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DON'T Forget Taxes and Healthcare in Projected Spending!
Old 05-20-2019, 01:35 PM   #1
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DON'T Forget Taxes and Healthcare in Projected Spending!

Sometimes I see (very) early retirees who share their projected spending without accounting for healthcare expenses. I also see folks here sometimes ask if FIRECALC accounts for taxes for you - it does NOT. In my experience, both expenses must be seriously considered when you figure out your projected spending in retirement.
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Old 05-20-2019, 01:42 PM   #2
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Most spending categories can be just eyeballed and smoothed across the entire plan based on historical values. But for both taxes and healthcare, it seems to me, need to be customized based on situation and age, and historical values are very much less useful.


I wonder if these things get left out because they're harder to model.
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Old 05-20-2019, 01:57 PM   #3
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agree both need to be modeled

taxes can change drastically in retirement - I'm planning to live off taxable investments (plus our pensions, rentals, interest and dividends) for the next several years so my taxable income will be about 25% of what it was in 2018, maybe lower.

For health costs, I assumed the max out of pocket for a bronze plan for myself and a MAPD plan for DW. Not that difficult to model.
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Old 05-20-2019, 02:08 PM   #4
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I used to only budget health insurance costs for medical. Between health issues as I've gotten older, bad luck, and higher deductibles, I figure premiums+deductible, if not Max OOP, and it's a bonus if I come under.

My fed taxes are minimal but the state keeps taking.
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Old 05-20-2019, 02:29 PM   #5
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Yes! The piece I left out when initially working through expenses was layering in deductibles and the out of pocket $ after medicare kicks in. Dental is another chunk that goes into healthcare and can end up being $$$.
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Old 05-20-2019, 03:41 PM   #6
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Dental is another chunk that goes into healthcare and can end up being $$$.
+1
Dental was the one I completely forgot, plus I didn't realize how much higher dental expenses would be at age 65 compared with age 45. Luckily I had enough of a "fudge factor" to cover these expenses.

Originally I thought that fudge factor could end up being used to partly cover (potential) massive inflation, but instead it is sending my dentist's kids to college....
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Old 05-20-2019, 03:46 PM   #7
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AMEN! HC is likely to be the largest single line-item expense that any of us will incur. Even IF you can manage income for ACA subsidy purposes TODAY, there is no guarantee that benefit will remain going forward, and the cost of non-subsidized (by ACA or corporate benefits) HC is MASSIVE depending on your age and where you live.

I'm budgeting $25K per year ($15K+ annual premiums for the two of us, with $5K+/pp deductibles and co-poays) with a 5% annual bump for HC between now and Medicare, and even that is probably less than we will need.

HC is easily our biggest ER expense, and that REALLY sucks.

ETA - also highly recommend estimating Federal, State and any other taxes and keeping current on payments quarterly. I've never been good at this, and it's bit me every single year at tax time with penalties for under-payment or late payments. I resolved to do "better" this year and so far...not doing a whole lot better at it. But at least I estimated what my 2019 tax liabilities will be..now I just need to figure out how and when to pay what I need every quarter and all will be good..err...better.
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Old 05-20-2019, 03:59 PM   #8
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I split my income taxes into two parts. The first is a "basic" part, based on the monthly and quarterly taxable dividends I receive to pay my expenses. That is part of my budget. The second part is an "excess" layer, the part generated by the more volatile and unpredictable cap gain distributions. There, I am not worried about additional income taxes because the additional distributions themselves can be used to pay the additional taxes.


HI is part of my medium-term budget and I have assigned its own inflation rate to it (10%, to all medical expenses) which is higher than the rest of my budget.
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Old 05-20-2019, 04:02 PM   #9
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Taxes were somewhat of a grey area for me up until recently. My spreadsheet contains cells for $ withdrawal (based upon a withdrawal % chosen from a drop-down), $ total income (to account for pension and social security (if chosen to include those items, again from a drop-down) and federal taxes (state/local taxes are my next project). I created an Excel VBA function to calculate federal taxes based on the withdrawal (from investments) and regular income (i.e., pension/ss). [Edit begin] I then put the calculated tax in the main spreadsheet, calculate fixed expenses based on this tax amount (i.e., fixed expenses known beforehand + taxes), and any discretionary money left over (total income - fixed expenses).[Edit end] If anyone finds it helpful, I include the code below. It's not perfect, as it assumes all of the investment withdrawal are either qualified dividends and/or long-term capital gains from taxable accounts. But it brings me close. I'm sure it can be easily modified to calculate taxes on withdrawals from tax sheltered accounts. I just figured, I can probably draw from taxable accounts until RMDs, at which time DW and I will be collecting social security. The function also assumes you're filing married filing jointly, but again, that's just a matter of changing the values in the tax reference sheet. Finally, the function assumes you're taking the standard deduction as a married couple filing jointly.


