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Old 06-14-2008, 09:14 AM   #1
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Tax/Benefit Assumptions

I fully understand:
  • the future is uncertain,
  • no one knows for sure (or we'd all be rich),
  • and no plan showing greater than about 80% (or whatever numbers you like) probability of success is meaningful.
  • sorry, but I always see these replies and most if not all of us know them already.
...but since we're an RE crowd and therefore engaged in very long range planning with considerably uncertainty, what basis do folks use to meaningfully project:
  • when and how much will Social Security benefits decline,
  • when and how much will Medicare benefits decline,
  • when and how much will Federal (or State) income taxes increase,
  • when and how much will FICA increase.
I mean no disrespect to anyone and if you disagree with the bullets above in the first place, that's fine. And again I am not looking for a philosophical discussion, I am looking for financial/economic insights. Numbers and rationale and/or sources to investigate would be most welcome. I also realize I can just assume there will be no SS or Medicare (and I have modeled same), but I haven't quite lost faith to that extent despite reading The Coming Generational Storm. Thanks...
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Old 06-14-2008, 10:32 AM   #2
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Quote:
Originally Posted by Midpack View Post
I fully understand:
  • the future is uncertain,
  • no one knows for sure (or we'd all be rich),
  • and no plan showing greater than about 80% (or whatever numbers you like) probability of success is meaningful.
  • sorry, but I always see these replies and most if not all of us know them already.
...but since we're an RE crowd and therefore engaged in very long range planning with considerably uncertainty, what basis do folks use to meaningfully project:
  • when and how much will Social Security benefits decline,
  • when and how much will Medicare benefits decline,
  • when and how much will Federal (or State) income taxes increase,
  • when and how much will FICA increase.
I mean no disrespect to anyone and if you disagree with the bullets above in the first place, that's fine. And again I am not looking for a philosophical discussion, I am looking for financial/economic insights. Numbers and rationale and/or sources to investigate would be most welcome. I also realize I can just assume there will be no SS or Medicare (and I have modeled same), but I haven't quite lost faith to that extent despite reading The Coming Generational Storm. Thanks...
Good question! This is a tough problem to tackle.

In order to project or model variables such as those you list, assumptions are made since there are a lot of unknowns. So in order to get numbers, the first step is to determine the assumptions you intend to use.

Based on that, I have two types of projection that I normally look at; worst case, and best case. Results from these projections provide brackets within which I believe reality will lie.

(1) For best case I assume that SS, Medicare, and taxes will remain as is. I plan to get SS at age 66 and spend it on discretionary items. I will get Medicare Part A along with my BCBS standard (lifetime) medical.

(2) For worst case projections I assume that SS and Medicare will implode and be useless (so that I get no benefits, and rely on my BCBS only for medical), that all investment proceeds will be regarded as ordinary income, and that taxes on ordinary income will rise 10%.
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Old 06-14-2008, 12:46 PM   #3
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My DH and I are late 30s/early 40s, and we hope to early-retire in the next 3-4 years. When we run the numbers, we pretty much assume SS & Medicare will NOT be there for us and are making financial plans/assumptions that we will need to cover ourselves. That said, I do believe that SS & Medicare will be there in some form 25 years from now, albeit reduced and possibly more needs based. If it's there for us, it's icing on the cake, and if it's not, we're covered anyhow. I'm not taking chances.

I tend to think of taxes in terms of my personal tax rate and my assumption about my personal tax rate is that it will drop significantly from where it is now (with 2 high income earners and little to no deductions, we get walloped every year). After retirement, we'll be taxed on mostly long term capital gains, as we withdraw what we need to live on. So, while as a whole, I believe taxes will rise for most, my own personal tax rate will be significantly smaller.

Charlotte
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Old 06-14-2008, 09:33 PM   #4
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I think if you are over 50, Social Security will probably be unchanged for you, as politicians will not deal a blow to those who vote. Below 50, and there will probably be some form of rationing, i.e. means testing, increased retirement ages, etc.
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I would look at two cases
Old 06-14-2008, 10:42 PM   #5
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I would look at two cases

The unchanged case assuming the midcost baseline. SS unchanged until 2041, then dropping to 78% of benefits then. This will still be more than current benefits due to wage indexation. Any cuts would just rearrange when the cuts occur, making them more gradually over time like increasing the retirement age by a month per year until age 70. Any increase shouldn't kick in until 2018 at the earliest and would amount less than 3% of payroll. Chances are any changes will be delayed further from there. The problem really isn't SS but the tax and spending policy of the government. Most of those suggesting cutting it actually want to use it's revenues for other spending.

