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Firecalc question
Old 04-02-2008, 08:34 AM   #1
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Firecalc question

Firecalc seems to be a popular calculator on this forum. How do you account for income taxes and RMDs? These seem to have a very large impact to the spreadsheets I have built. Especially, since over 80% of my nest egg is in qualified accounts.
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Old 04-02-2008, 08:42 AM   #2
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Firecalc seems to be a popular calculator on this forum.
FIRECalc is the reason this forum exists. Dory36, the guy who created FIRECalc, started the forum in 2002 as a place to allow those using the calculator to ask questions and discuss FIRE.
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Old 04-02-2008, 08:50 AM   #3
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Income tax: just gross up your expenses to account for your specific income tax details. This is such a highly variable factor that I couldn't imagine how else to account for it. So, if you need to spend $80k per year, and are in a 20% marginal bracket, enter 80,000/,8 = $100K for your annual expenses, from which you pay income tax.

Custom expenses (available to registered users) should allow you to fudge in your RMDs, though not specifically designed for that purpose.

My take is that FC pretty much leaves both of the above to the user since neither taxes nor RMDs lend themselves to a generic calculation (being so individual in nature), but you can work around them as above.

Hope that helps.
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Old 04-02-2008, 11:08 AM   #4
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Income tax: just gross up your expenses to account for your specific income tax details. This is such a highly variable factor that I couldn't imagine how else to account for it. So, if you need to spend $80k per year, and are in a 20% marginal bracket, enter 80,000/,8 = $100K for your annual expenses, from which you pay income tax...
You do include taxes, as you say, but the way you figure it is wrong.

Spending and taxes are mutually exclusive. It is possible to spend $80,000 and not pay any tax.

You need to determine your tax based on your taxable income, not your spending.
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Old 04-02-2008, 12:14 PM   #5
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You do include taxes, as you say, but the way you figure it is wrong.

Spending and taxes are mutually exclusive. It is possible to spend $80,000 and not pay any tax.

You need to determine your tax based on your taxable income, not your spending.
That's what is meant by "gross up your expenses to account for your specific income tax details." The 20% was merely an example. No tie-in between expenses and taxes is being assumed - it's different for every user, likely from year to year.

If you owe no taxes, you don't have to gross up anything. If you are drawing on already-taxed money to meet expenses, same. If you do owe taxes, you can treat it (for FIRECalc purposes) as an additional expense (over and above other living expenses) and the calculations work fine.

Bottom line is that it is hard to see any way for FC to automatically account for taxes given the almost unlimited variation from user to user.
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Old 04-02-2008, 12:16 PM   #6
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You do include taxes, as you say, but the way you figure it is wrong.

Spending and taxes are mutually exclusive. It is possible to spend $80,000 and not pay any tax.

You need to determine your tax based on your taxable income, not your spending.
I would tend to agree with this. I would think you can kind of pro-forma your investment income that will be taxed, and any other taxable income you may have coming in, in retirement (i'm so far from it and probably won't have it, but is SS income taxed?)
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Old 04-02-2008, 01:15 PM   #7
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I would tend to agree with this. I would think you can kind of pro-forma your investment income that will be taxed, and any other taxable income you may have coming in, in retirement (i'm so far from it and probably won't have it, but is SS income taxed?)
It is taxed depending on your other income. There is one threshold where 50% of your SSI is taxed and another threshold where 85% of your SSI is taxed. These depended on your filing status.
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Old 04-02-2008, 04:18 PM   #8
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...I would think you can kind of pro-forma your investment income that will be taxed, and any other taxable income you may have coming in, in retirement..
Exactly. I haven't gone through this exercise yet since I'm still in the accumulation phase, but you would need to create a spreadsheet for your withdrawal plan showing how much you will be withdrawing from each investment and the related tax associated with that specific withdrawal.

Of course, the best you can do is use the tax rules as we know them today and tweak them along the way as the tax laws and rates change.

This is where having both taxable and non-taxable accounts help in planning to minimize the tax burden. Based on what your spending needs are, you take enough out of the taxable accounts until you are just under the next highest tax bracket and then take the rest from your non-taxable accounts. Easier said than done sometimes, but at least you have a withdrawal model to follow.
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Old 04-02-2008, 05:34 PM   #9
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That's what is meant by "gross up your expenses to account for your specific income tax details." The 20% was merely an example. No tie-in between expenses and taxes is being assumed - it's different for every user, likely from year to year.

