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OMY, Taxes, and Withdrawal Rate
Old 05-06-2018, 07:16 PM   #1
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OMY, Taxes, and Withdrawal Rate

I am the schmuck who was going to quit this year, but the boss gave me an offer I couldn't refuse. So I OMY. And here I am, still schlepping.

Here's the cliff notes version: Once your withdrawal rate drops pretty low, and you're in a pretty high tax rate to begin with, incremental additional savings does not help you that much or reduce your risk.

That is based upon the interplay of the level of assets, the income that it throws off, and higher marginal tax rates, and an already low WR.

Here's the results of the calculations.

We have an already low WR of about 2.5% before social security and 1.6% after. If I work another three years (rather than just one more), which would net approximately $2.1 more net of taxes, would pump up our assets (including tax and non tax advantaged assets, excluding home) from approximately $7.3M to $9.4M, that would adjust the withdrawal rate pre SSI from 2.5% to...drum roll....2.2%...and post SSI goes from 1.6% to...another drum roll....1.5%. Almost no impact!

To be clear, the WR is based upon living expenses AND taxes expected to be incurred (ran it through Turbotax 2017 on a pro forma basis) assuming 60/40 equities/debt and 2% dividend yield and 4% debt yield.

I found that amazing that even such large amounts of income and additional assets could have such a negligible impact upon the withdrawal rate. I guess that's a function of an already low withdrawal rate.

Anybody else see the same results in their calculations? It's just math, so I think it's right, but wondering if anybody else has seen such a result who is in a similar situation.
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Old 05-06-2018, 07:35 PM   #2
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Originally Posted by Toddtheaccountant View Post
I am the schmuck who was going to quit this year, but the boss gave me an offer I couldn't refuse. So I OMY. And here I am, still schlepping.

Here's the cliff notes version: Once your withdrawal rate drops pretty low, and you're in a pretty high tax rate to begin with, incremental additional savings does not help you that much or reduce your risk.

That is based upon the interplay of the level of assets, the income that it throws off, and higher marginal tax rates, and an already low WR.

Here's the results of the calculations.

We have an already low WR of about 2.5% before social security and 1.6% after. If I work another three years (rather than just one more), which would net approximately $2.1 more net of taxes, would pump up our assets (including tax and non tax advantaged assets, excluding home) from approximately $7.3M to $9.4M, that would adjust the withdrawal rate pre SSI from 2.5% to...drum roll....2.2%...and post SSI goes from 1.6% to...another drum roll....1.5%. Almost no impact!

To be clear, the WR is based upon living expenses AND taxes expected to be incurred (ran it through Turbotax 2017 on a pro forma basis) assuming 60/40 equities/debt and 2% dividend yield and 4% debt yield.

I found that amazing that even such large amounts of income and additional assets could have such a negligible impact upon the withdrawal rate. I guess that's a function of an already low withdrawal rate.

Anybody else see the same results in their calculations? It's just math, so I think it's right, but wondering if anybody else has seen such a result who is in a similar situation.
Different question.
$7mm+ is on the high side even for this site. Why not just retire now? It sounds like you won the game already.
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Old 05-06-2018, 07:43 PM   #3
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I'm not at your level of assets, and didn't try running your numbers, but I'm not surprised.

And, what you're saying is, a drop in WR rate of 0.1% was an offer you couldn't refuse? Why not?
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Old 05-06-2018, 07:52 PM   #4
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Just posted in I am section

Different slant but similar situation. At least you worked up the nerve to quit, I have not managed that yet. In all likelihood you will die leaving millions. That will be the case with us. At least your kids will enjoy it. But yeah 2% on each additional million only throws off another $20,000 so your overall SWR does not budge that much. Another way to look at it, what if you spend your SWR but also an extra $100k each year on top of that? With decent growth on your portfolio it might still be worth more then in absolute dollars anyway.

If your portfolio generates 8% per year (on average) that throws off more than half million each year. With a decent amount in equities that is not hard to do. If you only take out a few percent each year, the portfoilo will grow and grow. You could get to $9M in retirement easily and soon enough.
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Old 05-06-2018, 09:36 PM   #5
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... a drop in WR rate of 0.1% was an offer (you) couldn't refuse
Apparently so. I left when pension = takehome. But it's a hard mindset to get into & sounds lIke there's another underlying issue. (2nd time I retired it was easier.)
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Old 05-06-2018, 10:19 PM   #6
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Please do not beat yourself up! There are many forces at play. In November 2007 I got married and bought our retirement home. DW moved into it, but I still was w**king and lived in my condo during the week because of the commute.
I wanted to wait until January 2008 to get my profit sharing, which was about 7% of my base salary. Unfortunately, because of inertia, I was an OMY victim. I did pull the plug in January 2009, right after I got my profit sharing . Two days after retiring, we were on a plane to South America for a 2 week tour
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Old 05-06-2018, 11:48 PM   #7
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Different question.
$7mm+ is on the high side even for this site. Why not just retire now? It sounds like you won the game already.
Yeah...that's why call myself "that schmuck!"
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Old 05-06-2018, 11:50 PM   #8
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I'm not at your level of assets, and didn't try running your numbers, but I'm not surprised.

