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.