If you owe no taxes, you don't have to gross up anything. If you are drawing on already-taxed money to meet expenses, same. If you do owe taxes, you can treat it (for FIRECalc purposes) as an additional expense (over and above other living expenses) and the calculations work fine.

Bottom line is that it is hard to see any way for FC to automatically account for taxes given the almost unlimited variation from user to user.
You and R@40 are debating the single biggest question in my plan. I know what to do with taxable withdrawals and tax deferred accounts, but how do I estimate the annual dividends, STCG & LTCG and the associated taxes from my taxable nest egg?
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Old 04-02-2008, 05:51 PM   #10
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You and R@40 are debating the single biggest question in my plan. I know what to do with taxable withdrawals and tax deferred accounts, but how do I estimate the annual dividends, STCG & LTCG and the associated taxes from my taxable nest egg?
Well, after all you have learned on this forum and the Diehards forum, your taxable dividends would be about 2% of your taxable investments, your STCG should be zero, and so should your LTCG.

If you like do some TurboTax runs. With TT, I showed that I could earn about $20K a year in qualified dividends and $50K in LTCG and pay no taxes. To get that $50K in LTCG, I'd probably have to sell $200K in equities.
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Old 04-02-2008, 05:52 PM   #11
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How is the tax problem any more difficult than estimating your future expenses for the next 50 years?

FWIW, I use a spreadsheet. It automagically downloads the yield data from Yahoo and estimates my investment-based taxes for the year.

Generally, your taxes in retirement will be much lower than when you're working due to the absence of earned income. And you can tweak your investments to adjust your tax hit a lot easier than you can tweak other expenses.
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Old 04-02-2008, 05:58 PM   #12
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How is the tax problem any more difficult than estimating your future expenses for the next 50 years?

FWIW, I use a spreadsheet. It automagically downloads the yield data from Yahoo and estimates my investment-based taxes for the year.

Generally, your taxes in retirement will be much lower than when you're working due to the absence of earned income. And you can tweak your investments to adjust your tax hit a lot easier than you can tweak other expenses.
I must be missing something, but I have 2 years to become more tax savvy. And how I can make sure I have no ST or LTCG has eluded me so far...
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Old 04-02-2008, 06:02 PM   #13
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I must be missing something, but I have 2 years to become more tax savvy. And how I can make sure I have no ST or LTCG has eluded me so far...
Never sell anything that has gain (only sell losers) and never invest in actively managed funds.
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Old 04-02-2008, 06:07 PM   #14
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Never sell anything that has gain (only sell losers) and never invest in actively managed funds.
Since I'm still working and 2 years from FIRE, I rarely sell anything so I have (sizeable to me) taxable dividends, ST/LTCG, every year although I have placed my holdings to minimize tax impact. I understand what you're saying for retirement although I'd like to think I'd have some years with no losers to sell. No reply necessary...
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Old 04-02-2008, 06:15 PM   #15
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I personnally use taxes as one of the fudge factors in my planning. That is, I tax all income at say 15%, knowing actual taxes should be less. This hopefully will give me additional play in case I'm off on my expenses. Since those of us not retired are too far off to know exactly what our retirement income will be, it's over-kill to try to get an exact number or percentage of what taxes will be then.
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Old 04-02-2008, 06:27 PM   #16
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I must be missing something, but I have 2 years to become more tax savvy. And how I can make sure I have no ST or LTCG has eluded me so far...
The Yahoo yield data includes all distributions, including cap gains. So, the trailing 12 months is my estimate for the year. And then I assume that my taxes will grow with inflation, like other expenses. IOW, it's a SWAG.

Now tax-managing your investments is a whole nuther thread. But it's generally a good idea tax-wise to run away from anybody who whispers "pssst, Wellesley" into your ear.
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Old 04-02-2008, 06:55 PM   #17
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I must be missing something, but I have 2 years to become more tax savvy. And how I can make sure I have no ST or LTCG has eluded me so far...
No claims by me as a financial authority, but I think you're putting too fine a point on it. Within a year of retiring, you'll have a general idea of what your various tax liabilities will be in real time. Of course this will change continuously but you'll have a ballpark idea. Heck, it's likely that the tax code, SS, and MC changes will have more impact on your net income than just how far off you are on guesstimating LT and ST CG, etc.

The custom expense thing in FC is a good place to start. Worst case is that your anticipated taxes are off; no big deal, just correct for it the next year. Make your best assumptions and then relax. It'll work itself out over time if your basics are intact.
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