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Basic SWR Question
Old 01-14-2018, 09:58 AM   #1
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Basic SWR Question

We've just complete our 1st full year of retirement, and I'm in the process of calculating our withdrawal rate for 2017.

What do you include in the numerator? Obviously Amazon purchases LOL...but wondering about things like income taxes, RMDs (we have an inherited IRA for which these are required), etc. Also, do you offset your withdrawals with investment income such as dividends and capital gains?
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Old 01-14-2018, 10:05 AM   #2
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Generally WR is total expenses (including taxes) over total portfolio. RMDs are not necessarily a withdrawal - they transfer from your IRA to a bank account or money market account. Only if you spend them they are in the numerator. If you put them back in your portfolio they are not. The taxes you pay on them are always an expense.

Same with dividends and investments. If you spent them they are in the numerator, otherwise the just moved around within your portfolio.

A better way to look at it is your 2017 spending (including taxes) over your start-of-year portfolio value. The ins and outs of RMDs, dividends, etc. are not really part of the equation.
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Old 01-14-2018, 10:25 AM   #3
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Expenses = money you spend.

Expenses include taxes. You have to find that money somewhere and itís not coming back. Expenses include all the goods and services you bought throughout the year, whether it was a sofa bought with your credit card or a cup of coffee you paid for in cash.

How I calculate total annual expenses is to download the data from my credit cards and my chequing accounts (I have two of each) and to delete any credit card payments and deposits to the chequing accounts. Then add the remainder. (I used to do a much more detailed monthly calculation, but the principle still holds.)

RMDs have nothing to do with expenses. Letís say you spent $50,000, including taxes, in the year before you had to start taking RMDs. Expenses were $50,000. Next year, you are obliged to take $20,000 in RMDs. You spent $51,000, including taxes. What were your expenses? $51,000 of course. Not $71,000. Not $29,000.

Another scenario: you have a pension that exceeds your expenses. You reach the age of RMDs. You take out the RMD and deposit it in your taxable investment account. You havenít spent any of that money.

Taking RMDs simply means you were forced to move money out of a tax sheltered account. The RMD will contribute to your taxable income. But as we all know, income and expenses are not closely correlated. You could save it somewhere else, or spend it (in which case it will show up in expenses). But the RMD is not included in the calculation of your expenses.
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Old 01-14-2018, 11:37 AM   #4
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Originally Posted by Trooper View Post
We've just complete our 1st full year of retirement, and I'm in the process of calculating our withdrawal rate for 2017.

What do you include in the numerator? Obviously Amazon purchases LOL...but wondering about things like income taxes, RMDs (we have an inherited IRA for which these are required), etc. Also, do you offset your withdrawals with investment income such as dividends and capital gains?
LOL - that’s not how you are actually supposed to do it, although many people here do.

The SWR models however assume you choose your withdrawal rate based on your analysis of your needs, risk tolerance, longevity, etc., then use that number to take an amount out of your retirement assets each year. That is to cover all your annual spending, including taxes, that not already covered by additional sources of income such as SS or pension. If you had already set some funds aside (outside the retirement assets) to cover certain irregular expenses (say a child’s college fund, or to save for a new car, or an HSA account) then obviously those also don’t need to be covered by the withdrawal.

The models assume total return including investment income - so no there is no offset.
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Old 01-14-2018, 11:52 AM   #5
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For me the numerator is my total spending minus the income from non portfolio sources.
(In our case rental income and DH's SS.)

Our portfolio includes an inherited IRA - so the RMD is part of the withdrawal. If the RMD were bigger than the withdrawal needed the remainder would be put back into the portfolio. TAXES on the RMD are definitely part of the numerator (total spend).

Most WR calculations assume TOTAL returns... so Cap Gains and Divs are part of the returns... and are assumed to be used as PART of your withdrawal OR reinvested.... NSTAAFL.

(TotalSpending-OtherIncomeSources)
WR = ------------------------------------------------------
(Total Investment Portfolio )

And it's only a SWR (safe withdrawal rate) if the withdrawal is small enough to be sustainable...
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Old 01-14-2018, 11:58 AM   #6
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LOL - thatís not how you are actually supposed to do it, although many people here do.

The SWR models however assume you choose your withdrawal rate based on your analysis of your needs, risk tolerance, longevity, etc., then use that number to take an amount out of your retirement assets each year. That is to cover all your annual spending, including taxes, that not already covered by additional sources of income such as SS or pension. If you had already set some funds aside (outside the retirement assets) to cover certain irregular expenses (say a childís college fund, or to save for a new car, or an HSA account) then obviously those also donít need to be covered by the withdrawal.

The models assume total return including investment income - so no there is no offset.
What She Said^^^

WDR = WD from your Investment Accounts/NW of Investment Accounts*

-or-

WDR = [Total Expenses (incl taxes) - Non-Investment Income (SS, Pension, etc)]/NW of Investment Accounts#

* Some folks include real estate; I donít, especially primary residence (as think it should be treated differently).