The calculation of tax uses another sheet that I use as reference with tax brackets. Basically:

Income Floor (In my spreadsheet, column E)
Income Ceiling (In my spreadsheet, column F)
Bracket Amt (ceiling - floor) (In my spreadsheet, column G)
Regular income tax rate (In my spreadsheet, column H)
Short-term capital gains rate (In my spreadsheet, column I)
Long-term capital gains rate (In my spreadsheet, column J)

Here is the VBA function with comments. I hope someone finds it useful. If you find problems with it, I'd appreciate it if you let me/us know.

Code:
' Takes withdrawal amount and total income amount as params
Private Function CalcTaxes(cWithdrawal As Currency, cTotalIncome As Currency) As Currency
    Dim cRegularIncome As Currency
    Dim cInvestmentIncome As Currency
    Dim taxBracketCell As Range
    Dim cBracketAmtTot As Currency
    Dim cTaxAmt As Currency
    Dim nTaxBracketRow As Integer
    Dim cStandardDeduction As Currency

    ' Add fixed property tax, which is contained in a reference sheet
    cTaxAmt = Sheet7.Range("PROPERTY_TAX").Value
    
    ' Get regular income and apply standard deduction contained in a reference sheet
    cRegularIncome = cTotalIncome - cWithdrawal
    cStandardDeduction = MaxVal(Sheet7.Range("STANDARD_DEDUCTION") - cRegularIncome, 0)
    cRegularIncome = MaxVal(cRegularIncome - Sheet7.Range("STANDARD_DEDUCTION"), 0)
    
    ' Calculate tax on regular income
    cBracketAmtTot = 0
    nTaxBracketRow = 2

    ' Iterate through the tax bracket sheet.  Column G corresponds to Bracket Amt
    For Each taxBracketCell In Sheet6.Range("G3:G11")
        If cRegularIncome < cBracketAmtTot Then Exit For
        nTaxBracketRow = taxBracketCell.Cells.Row
        cTaxAmt = cTaxAmt + (MinVal(cRegularIncome - cBracketAmtTot, taxBracketCell.Value) * Sheet6.Range("H" & nTaxBracketRow))
        cBracketAmtTot = cBracketAmtTot + taxBracketCell.Value
    Next taxBracketCell
    
    ' Apply any remaining standard deduction to investment income
    cInvestmentIncome = cWithdrawal - cStandardDeduction
    
    ' Calculate tax on investment income
    If cRegularIncome < cBracketAmtTot Then
        cTaxAmt = cTaxAmt + (MinVal(cBracketAmtTot - cRegularIncome, cInvestmentIncome) * Sheet6.Range("J" & nTaxBracketRow))
    End If
    
    nTaxBracketRow = nTaxBracketRow + 1

    ' Iterate through the tax bracket sheet.  Column G corresponds to Bracket Amt
    For Each taxBracketCell In Sheet6.Range("G" & nTaxBracketRow & ":G11")
        If cRegularIncome + cInvestmentIncome < cBracketAmtTot Then Exit For
        cTaxAmt = cTaxAmt + (MinVal(cRegularIncome + cInvestmentIncome - cBracketAmtTot, taxBracketCell.Value) * Sheet6.Range("J" & taxBracketCell.Cells.Row))
        cBracketAmtTot = cBracketAmtTot + taxBracketCell.Value
    Next taxBracketCell
    
