you’re retired, you can always adjust your federal income tax withholding by completing a W-4P form. If you’re getting ready to retire in the next few years, check out the DRS retirement planning checklist.
Deductions for medical insurance premiums can vary greatly by employer for active employees and by age for retirees who are eligible for the Public Employees Benefit Board (PEBB) so the scenarios below may differ from your own circumstances.
An example of worker vs retiree deductions
Let’s say a worker and a retiree both get $6,000 a month before deductions. After everything is taken out, the retiree could end up with around $800 more in their bank account each month than the worker. This is because retirees usually have fewer deductions taken out of their monthly payments.
Deductions for a worker
| Deduction Source | % Deducted | $ Deducted |
|---|---|---|
| Worker's income: | - | $6,000 |
| Fed Inc Tax | 0.11 | $660 |
| FICA | 0.062 | $372 |
| Medicare | 0.0145 | $87 |
| Union Dues | 0.015 | $90 |
| Retirement Contributions | 0.05 | $300 |
| PFML | 0.0058 | $34.80 |
| Workers Comp | 0.0015 | $9 |
| Medical Premiums | $100 | |
| Net monthly pay for worker: | $4,347.20 |
Deductions for a retiree
| Deduction Source | % Deducted | $ Deducted |
|---|---|---|
| Retiree's income: | - | $6,000 |
| Fed Inc Tax | 0.11 | $660 |
| Medical Premiums * | $180 | |
| Net monthly pay for retiree: | $5,160 |
Summary
Understanding the difference between your gross pay and take-home pay can help you plan better for retirement. Even though your pension is taxed, most of the deductions you had while working will no longer apply, which means you could take home more than you expect. Every situation is different, but knowing what to expect can make your retirement feel more secure and less stressful.
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