How the Average Retiree’s $330,186 Quietly Pushes Their Social Security Into Taxable Territory

The average worker age 65 or older holds roughly $330,186 in a 401(k), according to Vanguard’s How America Saves 2026 report. Baby Boomers carry an average IRA balance of $287,600, per Fidelity’s Q4 2025 retirement analysis. Those balances look reassuring on paper. They also happen to be the reason a growing share of retirees now hand a portion of their Social Security benefits back to the IRS every April. The combined income formula that decides how much of a benefit is taxable was written in 1983 and has never been indexed to inflation, so a nest egg that once looked ordinary is now large enough to trigger the rule on its own.

The mechanics of the calculation are straightforward. The IRS adds adjusted gross income, tax-exempt interest, and half of annual Social Security benefits to arrive at “combined income.” Single filers cross into taxable territory at $25,000 and married joint filers at $32,000. Above those lines, up to 50% of benefits become taxable, and above the upper tier, up to 85% is taxable. Those thresholds still sit exactly where Congress left them four decades ago.

How a normal balance crosses the line

Consider a retiree drawing the average Social Security benefit. Aggregate Social Security transfers rose from $1,427.6 billion in the first quarter of 2024 to $1,630.3 billion in the first quarter of 2026, a climb driven partly by the 2.8% cost-of-living adjustment that took effect in January 2026. According to the Social Security Administration’s July 2026 Monthly Statistical Snapshot, the average retired worker benefit reached $2,085.98 per month, which works out to roughly $25,000 per year. A typical single retiree already counts about $12,500 of that toward combined income before touching a dime of savings. That leaves only a narrow gap to the $25,000 single-filer threshold, and a typical 401(k) balance can cover that distance with interest income alone, well before any withdrawal is needed.

Interest income does most of the work. The 10-year Treasury yield sat at 4.48% on July 1, 2026. A $330,186 balance parked in intermediate Treasuries generates enough annual interest to push a single filer past the first tax threshold on its own. Required minimum distributions on top of that push most retirees comfortably into the upper bracket, where the majority of their benefit becomes taxable ordinary income.

Why the thresholds keep catching more people

The thresholds have not moved, but almost everything else has. CPI-W rose from 316.349 in July 2025 to 328.829 in May 2026, and Core PCE climbed from 126.43 to 130.082 over roughly the same window. Benefits have been adjusted upward to keep pace with prices, which mechanically raises the combined-income count each year, while the single and joint filer lines stay frozen. What was designed in 1983 to affect only the wealthiest tenth of beneficiaries now reaches deep into the middle of the retiree distribution.

Cost of living compounds the pressure. The Bureau of Labor Statistics reports average annual household expenditures of $78,535 in 2024, up from $72,973 in 2022. Retirees spending at anywhere near that level need meaningful portfolio withdrawals on top of Social Security, and those withdrawals feed straight into AGI. The personal savings rate stood at 4.0% in the first quarter of 2026, according to the Bureau of Economic Analysis, down sharply from 6.2% in early 2024. That decline reflects households drawing down reserves rather than building them.

What retirees can actually do

Two main levers determine the outcome. The first is the composition of taxable income. Roth conversions completed before required minimum distributions begin can shrink future AGI, because qualified Roth withdrawals sit outside the combined-income calculation entirely. Municipal bond interest is worth special attention here: it counts toward combined income even though it is federally tax-exempt, so retirees using munis to lower their tax bill may still trigger Social Security taxation without realizing it.

The second lever is the sequence of withdrawals. Pulling from taxable brokerage accounts first can hold AGI down in early retirement, while delaying Social Security to age 70 raises the benefit and creates space for strategic Roth conversions in the intervening years. Both moves can reduce how much of the benefit is taxed and at what rate. The frozen 1983 thresholds are the reality of the system, and working around them is what an average retiree balance now requires.

Editor’s note: This article was updated to reflect Fidelity’s Q4 2025 Baby Boomer average IRA balance of $287,600, replacing an earlier Q4 2024 figure of $257,002. The average Social Security retired-worker benefit was also updated to approximately $25,000 annually, based on the SSA’s July 2026 Monthly Statistical Snapshot, and the personal savings rate for Q1 2026 was corrected to 4.0% per Bureau of Economic Analysis data.

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