And, what you're saying is, a drop in WR rate of 0.1% was an offer you couldn't refuse? Why not?
Well, as I said in the OP...I am a schmuck. But the reality was, it was going to be a signficant amount of money...but I had not looked at it this way, fully modeling the impact, until now. Better late than never, eh?
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Old 05-06-2018, 11:51 PM   #9
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Apparently so. I left when pension = takehome. But it's a hard mindset to get into & sounds lIke there's another underlying issue. (2nd time I retired it was easier.)
The other underlying issue was greed...misplaced...and a failure to fully model the impact until now.
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Old 05-07-2018, 05:08 AM   #10
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And, what you're saying is, a drop in WR rate of 0.1% was an offer you couldn't refuse? Why not?
+1. You're past the finish line but still running. Time to stop.
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Old 05-07-2018, 06:17 AM   #11
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Todd, it might be an even worse deal than the .1% you calculated. Assuming a 30 year retirement, by working 3 more years you give up 10% of your retirement time all for the incremental .1% increase in WR. (Some may point out your theoretical WR will actually go up more than .1% since you will need it for 3 years less. The other side of my point.) Run, run away now!
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Old 05-07-2018, 07:11 AM   #12
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One thing to consider in the transition, if you haven稚 already, is how you are going to manage health insurance. I FIRED about a year ago with about $9million in retirement assets. With market run up last year I知 now close to $11million. Seems like I should be all set, right? In terms of withdrawal rate I知 below 3%, which means I値l probably going to leave most/much of this to my kids. Even with this situation I知 seriously considering going back to work - part time/less stress, because I知 not happy with the private insurance plans available in my area. First they are expensive but more importantly they are really bad plans especially regarding physician networks.

So. A long way of saying: you should consider structuring an exit with a long tail of health coverage. Maybe trading some of the near term income, if you decide to work another year, into retirement health coverage.
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Old 05-07-2018, 08:17 AM   #13
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If saving the extra 2.1M doesn't do much for your standard of living or peace of mind, then why not spend it over the next, say, 10 years on having lots of fun or helping out your community or whatever else you care about?
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Old 05-07-2018, 08:55 AM   #14
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One thing to consider in the transition, if you haven稚 already, is how you are going to manage health insurance. I FIRED about a year ago with about $9million in retirement assets. With market run up last year I知 now close to $11million. Seems like I should be all set, right? In terms of withdrawal rate I知 below 3%, which means I値l probably going to leave most/much of this to my kids. Even with this situation I知 seriously considering going back to work - part time/less stress, because I知 not happy with the private insurance plans available in my area. First they are expensive but more importantly they are really bad plans especially regarding physician networks.

So. A long way of saying: you should consider structuring an exit with a long tail of health coverage. Maybe trading some of the near term income, if you decide to work another year, into retirement health coverage.
You don't have to use a physician in your network. When Anthem moved out of my county in Virginia, I was left with an expensive policy with only some of my docs in it, or a cheap one (especially with subsidy) with none of them. I opted for the cheaper one, basically as a catastrophic health policy. The out of network OOP and deductible limits are double the in-network amounts, but that's just about the amount of the savings in premiums. It also means I'm not getting in-network prices for the out-of-network doctors I'm seeing, but you may be able to negotiate that. Or just pay it since you are worth 8 figures.

I suspect this may be another case where something may sound like big money, but when you put it in perspective with your wealth, it's not all that much, and the free time lost is much more signficant.
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Old 05-07-2018, 09:15 AM   #15
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Old 05-07-2018, 09:19 AM   #16
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Agree with running bum. I think many of us are used to viewing healthcare as free, so when we actually have to pay for it, it makes it more difficult. We still have great insurance through my employer, but DH and I spent a crazy amount out of pocket on fertility services having our kids and then my ob switch’s to a mostly concierge practice. It’s changed my perspective on the type of plan we would most benefit from. We have a ppo, so could still see our ob, but our plan only reimbursed ~2000 for the ob care vs the 4000 he charges. I now view insurance as a way to pay for the big stuff—a cancer scare, hospital services, etc—these are usually dictated by your local market. For my particular dr, I’m more willing to pay out of pocket.
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Old 05-07-2018, 09:35 AM   #17
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One thing to consider in the transition, if you haven’t already, is how you are going to manage health insurance. I FIRED about a year ago with about $9million in retirement assets. With market run up last year I’m now close to $11million. Seems like I should be all set, right? In terms of withdrawal rate I’m below 3%, which means I’ll probably going to leave most/much of this to my kids. Even with this situation I’m seriously considering going back to work - part time/less stress, because I’m not happy with the private insurance plans available in my area. First they are expensive but more importantly they are really bad plans especially regarding physician networks.

So. A long way of saying: you should consider structuring an exit with a long tail of health coverage. Maybe trading some of the near term income, if you decide to work another year, into retirement health coverage.
We have budgeted 24k per year for health care expenses in our pre sss WR. For the post sss WR we figured 12k annual benefit of Medicare at 65. Does that seem reasonable estimate?
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Old 05-07-2018, 09:47 AM   #18
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Todd, it might be an even worse deal than the .1% you calculated. Assuming a 30 year retirement, by working 3 more years you give up 10% of your retirement time all for the incremental .1% increase in WR. (Some may point out your theoretical WR will actually go up more than .1% since you will need it for 3 years less. The other side of my point.) Run, run away now!
Flint that is a great way to look at it and I agree! There is no way in he** I am doing three more years. I have already told them I am short term... And it's entirely ego but I'd like to take a year of the higher comp (taking me to early next year) and then I will fly the coop no ifs, ands, or buts. Period. Finito. Completo.
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Old 05-07-2018, 10:01 AM   #19
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Flint that is a great way to look at it and I agree! There is no way in he** I am doing three more years. I have already told them I am short term... And it's entirely ego but I'd like to take a year of the higher comp (taking me to early next year) and then I will fly the coop no ifs, ands, or buts. Period. Finito. Completo.
Okay we are marking it down and will check up on you then...
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Old 05-07-2018, 10:22 AM   #20
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I ran a similar - kind of opposite scenario - and was surprised. If I pull out a fairly large amount for a one-time larger purchase, it won稚 make much difference in SWR.
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