# Simplified with assumption you withdraw only whatís needed for annual expenses.
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Old 01-14-2018, 12:35 PM   #7
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I segregate our "retirement portfolio" from our local savings and checking accounts that we use to pay our bills since those localaccounts are only $10-20k at any given point in time. With this arrangement it is easy for me to determine my "withdrawals"... it is transfers from the retirement assets to our local checking account, including dividends from our taxable accounts (that are part of our retirement assets) that go directly into our checking account.

The withdrawals for the year divided by our numerator is our withdrawal rate for the year. The numerator would be either the value of our retirement assets at the beginning of the year or at the time we retired, depending on what measure is needed.
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Old 01-14-2018, 12:55 PM   #8
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It isn't rocket science. I just look at the total value of my investment accounts on Dec.31 and take a percentage of that . I use 4% .That amount plus my SS and pension is my spending amount for the year which includes taxes and everything else. If at the end of the year there is money left over it goes into a slush fund for future expenses ( cars , Vacations , home improvements ,etc.)
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Old 01-14-2018, 02:32 PM   #9
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Expenses = money you spend.

Expenses include taxes. You have to find that money somewhere and itís not coming back. Expenses include all the goods and services you bought throughout the year, whether it was a sofa bought with your credit card or a cup of coffee you paid for in cash.

How I calculate total annual expenses is to download the data from my credit cards and my chequing accounts (I have two of each) and to delete any credit card payments and deposits to the chequing accounts. Then add the remainder. (I used to do a much more detailed monthly calculation, but the principle still holds.)

RMDs have nothing to do with expenses. Letís say you spent $50,000, including taxes, in the year before you had to start taking RMDs. Expenses were $50,000. Next year, you are obliged to take $20,000 in RMDs. You spent $51,000, including taxes. What were your expenses? $51,000 of course. Not $71,000. Not $29,000.

Another scenario: you have a pension that exceeds your expenses. You reach the age of RMDs. You take out the RMD and deposit it in your taxable investment account. You havenít spent any of that money.

Taking RMDs simply means you were forced to move money out of a tax sheltered account. The RMD will contribute to your taxable income. But as we all know, income and expenses are not closely correlated. You could save it somewhere else, or spend it (in which case it will show up in expenses). But the RMD is not included in the calculation of your expenses.
Thanks Meadbh and everyone else. Your method is pretty close to what I did, except I don't download credit card statements since they are paid out of checking anyway. I came up with 3.4% which is maybe a little high, because the estimated tax payments included in our spending were overestimated and I will be getting a refund.
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Old 01-14-2018, 03:24 PM   #10
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You most definitely do NOT need to include taxes in spending. (Whether it makes sense or not depends on your overall situation.)

For example, consider someone who is retired with no income, and is spending from their taxable account, while doing Roth conversions. Suppose almost all their tax is from their Roth conversions. Well the spending and taxes are almost totally disconnected. It may be more suitable to measure assets in Traditional accounts in post-tax dollars, so that when you Roth convert you are converting unrealized tax to realized tax. But it would be totally nuts to classify that tax as "spending".

The tax decisions can be complex (especially when various income/asset/(M)AGIs affect all kinds of stuff). You have to figure it one way or another. But simplistically calling tax "spending" is really a very bad case of putting a square peg in a round hole.
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Old 01-14-2018, 04:17 PM   #11
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You most definitely do NOT need to include taxes in spending. (Whether it makes sense or not depends on your overall situation.)

For example, consider someone who is retired with no income, and is spending from their taxable account, while doing Roth conversions. Suppose almost all their tax is from their Roth conversions. Well the spending and taxes are almost totally disconnected. It may be more suitable to measure assets in Traditional accounts in post-tax dollars, so that when you Roth convert you are converting unrealized tax to realized tax. But it would be totally nuts to classify that tax as "spending".

The tax decisions can be complex (especially when various income/asset/(M)AGIs affect all kinds of stuff). You have to figure it one way or another. But simplistically calling tax "spending" is really a very bad case of putting a square peg in a round hole.
I think most of the posters above inferred that one needs to make a current estimate of taxes for oneís current situation, even though taxes in retirement will almost certainly be very different; I know I certainly did.

So, Iíd venture to say that youíre in violent agreement with the posters before you.
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Old 01-14-2018, 04:43 PM   #12
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You most definitely do NOT need to include taxes in spending. (Whether it makes sense or not depends on your overall situation.)

For example, consider someone who is retired with no income, and is spending from their taxable account, while doing Roth conversions. Suppose almost all their tax is from their Roth conversions. Well the spending and taxes are almost totally disconnected. It may be more suitable to measure assets in Traditional accounts in post-tax dollars, so that when you Roth convert you are converting unrealized tax to realized tax. But it would be totally nuts to classify that tax as "spending".

The tax decisions can be complex (especially when various income/asset/(M)AGIs affect all kinds of stuff). You have to figure it one way or another. But simplistically calling tax "spending" is really a very bad case of putting a square peg in a round hole.
I disagree. SWR is safe withdrawal rate... if money leaves the portfolio then it doesn't matter if it was spent on food, travel, mortgage payments, taxes, a new roof, a new car, a vacation home or hookers.... it left the portfolio.

