After tax portfolio value

[utrecht]

2 people could have a $1 million portfolio but have drastically different after tax values. For example: I could have $1 million in a regular acct where all withdrawals will be taxed at 15% due to everything being LTCG giving me an after tax portfolio value of $850,000. Another person could have $1 million in a 401k where everything will be taxed at their normal income tax rate which may be 25% giving them an after tax portfolio value of $750,000.

Do any of you give any consideration to the after tax value of your portfolio when it comes to deciding on your withdrawal rate?

 

[REWahoo]

Do any of you give any consideration to the after tax value of your portfolio when it comes to deciding on your withdrawal rate?

No.

The only consideration I give to the value of my portfolio is whether it will stay above 0 while I stay above ground.

 

[Closet_Gamer]

2 people could have a $1 million portfolio but have drastically different after tax values. For example: I could have $1 million in a regular acct where all withdrawals will be taxed at 15% due to everything being LTCG giving me an after tax portfolio value of $850,000. Another person could have $1 million in a 401k where everything will be taxed at their normal income tax rate which may be 25% giving them an after tax portfolio value of $750,000.

Do any of you give any consideration to the after tax value of your portfolio when it comes to deciding on your withdrawal rate?

I'm not in the withdrawal rate phase, but I do load future taxes onto my balance sheet to get a more accurate view of net worth.

 

[ronin]

Presumably, your after tax account would have some basis and withdrawals would only be partly taxable.

 

[pb4uski]

I expect the taxes on my tax-deferred account withdrawals to be relatively modest. In 2014 they were about 7% for federal and 4% for state on my Rorh conversions to the top of the 15% tax bracket. I have included taxes in my living expenses.

 

[Meadbh]

I don't, because it could get complicated depending on tax deferral, RMDs, etc.. However, I had a financial plan done in 2013, and current and future tax liabilities were considered. Nevertheless, the FP's conclusion was that I could increase my WR.

 

[utrecht]

Presumably, your after tax account would have some basis and withdrawals would only be partly taxable.

Yes, and that would make the difference in the after tax value between the $1 million 401k portfolio and the $1 million regular after tax acct portfolio even more dramatic

 

[utrecht]

I expect the taxes on my tax-deferred account withdrawals to be relatively modest. In 2014 they were about 7% for federal and 4% for state on my Rorh conversions to the top of the 15% tax bracket. I have included taxes in my living expenses.

But wouldn't your taxes still be even lower if all your money was in after tax accounts? And since you include taxes in your living expenses, wouldn't that mean that your expenses would be lower so your withdrawal rate could be lower (or you would've needed less money to be FI in the first place)

 

[audreyh1]

Do any of you give any consideration to the after tax value of your portfolio when it comes to deciding on your withdrawal rate?

No, because I pay all taxes out of the amount I withdraw. So it's a non-issue in determining a safe withdrawal rate.

 

[jebmke]

Instead of adjusting the value, I include income taxes as a future expense when I start RMDs.

 

[pb4uski]

But wouldn't your taxes still be even lower if all your money was in after tax accounts? And since you include taxes in your living expenses, wouldn't that mean that your expenses would be lower so your withdrawal rate could be lower (or you would've needed less money to be FI in the first place)

Yes and yes. But the rate is so low that it isn't worth worrying about so I really don't think about it. My 2014 taxes would be 0.3% of my portfolio so the impact on my WR is minimal, like paying a 0.3% AUM fee.

 

[utrecht]

No, because I pay all taxes out of the amount I withdraw. So it's a non-issue in determining a safe withdrawal rate.

You safe withdrawal rate is what it is depending on your portfolio size and your expected lifespan. Your actual withdrawal rate obviously should be the same or less than your safe withdrawal rate.

But wouldn't your actual withdrawal rate be lower if you had less tax to pay due to the fact that your portfolio had less taxes due in it? Its probably not possible to determine exactly how much tax is due within your portfolio but you could come up with an educated guess, and the taxes due would certainly be lower if more of your money was in after tax accts or Roths and less in 401Ks.

 

[fritz]

In retirement as in one's working years - Taxable accounts are taxed as they grow (dividends and realized capital gains) vs. Roth/IRA growing tax free. Taxable account withdrawals taxed on CGs. Roths are not taxed, and IRA withdrawals are subject to taxes on ordinary income at one's current Federal (and State, if applicable) tax rates which vary by amount of annual income. Quite a moving target....

