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Old 08-31-2009, 05:01 AM   #61
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I would really enjoying seeing such well written experiences like these to made a "sticky" for both newcomers to old timers to reference. They detail the human experience, of dreams, planning, luck, opportunities taken and most importantly coming out the other end OK during a very difficult period. I found this thread to be interesting, informative and inspirational. Congrats to all who have FIRE'd in the last decade and made it!!!
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Old 08-31-2009, 07:34 AM   #62
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Excellent posts.
I am paying very close attention to the 5 points in the Conclusions.
My early investing days also occurred in the early 2000s, as luck would have it. I cranked in as much as I could via DCA and made the usual beginner's mistakes (too many funds, chasing performance). I finally got with the program after reading quite a few investment books.
TY for sharing
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Old 08-31-2009, 08:01 AM   #63
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Originally Posted by bmcgonig View Post
Audrey

What percentage of you portfolio is paid to the tax man every year? Approximately? ie for dividends, capital gains etc. I always read that my rate will be low but I would like to get some real data.

For ex in my case, Id like to retire (eventually) with 1.5-2M and take 4%. But I cant get a feeling for how much taxes Ill be paying every year.

Thanx in advance

B
First of all, my portfolio is all taxable investments and this affects taxes in a different way than having a portfolio in an IRA and drawing from it. In the former case, taxes are incurred from interest/dividend and cap gains distributions paid out by the mutual fund and the occasional realized gain/loss from a sale. In the later case, taxes are incurred from withdrawing X amount from the portfolio. So you can see for planning purposes you have to carefully take your scenario into account.

It looks like my portfolio has been averaging around 0.5% of the portfolio although some years it really varies. Still, I have assumed 0.5% for planning purposes. I had used it for some of the initial planning and the assumption has appeared to be reasonable for me.

I think for some folks that number may be a tad high as I've seen other people report lower percentages. My top tax bracket is 25%, but many years my income is subject to the AMT which drives the tax burden up. I also only use the standard deduction.

I notice the following pattern - as the markets extend a bull run (which also means higher interest income), the portfolio starts throwing off a LOT in dividend and cap gains distributions. Taxes go up. Then we go through a bear market, taxes go almost to zero suddenly because there is opportunity to harvest tax losses. After a big bear the mutual funds throw off much less in distributions, and interest income is much lower due to low interest rates at the same time. This seems to last a couple of years. So I've seen swings from -0.25% to 1.1% paid to taxes from the portfolio.

Recommendation on how to model your potential tax burden:

I recommend that you take a balanced mutual fund that roughly matches your target allocation, and look at what it has generated in distributions over several years. This information is readily available. Assume that you have your entire allocation in this fund and see what taxes you would end up paying each year. This is probably the most realistic way to model your potential tax burden.

Audrey
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Thanx
Old 08-31-2009, 09:51 AM   #64
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Thanx

Very helpful response. Thanx Audrey.
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Old 08-31-2009, 01:48 PM   #65
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Wow Audry, great post. Lots of parallels to my situation, although yours sure sounds like it went a lot smoother than mine is going due to your extreme planning skills.

I'm worrying my head off about setting up my bond allocation at this tricky time, so I've decided to DCA into it over 24 months like you did and also stick to mostly ST bonds for now.

Thanks for all the additional help you have given me over the last few weeks!

xcardude
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Old 08-31-2009, 01:50 PM   #66
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xcardude, did you sell your house? You may have posted an update but I missed it.
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Old 08-31-2009, 01:54 PM   #67
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xcardude, did you sell your house? You may have posted an update but I missed it.
Nope, still have it. Decided to keep it until the kids graduate from HS and start college. Another 9 years. I refinanced and got the payment in line with our budget, and we are not making our crazy move to Costa Rica, and DW loves the house, and nothing is selling worth a damn in our area right now, so there are our reasons for staying. The main one being the DW one.
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Old 08-31-2009, 02:18 PM   #68
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Thanks audreyh1! This is the sort of real-world information you can't get anywhere else that keeps people coming back here.
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Old 08-31-2009, 02:32 PM   #69
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Audrey and EJMan,

Thank you both for your thoughtful and detailed posts. It really helps to see how successful ERs are handling their finances.

