Join Early Retirement Today
Thread Tools Search this Thread Display Modes
Pretty good advice from Mr. Cruz
Old 08-09-2004, 08:20 AM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
mickeyd's Avatar
Join Date: Apr 2004
Location: South Texas~29N/98W
Posts: 5,664
Pretty good advice from Mr. Cruz

Humberto Cruz

Include your taxes in planning retirement
Published August 9, 2004

Q: Recently, you provided "rules of thumb" for required retirement savings. I agree the answer is much more complicated than simple formulas and I personally have a set of spreadsheets to analyze the same question. Nonetheless, it is always good to compare the application of rules of thumb to my results. My question is this: Are the guidelines you discussed before tax or after tax?

A: I intensely dislike (and mistrust) rules of thumb in all financial planning, and particularly retirement planning. But many readers would have my head if I didn't come up with some.

So, I suggested a formula for the amount needed in retirement savings, based on numerous studies of how much money can be safely withdrawn each year from a retirement portfolio.

This formula is based on your "spending shortfall" -- that is, the amount of desired retirement spending not covered by other sources of income such as pensions and Social Security.

My rule of thumb:

If you retire at age 60, multiply your annual spending shortfall by 25. (For example, if you need your savings to produce $30,000 of spendable money the first year of retirement, multiply $30,000 by 25. The answer, $750,000, is how much money you need to be able to spend $30,000 the first year and increase the amount each year to keep up with inflation.

For every year you are over 60 when you retire, subtract 0.5 from 25 and multiply the result by the spending shortfall. (At age 70, you would multiply $30,000 by 20, for $600,000 in savings).

If you are younger than 60 when you retire, add rather than subtract 0.5 for each year. For example, at age 55 you would need $825,000, or 27.5 times $30,000.

I should have anticipated the question of whether the spending shortfall was before or after taxes. The question always comes up whenever I discuss projected expenditures or savings goals.

And yet, the issue never occurs to me because I look at taxes as I would any other expenditure, such as health care, the groceries or the electric bill. (Whenever I discuss savings goals or spending projections, they will be before taxes.)

Although this view is far from being universally shared, I would suggest it is the only proper way to plan your finances. Taxes are just another expense, to be budgeted and managed wisely. Being aware of this expense is the first step to reduce it.

Besides, not everybody's tax situation is the same, so how can you generalize? A retiree who gets his income from qualified stock dividends, which are taxed at a maximum rate of 15 percent, will pay less in taxes than one who gets his income from taxable interest, which can be taxed as high as 35 percent. A retiree who simply draws down previously taxed principal for living expenses incurs no tax obligation.

As for my wife, Georgina, and me, quarterly estimated tax payments have been our biggest expense the past two years because they must include not only federal income tax but also self-employed Social Security and Medicare tax on our freelance writing earnings.

Bottom line: Be aware of what you pay in taxes, and include it in your expense projection.

Part-Owner of Texas

Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. Groucho Marx

In dire need of: faster horses, younger woman, older whiskey, more money.
mickeyd is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Pretty good advice from Mr. Cruz
Old 08-09-2004, 08:23 AM   #2
Posts: n/a
Re: Pretty good advice from Mr. Cruz

And I love "rules of thumb". Why? Because they are
easy. I'm way too lazy to crunch all those numbers.
So far so good..................

John Galt
  Reply With Quote
Re: Pretty good advice from Mr. Cruz
Old 08-09-2004, 10:57 AM   #3
Posts: n/a
Re: Pretty good advice from Mr. Cruz

Seems like good advice on the tax question. As a "rule of thumb" it seems utterly useless since for most of us the "shortfall" changes as SS, medicare, pensions etc. kick in along the way...
  Reply With Quote
Re: Pretty good advice from Mr. Cruz
Old 08-09-2004, 01:38 PM   #4
Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 2,067
Re: Pretty good advice from Mr. Cruz

I "assume" that these type of formulas exclude the income from from SS and of course pensions.

For example if my expense will be $40K at 57, according to the formula, I will need $1060K.

If you receive $20K 5 years later from SS, how will that alter the initial amount of $1060K.

Assuming you live a very long life, how does life expectancy effect this formula?

I look to the present moment because that's where I live my life.
MJ is offline   Reply With Quote
Re: Pretty good advice from Mr. Cruz
Old 08-09-2004, 05:00 PM   #5
Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,318
Re: Pretty good advice from Mr. Cruz

If you follow his rule of thumb, he starts out with a 4% SWR for someone 60 years old, (1/25) but that falls to a 3.07% SWR (1/32.5) for a 45 year old. Interesting. (assuming we still believe in SWRs around here!)

ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
ESRBob is offline   Reply With Quote

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
update on parents and need $ advice on several issues WM FIRE and Money 17 06-27-2007 06:55 PM
Good Regional Food yakers Other topics 28 04-18-2007 05:03 PM
pretty good affinity credit card Green Jeans FIRE and Money 5 07-22-2006 03:53 PM
Recommend Wellesley to parents: good advice? soupcxan FIRE and Money 54 07-17-2006 02:50 PM
Pretty good CD rates charlottebandito Young Dreamers 9 06-26-2005 09:47 AM


All times are GMT -6. The time now is 05:34 PM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2016, vBulletin Solutions, Inc.