    ' Return calculated tax
    CalcTaxes = cTaxAmt
End Function
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Old 05-20-2019, 04:07 PM   #10
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Sometimes I see (very) early retirees who share their projected spending without accounting for healthcare expenses. I also see folks here sometimes ask if FIRECALC accounts for taxes for you - it does NOT. In my experience, both expenses must be seriously considered when you figure out your projected spending in retirement.
So, in using FIRECalc there is no place to plug in tax percentage, right?
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Old 05-20-2019, 04:08 PM   #11
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So, in using FIRECalc there is no place to plug in tax percentage, right?
Right. One way to include it is simply consider it as another expense item in your annual spend.
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Old 05-20-2019, 04:11 PM   #12
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Right. One way to include it is simply consider it as another expense item in your annual spend.
Gotcha
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Old 05-20-2019, 06:34 PM   #13
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ETA - also highly recommend estimating Federal, State and any other taxes and keeping current on payments quarterly. I've never been good at this, and it's bit me every single year at tax time with penalties for under-payment or late payments. I resolved to do "better" this year and so far...not doing a whole lot better at it. But at least I estimated what my 2019 tax liabilities will be..now I just need to figure out how and when to pay what I need every quarter and all will be good..err...better.
I have 4 reminders on my iPhone/iPad each two weeks before estimated taxes are due, or I’d never remember. I wrote a spreadsheet to enter dividends, cap gains, etc. that calculates federal and state estimated taxes for me. You can also use Turbo Tax to do it, though the spreadsheet is clearer to me for projecting future quarters.

I shoot to pay 95% of estimated taxes, I want to owe without having a penalty, like most I assume.
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Old 05-21-2019, 07:32 AM   #14
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The act of paying taxes seems like an easier problem as compared to modeling taxes over the entire plan duration. A few of us don't bother with quarterly and just dial-in the withholding from tIRA/401k pulls.


It's interesting that people model premiums and max out of pocket every year. That's conservative, but for us, unrealistic. I guess if your plan survives that level of health care spending, you're in good shape.
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Old 05-21-2019, 07:48 AM   #15
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Sensational, not sure if you were referring to me. I don’t actually model this to any level of detail—I just have a generous healthcare plug that increases over time. I did take the time at one point to price plans in 5 year increments (e.g. cost of plan for DH and I at 50, 55, 60, 65) to get a feel for how it increases with age to make sure my plug was reasonable. At some point I realized our out of pocket/deductible spend was large enough to warrant a line item in our annual budget, so increased the healthcare plug again.

It’s one of our largest costs, so I definitely want to make sure I’m not wildly off. I’ve ended up increasing the plug by about 30% as I better understood what goes into it and baked in additional conservatism.
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Old 05-21-2019, 07:50 AM   #16
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Good points. I would also model healthcare expenses without ACA subsidies now that it has been ruled unconstitutional by a federal judge, and given the composition of the supreme court.
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Old 05-21-2019, 07:58 AM   #17
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Sometimes I see (very) early retirees who share their projected spending without accounting for healthcare expenses. I also see folks here sometimes ask if FIRECALC accounts for taxes for you - it does NOT. In my experience, both expenses must be seriously considered when you figure out your projected spending in retirement.
Good point Midpack! Soo, the one and only FA I have met with was an EJ rep out on Maui when I was working there. I had some time on my hands and decided to humor myself. I was so prepared when I walked in, he said he couldn't court me into EJ...as I knew enough to DIY.

But I asked, what should I be worried about that I'm not thinking about. He said the X factor to Early Retirement (and the reason so many ER hopefuls fail) is because of health and healthcare costs. He said those with high healthcare costs fail more often than others.

For us, I figure I am budgeting based on today's expenses *including 21k a year for our mortgage and 20k for daycare expenses. I figure that 41k of expense I am paying during accumulation will just be substituted for Health Care costs when I switch to ER. IF healthcare is more than $41,000 a year in 13 years, I will likely need to OMY it lol.
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Old 05-21-2019, 08:16 AM   #18
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TB, not specifically you, as the theme is a common one. I'm grateful that, right now at least, PTC pays the premiums and we rarely use HC service, so the actual expenses for us have been near zero for HC, and i-orp manages the taxes (optimizes after tax spend).


I probably should do what you have done and put in an increasing plug, but I really have never planned at that level... it's always just been total available to spend was sufficient, but not what items the spending would be on. Maybe I'll build a new sheet.
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Old 05-21-2019, 12:11 PM   #19
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I am on a military pension. My pension puts us just barely below the threshold for paying income taxes.

We do pay income taxes on our investment income.
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Old 05-21-2019, 01:06 PM   #20
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Always had all of this in my spreadsheets prior to retiring. I have reviewed and actual to estimated expenses have been within 5%. I didn't want to be surprised by anything short of a catastrophe
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