Join Early Retirement Today
Thread Tools Search this Thread Display Modes
Re: Quiz - $1 Million Tax Deferred or Not?
Old 08-22-2006, 11:42 AM   #41
Thinks s/he gets paid by the post
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: Quiz - $1 Million Tax Deferred or Not?

Originally Posted by Texas Proud
What else do you want

I'm afraid that no general simulation can get to the answers you are seeking. *

In the accumulation phase, the tax deferred account will clearly build faster (all else being equal). *So at the beginning of the withdrawal stage, you are starting with different nest egg amounts. *How much different? *It depends on what you assume about investment amount, return performance, period of accumulation, and tax rate on the taxable account. *You can't give a general answer short of providing a fairly complex formula.

In order to compare the two cases fairly during the distribution phase, you first have to normalize the initial withdrawal rates to account not only for the difference in starting nest egg value, but also the difference in taxes. *This gets very messy since the taxes on the tax deferred account are based on withdrawal amount while the taxes on the taxable account are based on earnings. *

If I use the same scenario as before with $2000 a year deposited for 30 years, then apply two constraints during withdrawal:
1) assume a 4% total withdrawal from the nest egg accumulated in each case, and
2) hold the amount of initial spendable withdrawal (after taxes) to be equal for both cases,
I can come up with additional comparisons.

I force the two constraints above to occur by allowing the effective tax rate on the taxable account to vary and assume the same effective tax rate on that account both during accumulation and withdrawal.

Here's what I find: *If you assume the tax deferred account tax rate is 28%, then you need a taxable account tax rate of less than 10.3% to achieve the same results. *If you assume a tax deferred account tax rate of 18%, then you need a taxable account tax rate of less than 6.4% to achieve the same results.

Even after I've done all of the above, the comparisons are still not quite the same. *Since I am assuming a withdrawal of 4% of the portfolio each year in the simulation and since the taxes for the two cases are based on different quantities, the actual spendable portion of the withdrawal figures diverge slightly over the 30 year period. *This can be significant leading to a much lower spending rate for the taxable account *after 30 years.

sgeeeee 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!


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
Help with how to manage WD from variety of taxable and tax deferred accounts chinaco FIRE and Money 28 04-03-2007 02:08 PM
Taxes tryan Other topics 0 12-08-2006 07:45 AM
Ratio of taxed to tax deferred savings at ER nun FIRE and Money 34 04-27-2006 12:02 PM
Tax deferred Mutual fund account geeman Young Dreamers 17 07-13-2005 05:08 PM
Tax Deferred to Roth Strategy mccl FIRE and Money 10 06-09-2004 11:08 AM


All times are GMT -6. The time now is 07:50 AM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2016, vBulletin Solutions, Inc.