Thanks again.
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Old 08-31-2009, 04:55 PM   #70
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Conclusions

... but I think survival also had more do with starting with plenty and overestimating our expenses.

...
Nice post. Thanks for the background.

Your careful and conservative approach has worked for you... having plenty of cushion helps.

Congrats on the first 10 and good luck on the next 10.
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Old 08-31-2009, 05:51 PM   #71
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Thank you for posting your story, Audrey. It's good experience to share with others who are working toward the same goal!
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Old 08-31-2009, 06:36 PM   #72
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i want to print this and read it at my leasure, i love reading peoples success stories and seeing what i can steal to improve my own situation. the thing about you audrey is you lived it. alot of us like myself are still in the planning stages and while we are like the new west point graduates you are battle hardened and been there and done it...
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Old 08-31-2009, 06:37 PM   #73
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For ex in my case, Id like to retire (eventually) with 1.5-2M and take 4%. But I cant get a feeling for how much taxes Ill be paying every year.
Tax laws will change, that is to say taxes will be higher than they are now. But the way things stand right now, taxes for a retiree living off a portfolio in a taxable account can be very low.

Assume a $2MM portfolio split 60/40 between the S&P 500 index and the Bond Market Index held in a fully taxable account. The portfolio yields $54,720 in total income, broken down between $29K in ordinary interest income and $25.6K in stock dividends. To reach the 4% withdrawal rate ($80K), assume the retiree sells assets of $25,280 and realizes capital gains on half of that amount ($12,640). Plug these numbers into the calculator at Dinkytown with the assumption that our retiree is married and their total Federal tax owed is . . . $1,034.

On the other hand, someone drawing $80,000 out of a traditional IRA will pay $8,360 in Federal taxes. Someone drawing $80,000 out of a Roth IRA will pay $0. (The poor working stiff who grosses $80K per year in regular wages pays $13,360 in Federal taxes).

As you can see, the specifics matter quite a bit. So you'll have to come up with some estimation as to how specifically your 4% withdrawal is funded to arrive at any reasonable approximation of your tax bill.
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Old 08-31-2009, 06:54 PM   #74
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i want to print this and read it at my leasure, i love reading peoples success stories and seeing what i can steal to improve my own situation. the thing about you audrey is you lived it. alot of us like myself are still in the planning stages and while we are like the new west point graduates you are battle hardened and been there and done it...
Mathjak - I didn't realize you weren't already retired! Running around taking all those great photographs - you sure are acting retired! How do you have time to work? LOL!

Audrey
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Old 09-01-2009, 04:51 AM   #75
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Mathjak - I didn't realize you weren't already retired! Running around taking all those great photographs - you sure are acting retired! How do you have time to work? LOL!

Audrey
i only work to fill the time between weekends ha ha ha
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Old 09-01-2009, 06:56 AM   #76
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I have made some refinements from the past 10 years experience. I found rebalancing so frequently very disconcerting, so I widened my criteria so that I won't rebalance so often, although chances are we won't see that kind of volatility again for a very long time. I am keeping my 1-3 years living expenses cash account, it really helped me stay sane especially over the past year. Company stock is a much smaller % of our net worth at this time as we drew down on that over the past decade. Total net worth is now up 24% from where we started, and only down 20% from the peak in late 2007. Funny, how we can feel good about "only 20% down".
It's difficult to predict volatility in the future. A wider margin re-balancing scheme is not a bad idea to reduce the frequency.
We were down by 18% last year and did not go crazy.
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Old 09-10-2009, 10:55 PM   #77
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Audrey/Ejman, thanks for the posts very enjoyable reading. Great job executing your plans!
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