 

[audreyh1]

You safe withdrawal rate is what it is depending on your portfolio size and your expected lifespan. Your actual withdrawal rate obviously should be the same or less than your safe withdrawal rate.

But wouldn't your actual withdrawal rate be lower if you had less tax to pay due to the fact that your portfolio had less taxes due in it? Its probably not possible to determine exactly how much tax is due within your portfolio but you could come up with an educated guess, and the taxes due would certainly be lower if more of your money was in after tax accts or Roths and less in 401Ks.

No. I withdraw what I've established as my safe enough rate, no matter how little or more taxes I pay. Even if I end up with more after tax than I actually spend, I still withdraw it. So taxes have no impact on my withdrawal rate.

Taxes do impact how much I have available to spend each year!

 

[Independent]

I focus on dollars, not a withdrawal rate.

I knew that we could withdraw fewer dollars in the early years of retirement because we would draw from after tax accounts first, and wouldn't be paying much FIT on that money.

My decision about when I could afford to retire didn't rely on that, I just assumed everything would be taxed the same. Those early tax savings were small enough that they were just part of my "conservative assumptions cushion".

 

[bingybear]

2 people could have a $1 million portfolio but have drastically different after tax values. For example: I could have $1 million in a regular acct where all withdrawals will be taxed at 15% due to everything being LTCG giving me an after tax portfolio value of $850,000. Another person could have $1 million in a 401k where everything will be taxed at their normal income tax rate which may be 25% giving them an after tax portfolio value of $750,000.

Do any of you give any consideration to the after tax value of your portfolio when it comes to deciding on your withdrawal rate?

No... not much one can do about taxes.... other than plan to try to control them. Instead of withdrawing them all at once... say the person with the $1 mil withdraws 4% or $40k in a given year (sounds like early RMD)... that tax on $40k would likely not be anywhere near 25% unless one has a lot more income elsewhere.
My plan in ER is to use the lower income to do TIRA ->RIRA conversions while my other income is lower than it has been. Will be living off taxable accounts and the cash they throw off. In this way my RMD will be a little lower.... but still will be nicely taxed I'm sure with SS in the mix too. But I'll peal off a nice chunk into RIRA which hopefully will stay tax free.

 

[RunningBum]

Do any of you give any consideration to the after tax value of your portfolio when it comes to deciding on your withdrawal rate?

Absolutely. $1M in a tIRA, $1M in a Roth IRA, and $1M in a taxable account with an $700K basis are effectively 3 very different amounts, at least in my tax situation. I started doing this when the bulk of my net worth was in unexercised stock options that were going to be heavily taxed. It made a lot of sense for my situation. For others it may not matter much. As long as taxes are factored in one way or another it doesn't really matter for your own personal record keeping.

Put another way, if I do a partial Roth conversion at the same 15% tax rate I'd expect the tIRA to be taxed at later, it should essentially be a net wash to me financially. I've just paid a future tax liability now. But my raw net worth has been reduced by 15% (+ state tax) of the conversion to pay for the taxes. The way I account for this is to reduce by tIRA holdings by the expected 15%+state rate tax liability. That way the conversion does become a zero sum transaction.

 

[steelyman]

No.

The only consideration I give to the value of my portfolio is whether it will stay above 0 while I stay above ground.

Better cancel that trip to Bolivia, Butch.

 

[Gumby]

When I calculate my cash needs, I gross up to account for taxes. For example, if I expect to spend $72,000 per year and assume no pension or SS income, I need to withdraw just about $80,000 per year from a fully taxable source (assuming married filing jointly, 2 personal exemptions and the standard deduction -- here is a quick and dirty calculator Tax Calculator - Estimate Your Tax Liability | Calculators by CalcXML ). Then I base my savings needs on that number. This implicitly values the nest egg on an after tax basis. I could adjust as necessary to account for the percentage of after tax versus pretax savings to draw on, but I don't because it is more conservative to assume that everything will be taxed.

 

[W2R]

2 people could have a $1 million portfolio but have drastically different after tax values. For example: I could have $1 million in a regular acct where all withdrawals will be taxed at 15% due to everything being LTCG giving me an after tax portfolio value of $850,000. Another person could have $1 million in a 401k where everything will be taxed at their normal income tax rate which may be 25% giving them an after tax portfolio value of $750,000.

