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How do you calculate Monies in 401K or other Tax Sheltered Vehicles
Old 08-02-2011, 01:19 AM   #1
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How do you calculate Monies in 401K or other Tax Sheltered Vehicles

When deciding how much you have for retirement, do you give a discounted percentage to monies that are in tax sheltered vehicles (401K, IRA, etc). Because, realistically, you still have to pay taxes on that money.

So let's say you have 1 million set aside that you've paid taxes on and another million in a 401K. Do you consider yourself to have 2 million saved for ER or 1.66 million?

Thanks,
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Old 08-02-2011, 04:32 AM   #2
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I count it all without a discount for taxes. I estimate taxes as expenses in retirement.

In some calculators such as Fido's retirement income planner they actually have categories for IRA, Roth IRA and 401k money in your assets.
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Old 08-02-2011, 04:52 AM   #3
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Mostly I use before taxes. But I am mindful of them. I have done rough estimates in the past.

Since security values float.... a mark to market before tax is simpler. Taxes are complicated and unrealized. The best I could do is estimate... and tomorrow it would change... and still be unrealized!


On the expense side of things... I know my normal living expenses (which requires net tax money). My income figure in FIRE (which just started) will be before tax. My gross income includes normal living expenses (our normal lifestyle) and extra discretionary spending (for travel). I will manage our spending to the net tax figure... the yearly discretionary spending pool will balance the account (after Uncle Sam is paid)! So depending on my efficiency (in a given year) at managing taxes ... we will have more or less actual discretionary spending $ for FIRE travel... I am not going to try to manage outflow at a net level.



I have longer term plan to manage our marginal income tax level for the long-term also which includes rolling my tax deferred assets to Roth IRAs. Of course... tax law may be getting ready to change. We will have to wait and see!
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Old 08-02-2011, 06:00 AM   #4
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Quote:
Originally Posted by Alan View Post
I count it all without a discount for taxes. I estimate taxes as expenses in retirement.

In some calculators such as Fido's retirement income planner they actually have categories for IRA, Roth IRA and 401k money in your assets.
+1 (And I also use RIP, which does an assumed tax calculation to provide net income...)
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Old 08-02-2011, 06:55 AM   #5
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I discount the 401K/IRA for taxes. I also discount unrealized gains I have in my taxable account. That way the only taxes I have to account for in my budget are for dividends, pension, and social security.

The main reason I do this is because so much of my net worth used to be in company stock options and I knew I'd be paying heavy taxes on those within a few years, and wanted to know what I'd really be netting out of those. Once I started down this path it made sense to me to do it for everything.

It's pretty easy with most brokerage firms to see your cost basis, so when I update my "net worth" spreadsheet I update the basis as well as the current holdings and calculate the after tax value. This seems easier to me than to try to adjust my budget to account for extra taxes if my stocks go up 20%. Also, when I do my IRA to Roth partial conversions, it's a wash because I'd already discounted the IRA by the taxes I just paid.
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Old 08-02-2011, 07:27 AM   #6
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Have to agree with most posts here. I actually take into account estimated taxes like any other retirement expense. Just add it to a line item on your spreadsheet. Lets hope they don't go up too much for us...
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Update on Your Money Or Your Life Wall Chart
Old 08-02-2011, 07:44 AM   #7
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Update on Your Money Or Your Life Wall Chart

Team ER,

I have now been charting solidly for 8 months following exactly the process laid out in Your Money Or Your Life for the Wall chart.

Prior to this I have been charting income and expenses loosely. By that I mean I wasn't 100% taking into account all the comings and goings on a month over month basis. I routinely took so called 1 time charges and credits and left them off the plan completely. For example a tax refund or payment wouldn't show up on the chart or a credit card charge I forgot to include etc.

But over the last 8 months I have been tracking every single dollar coming and going.

For those who don't know YMOYL wall chart is basically it is a 4 line chart that can be hand written or excel or similar. You track the following:

Line 1. Total Income
Line 2. Total Expenses
Line 3. Projected Retirement Income (Basically use current 30 year treasury rate times your investable funds to get that number). That's the safe money version I use
Line 4. Projected Retirement Expenses. (If you have been charting for a few years you should see a good average based on your figures you recorded)

So some findings from the last 8 months of note:

1. At 4 times during this period my expenses were actually below my projected retirement income.
2. At no time during this period did my expenses ever exceed my income on a monthly basis.
3. My monthly average is nicely projecting a ER crossing point of Aug 2014 just in time for my 42nd birthday. I will continue to work another 8 or so years to beef up the portfolio value and account for the missing taxes and inflation in this methodology. As I use excel I could even go back through the data sometime and add in taxes and a 3% inflation rate over time.

I do plan on moving back to my home country at some point in ER so at least my health care is covered at a deficient rate. Currently private top tier cover is only $356 a month for my family of 3.
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Old 08-02-2011, 08:34 AM   #8
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I don't discount my IRA, either, for the same reasons stated by others.

But.....when I was on the verge of ERing in 2008, I indirectly did discount the lump sum value of the company stock I was going to sell upon leaving the company because I used other monies to pay the big tax bill. On an overall net worth basis, I was taking it into account.
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Old 08-02-2011, 11:53 AM   #9
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One could only hope to be so precise in predicting the future of anything.

In other words, don't get so caught up in the details. Retest your projections with a few "worst case scenarios" along with some contingency plans and hope for the best.
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Old 08-02-2011, 11:57 AM   #10
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Yep. One way or another, account for the taxes as best as you can. From an accounting perspective, taxes are an expense and you'd put it in your budget with your other expenses. I just found it easier for me to do the other way.
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Old 08-02-2011, 12:40 PM   #11
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As best I can, I've run the numbers both ways. Unfortunately, about half my stash (in nominal dollars) is in qualified plans. So, realistically, I should discount my net worth. But, whether it's a psychological quirk or something else, I still carry around my "bottom line" net worth without accounting for the taxes that will be due when I spend the money. Perhaps I assuage my conscience by thinking of the net worth as "invested money" - not net worth. In any case, I consider the taxes in the "expenses" column.

But! I'm attempting to deal with this schizophrenic situation by converting TIRA (etc.) money to Roth money and recognizing the taxes by actually paying them. Whether this turns out to be a good idea is one of the unknowables - at least until it's to late to change the actions. I'm trying to juggle TIRAs, Roths, future RMDs, current taxes and future taxes. No wonder it seems schizophrenic.
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