April 6, 2009

Income versus Age and resulting tax brackets

The Census site has data on household income by age of householder. The data there is from 2007 so its fairly recent. It is interesting to look at typical income levels for people of various age groups.

First lets look at median income for different age levels. The median income figures for each 5 year age group are as follows:

Median Income
25 to 29 years $47,358
30 to 34 years $55,077
35 to 39 years $61,782
40 to 44 years $62,578
45 to 49 years $64,802
50 to 54 years $66,244
55 to 59 years $61,174
60 to 64 years $52,428
65 to 69 years $40,296
70 to 74 years $31,654
75 and older $23,230

Graphically the median income levels look like this:

Current median income rises are higher for people in older age groups through their 20's, 30's, 40's and 50's. Then as people hit their late 50's and get above the older they are the lower the median income are.

Remember this is just a snapshot of one year. It doesn't follow an individual. So I would not necessarily look at this data and conclude that peoples incomes go and down in this similar plotline as shown in the graphic. I would not assume for example that your income will go down as you age after retirement. Its possible that people in later years have fixed income or incomes that increase at a slower rate and are working less and less. So simply compared to younger people their incomes look lower since they have been increasing at a slower pace over decades. On the other hand people of working age are getting annual raises and gaining more work experience and gradually getting other sources of income.

Whatever the cause, its obvious that people in retirement age typically have lower income levels than people of working ages at any given time.

In fact if you compare median income of people above 65 to people below 65 the difference is pretty significant. People under age 65 have a median income of $56,545 and people over age 65 have a median income of $28,305.

While the median tells us where the middle income level will be its also good to look at how income is distributed for each given age group. I figure one good way to do that is to break income into groups that roughly equate to the federal income tax brackets. So using the 2007 tax brackets for a married couple I broke income levels into 4 groups. People making under $15,000 which roughly equates to the 10% bracket, people making between $15,000 and $62,500 which is about the 15% tax bracket, people making from $62,500 to $100,000 which falls into the 25% bracket and then finally people making over $100,000 which is everyone else including the top part of the 25% bracket and up.

Now lets look at how the income of people of different ages falls into these groups.

For people under 65 versus people over 65 it looks like this:

While the largest income group for either age is in the middle, the people over 65 are more often in the lower group and people under 65 are more often in the higher group . People over 65 years old make under $15,000 twice as often as people under 65. People over 65 make over $65,500 half as often as people under 65.

Now lets look at the income distribution for people over each 10 year age group:

People in their early ages are more often making lower income compared to people in their 40's and early 50's. But by the time that people hit their 50's and 60's or older they are more often making lower incomes.

Since these income levels are roughly divided to coincide with the tax brackets we can see a rough picture of how people of different ages fit into different tax brackets.

80% of people over 65 are in the 10% & 15% brackets and only 20% of them are in the 25% and higher brackets.

53% of people under 65 are in the bottom 10% & 15% brackets while 47% are in the 25% and higher brackets.

Looking at the actual income distributions for age I would conclude that in general people are more often in lower tax brackets when they are retired.

Notice I've got the words 'in general' in italics above. The data represents medians which is a indicator of where the middle falls. It is important to keep in mind that median numbers aren't any real indicator of what we as individuals will see for ourselves. Each of us is different so our individual income picture in the past, present and future will vary. In short, just because retired people are typically in lower tax brackets doesn't mean you will be too.

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