Do any of you give any consideration to the after tax value of your portfolio when it comes to deciding on your withdrawal rate?

No. I regard my taxes as an expense, part of my spending. That is where I take care of them - - on the spending side of the equation. I pay them out of the money I withdrew rather than fiddling with my withdrawal rate.


FIRECalc doesn't care if you spend your money on taxes or a fleet of Corvettes.

 

[steelyman]

I do know approximately what the percentage split is between tax-deferred and tax-free (Roth) in my retirement accounts, it's currently 68.5/31.5.

From there, the estimated post-tax value is easy to get, but it doesn't affect my plans for withdrawals at all.

 

[David1961]

No. I withdraw what I've established as my safe enough rate, no matter how little or more taxes I pay. Even if I end up with more after tax than I actually spend, I still withdraw it. So taxes have no impact on my withdrawal rate.

Taxes do impact how much I have available to spend each year!

Audrey:

A few questions, if you don't mind.

If you end up with more money after tax than you actually spend, where does it go? You still withdraw it, but do you include it as part of next year's portfolio?

What would you do if your tax bill increased your spending to be more than your safe withdrawal rate you established for the year?

How do you calculate your safe withdrawal rate each year? Is it a percentage of your portfolio?

 

[Cobra9777]

2 people could have a $1 million portfolio but have drastically different after tax values. For example: I could have $1 million in a regular acct where all withdrawals will be taxed at 15% due to everything being LTCG giving me an after tax portfolio value of $850,000. Another person could have $1 million in a 401k where everything will be taxed at their normal income tax rate which may be 25% giving them an after tax portfolio value of $750,000.

Do any of you give any consideration to the after tax value of your portfolio when it comes to deciding on your withdrawal rate?

Technically, net worth is supposed to be reported on an after-tax basis. But as a practical matter, very few people actually do that. My guess is that even fewer people do it when calculating withdrawal rates. It seems more straightforward and intuitive to include taxes as part of one's expenses and leave the portfolio gross. I suppose you could exclude taxes from both the numerator and denominator, but that won't change the rate vs doing it gross... 40/1000=4%... 30/750=4%... 34/850=4%. It would not be correct to exclude taxes from the portfolio but still include them in expenses when calculating WR.

The mix of taxable vs tax-deferred affects my withdrawal strategy (sequence, timing, SS), but it has no bearing on the withdrawal rate. Like Independent, I focus on dollars, not a rate. I withdraw what I need, when I need it. Taxes are just part of that need.

The relative advantage of taxable vs tax-deferred has to be considered in the context of an entire lifetime of tax-paying. I deferred tax at a very high rate while working. The most I'll pay now is some mix of 15% and 25% once RMDs start in 16 years, and that could be reduced with Roth conversions. More importantly, those deferred taxes grew, inside my portfolio, at a very significant rate during my working career.

Yes, as I sit here today, I'd love to have a larger after-tax portfolio and smaller tax-deferred. Who wouldn't? But it is what it is. I am comforted by the knowledge of how much tax I avoided via deferral and how much growth that enabled. If (as you suggest) my WR is high today due to embedded tax liabilities in my portfolio, then I would suggest that effect is more than offset by the size of the portfolio itself, which was enabled by deferral at a higher rate than I owe today. So in fact, my net WR today is lower than it would have been without the deferrals.

 

[LoneAspen]

For example: I could have $1 million in a regular acct where all withdrawals will be taxed at 15% due to everything being LTCG giving me an after tax portfolio value of $850,000.

Don't forget the highest LTCG rate isn't 15%, it's 20%. Then there's another 3.8% surtax above a certain amount (can't remember what it is off the top of my head) which makes the effective top rate 23.8%.

I see a lot of folks using 15% as the LTCG rate, but just be aware it can be as high as 23.8%

 

[Animorph]

Roth conversions don't make a lot of sense in terms of net worth just before and after the conversion if you don't allow for taxes. So in my simple calculations I try to approximate after-tax values to make myself feel better.


But I base all my financial planning on a more detailed year-by-year calculation that includes all taxes and calculates my yearly spending amount. Even with that, the concept of net worth is still pretty vague. Is it a liquidation value, an inheritance value, a current balance value, or sort of a nominal value assuming you can liquidate over many years with a lower tax hit? Other than setting some withdrawal rate limits, I usually only consider the annual spending amount and ignore net worth.