I include all withdrawals when calculating a WR. When we bought a winter condo a couple years ago I calculated two WRs... one with the winter condo and one without. The one without would apply IF I considered the winter condo to be part of my retirement portfolio (but I don't even though a fair argument could be made that I should).
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Old 01-14-2018, 04:44 PM   #13
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I disagree. SWR is safe withdrawal rate... if money leaves the portfolio then it doesn't matter if it was spent on food, travel, mortgage payments, taxes or hookers.... it left the portfolio.
Yep.
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Old 01-14-2018, 04:52 PM   #14
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I disagree. SWR is safe withdrawal rate... if money leaves the portfolio then it doesn't matter if it was spent on food, travel, mortgage payments, taxes, a new roof, a new car, a vacation home or hookers.... it left the portfolio.
Yes, I understand 43210s comment about the complexity of taxes, but if you have to write a check to the IRS or your state it is spending from your portfolio and requires a withdrawal of some sort.
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Old 01-14-2018, 04:57 PM   #15
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As long as you've accounted for taxes one way or another (either using an estimated after-tax value of your portfolio, or including tax as an expense), it all works out. I took large capital gains and made a large Roth conversion this year, but I'm not counting the tax on that as part of my withdrawal for the year, because I had already devalued the asset. Otherwise, I'd have blown past my WR target, only because I did some asset shuffling to better position myself for future years.
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Old 01-14-2018, 05:08 PM   #16
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A perfectly legitimate way of looking at Trad 401k/IRA/etc is that Uncle Sam already (and always) owns a portion of the balance (even if the exact percentage is not known). (You can do the same with unrealized cap gains.) If you don't take that into account you are arguably miscalculating your assets. You can treat the taxes as if they were already gone, right from the outset, and that certain tax events merely convert unrealized tax to realized tax.

I'm not saying you have to account for it this way. (I'm still thinking about how best to do it.) But you can. So treating taxes as "spending" is not necessary.
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Old 01-14-2018, 05:10 PM   #17
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As long as you've accounted for taxes one way or another (either using an estimated after-tax value of your portfolio, or including tax as an expense), it all works out. I took large capital gains and made a large Roth conversion this year, but I'm not counting the tax on that as part of my withdrawal for the year, because I had already devalued the asset. Otherwise, I'd have blown past my WR target, only because I did some asset shuffling to better position myself for future years.
I'd expect everyone can agree with this. You have to account for taxes, but there are different ways of looking at it.
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Old 01-14-2018, 05:20 PM   #18
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I disagree. SWR is safe withdrawal rate... if money leaves the portfolio then it doesn't matter if it was spent on food, travel, mortgage payments, taxes, a new roof, a new car, a vacation home or hookers.... it left the portfolio.
Dang - I forgot about hookers!
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Old 01-14-2018, 05:30 PM   #19
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You most definitely do NOT need to include taxes in spending. (Whether it makes sense or not depends on your overall situation.)

For example, consider someone who is retired with no income, and is spending from their taxable account, while doing Roth conversions. Suppose almost all their tax is from their Roth conversions. Well the spending and taxes are almost totally disconnected. It may be more suitable to measure assets in Traditional accounts in post-tax dollars, so that when you Roth convert you are converting unrealized tax to realized tax. But it would be totally nuts to classify that tax as "spending".

The tax decisions can be complex (especially when various income/asset/(M)AGIs affect all kinds of stuff). You have to figure it one way or another. But simplistically calling tax "spending" is really a very bad case of putting a square peg in a round hole.
Taxes are expenses whether or not you consider them ďspendingĒ. They have to be covered one way or another. In the case of Roth conversions you either take the taxes owed from the conversion putting less with the Roth or you have to cover them from your annual withdrawal/income. It seems like most people do the latter to maximize their amount in the Roth account. It is part of their annual costs in that case.

We live off our taxable investments. I cannot budget our taxes, they are quite unpredictable as distributions vary wildly as do rebalancing needs. But I do have to cover them with our annual withdrawal. When I withdraw the annual funds I set aside what I estimate will go to owed taxes and estimated taxes during the year in savings. The remainder is then available for after-tax spending. A small reconciliation is made when we file the taxes in April.
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Old 01-14-2018, 05:33 PM   #20
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I have a spreadsheet that forecasts the next 30+ years of my portfolio. It's not as sophisticated as retirement calculator, but here's how it treats taxes:

I come up with an amount that's needed from the portfolio each year, based on budgeted spends, less income from SS and pension. Then I gross that up by the combined state and local tax rates. For example if we'll spend $80K in a given year, and SS/pensions take care of $30K of that, then I need $50K from the portfolio. But because a portion of our investments are qualified, I divide the $50K by (1-tax rate) to come up with what the portfolio needs to provide.

Of course, coming up with the tax rate is quite the crap shoot.
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