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Taxable Pension Treated as Regular Income?

 

Bill Hines, Retirement Planner
(@hines202)
Trusted Member Customer
Joined: 11 months ago
Posts: 89
Topic starter  

I have a client who is receiving a pension each year (government - CA state). Nothing else entered into that input section other than the 50% survivor benefit. In the Income tab of tabular results I see it at the correct starting amount, but then it drops each year by about 3% in the Taxable Pension Treated as Regular Income. Is that due to some California state taxable algorithm?

Bill Hines
Investment Advisor/Financial Counselor/Retirement Planner
Emancipare Investment Advisors LLC
https://emancipare.com
bill@emancipare.com


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Stuart Matthews
(@smatthews51)
Member Admin
Joined: 1 year ago
Posts: 248
 

Bill,

No. My guess is that you're looking at this in terms of today's dollars with inflation set at 3%. If you don't specify an annual rate of increase on that pension, PRC assumes it's a fixed pension and will lose 3% of its value each year.

Stuart


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Bill Hines, Retirement Planner
(@hines202)
Trusted Member Customer
Joined: 11 months ago
Posts: 89
Topic starter  

@smatthews51 Good point, and correct. Today's values/future values can be confusing, as well as when inflation should be factored in. Especially in pensions and annuities.

Most annuities are fixed and not given an annual COLA (cost of living increase) to match inflation. But if PRC users aren't careful, and just plug in the annuity amount in the Income page, their projections will be overly optimistic (will be bumped by the rate of inflation each year). It's very important in fixed annuities to put a negative of the number you used on the home page for expected inflation, to keep those annuity payments fixed.

So if you put 2.8% as the expected rate of inflation on the home page, put -2.8% under Annual Real Rate of Return for that fixed annuity, to keep it fixed.

For pensions, it's a bit different. Many do include an annual inflation/COLA increase. The field in the Income section for this is called "Annual % Increase" and if you leave that blank and have a COLA-adjusted pension, your results will be overly pessimistic, as the pension will be considered to be fixed. So you would want to put the positive 2.8% here in my example, if that's what you expect inflation to be. (this field changed in PRC 2021 as far as what it does)

Obviously inflation isn't the same every year, so these are an average over time.

Bill Hines
Investment Advisor/Financial Counselor/Retirement Planner
Emancipare Investment Advisors LLC
https://emancipare.com
bill@emancipare.com


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