Final answer:
Up to 85% of Social Security benefits may be taxable for retirees with moderate to high taxable income. Traditional pensions do not typically increase with inflation, potentially reducing purchasing power, while 401(k)s and 403(b)s offer tax-deferred saving options.
Step-by-step explanation:
Up to 85% of Social Security benefits, in retirement, may be taxable for taxpayers with moderate to high taxable income. Pensions, known as "defined benefits" plans, have traditionally been a significant source of income for retirees. However, these pensions are fixed and do not typically increase with inflation, which can erode purchasing power over time. As a means to save for retirement, individuals often utilize 401(k)s and 403(b)s, which are "defined contribution" plans where taxes on contributions are deferred until the funds are withdrawn.
Understandably, retirees must be mindful of the potential tax implications on their retirement income and the effect of inflation on a fixed income. Social Security and pension benefits are critical components of retirement planning, and analyzing their tax impact is essential for managing retirement finances effectively.