Q. I am thoroughly confused. Sick of work (doing what I am now). Self-employed (have always been).   I'm also sixty years old and married to same---only 62. We are both professionals--- interior designer and lawyer--- with five degrees between us. I have a lot of questions. First, is Social Security income taxed? No matter what other income you have? Does being "retired" change the tax brackets?

Many people today are self-employed and feel that we are headed for uncharted waters in the hoped for land of "retirement." We are desperate to find safe, income producing vehicles in which to invest. Our IRA's are earning pathetic interest. Is it a myth that you will be in a lower tax bracket when retired? How can you be in a lower tax bracket (reduce your income) and still have enough to live decently?

Can two people live, pay insurance, house and car payments, and taxes on less than $40,000 a year?

---L.P., by e-mail


A.   That's a lot of question--- but par for the course. Yes, Social Security income can be taxed. It is only taxed when your income from Social Security and other sources exceeds certain threshold amounts. As you might expect, how the tax is calculated is based on a wretchedly complicated formula. For a joint return, the taxation of Social Security benefits begins when the total of one-half of your Social Security benefits, your adjusted gross income, any tax-exempt income, and some other items exceeds $32,000.

Worse, that $32,000 figure isn't indexed   like most items in the tax code so people will start paying taxes on Social Security benefits at lower and lower levels of real income as inflation continues. It's a bummer of a tax hit. It will affect younger people even more than it will affect you.

That said, your tax burden will probably decline in retirement because you won't be paying the largest and most regressive tax of all, the employment tax. This tax currently takes 15.30 percent of earned income up to $84,900.  

Here are some other ways your income requirement will decline:

•         Your Federal income tax bill will probably decline.

•           You won't need to save any more because you'll be retired.                That could be 13 percent of your income or more.

•           Many people who are retired have paid off their home                mortgages. They also have no car loans or credit card                debt. As a result, they don't need as much income to                sustain their standard of living. If you and your husband                work to 'clear the decks' you can be in that position, too.

•           Work-related expenses disappear in retirement, cutting your                cost of living still more. Many two-earner couples, for                instance, eat out regularly because they are too tired to                cook after a long workday. That will change.

All this can be, and is, measured very carefully. The 2001 Retirement replacement income study done at Georgia State University, for instance, found that two-earner couples with pre-retirement incomes of $60,000 to $90,000 only needed about 75 percent of that in retirement.

Can a couple live on $40,000? Millions do.


Q. My wife and I have been "maxing out" on our respective 401k and 403b plans for a number of years. We have fairly well diversified plans, but like most other people, have seen our contributions going up in smoke of late. While we've been contributing the maximum legal amount to retirement, we've been living well below our means housing-wise, mostly so we could afford large contributions to retirement.

Question: Given the tenuous future of mutual fund returns, would it make sense for us to shift a portion of that savings to more expensive housing as a better shelter for our savings? That is--- should we move into a more valuable home with the assumption that, at retirement, we could downsize and capture the equity?

---TW, Denton, TX


A. It doesn't make much sense to raise your overhead expenses in the hope of making a long-term gain on housing because that's far less diversified and far more risky than building a portfolio. I suggest a different path. Take a look at your current mortgage payment and calculate how much of a payment increase it would take to have it paid off ten years earlier.

It won't take as much as you think and it you'll get to see your debt decrease on each mortgage statement.