Medicare is a different story. It will crash much sooner, like the next 10 years if nothing is done. It will require health care reform involving cost control. Hopefully the next administration will start to tackle this but those who profit from the system as it is will do everything they can to oppose it. Without change, it may exist but no one may accept it, or it will begin to take over the budget. Medical tourism may end up cheaper than the copay.

Taxes are more difficult to project since I expect most of the debt to be rolled over. It will really be not having the SS surplus to spend and especially Medicare that will drive spending cuts and tax increases. Health care may be taxed as in McCain's proposal or a consumption tax introduced. Something will have to be done along these lines in the next 10 years, but fixing healthcare will limit how much will need to be done.
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Old 06-15-2008, 08:29 PM   #6
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I'm 40, DW is 41.

Social Security - we figure NOTHING. Anything we get is gravy.

Medicare - we figure NOTHING. Anything we get is gravy.

Taxes ---- well, that's the rub. I use a lower expected tax rate, based both on our expected lower income in retirement plus favorable capital gains tax treatment. But that could change, eh? A couple of able-bodied folks who have the audacity to FIRE by LBYM and prudent investing aren't going to generate a lot of sympathy. So right now we treat the tax rules as if they won't change significantly... but I think that's the biggest hole in our crystal ball.

(I tend to be fiscally conservative. At some point, safety factors piled upon safety factors get rediculous - but considering the upside and downside of bad FIRE assumptions, I'm comfortable being on the conservative side.)
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Old 06-16-2008, 02:32 AM   #7
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I think SS will be around in some form. If any changes happen, there will be an age cut-cuttoff.

I do expect taxes to increase. SS may become taxed based on income.

If universal health care happens... medicare will probably be rolled into it. Medicare will continue... premiums will probably raise, but your premium may be discounted if you are below a certain income level.
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Old 06-16-2008, 08:45 AM   #8
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if your in the middle/upper income brackets, i'd guess:
1) income tax rates will increase
2) capital gains rates will increase
3) soc sec will become fully taxable
4) medicare premiums will increase
(if you're still working, i'd plan on increased soc sec and medicare tax rates)
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Old 06-16-2008, 09:02 AM   #9
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If you're over 50, you probably won't get screwed much. AARP won't let it happen no matter how much it bankrupts their grandkids.

If you're (say) 40-50, you can probably count on getting screwed a little bit in terms of reduced benefits or higher taxes on retirement entitlements.

If you're under 40, enter "zero" in all your SS planning. It's safer that way, you have time to overcome it, and who knows? You might get lucky and get something.

I expect my taxes to be somewhat lower when I semi-FIRE in a few years. We'll be able to live on much less income than now, and I think we're turning into a society that is increasingly encouraging ants to become grasshoppers through more punitive taxation of production and more stuff for non-producers.

And when the incremental value of hard work -- after considering taxes on ants and means-tested goodies for grasshoppers -- gets close enough to zero that a lot of people adding value to the economy decide to call it quits, the nation is headed for a death spiral economically.
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Old 06-16-2008, 12:44 PM   #10
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Quote:
Originally Posted by Midpack View Post
...but since we're an RE crowd and therefore engaged in very long range planning with considerably uncertainty, what basis do folks use to meaningfully project:
  • when and how much will Social Security benefits decline,
  • when and how much will Medicare benefits decline,
  • when and how much will Federal (or State) income taxes increase,
  • when and how much will FICA increase.
...
SS Benefits: I model them staying the same. See the arguments made in this thread:
http://www.early-retirement.org/foru...out-36012.html

Medicare: I'm assuming they stay the same. If our heath-care inflation continues at the current rate, we'll have other huge problems to worry about (to your "greater than 80%" point)

State & Fed taxes: I think they'll stay roughly the same for people in the sub-100K (today's $) bracket. I don't have any source to back this up.

FICA : I've ER'd, so it doesn't apply to me & I haven't given it any thought.

I don't lose much sleep over the above because:
a ) The 4% SWR (whichever variant you use) takes the historical worst case into account, so if you follow that, you're already being very conservative.

b) Retiring early means you have a good chance of being able to go back to work and earn a salary comparable (probably a bit lower) than what you made before.

Maybe I'm being a bit too optimistic, but I've chosen time over money & hope to be able to compromise to make it work.
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Old 06-16-2008, 11:19 PM   #11
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SS means testing will be here within a decade. I hope someone tells me I am wrong....ten years from now.
Jeff
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Ah . . . Modeling the Future
Old 07-29-2008, 03:25 PM   #12
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Ah . . . Modeling the Future

Hi,

My forem name is my philosophy, "PauperStrategy" and it derives from attempting to model the future and then optimize my decisions.

Note the following:

Tax rates are scheduled to go up when the Bush tax cuts expire.

The Social Security Trust fund gets its maximum contribution in 2008.
If nothing is done, the Social Security trust fund goes dry in 2042 or so. At that point in time, 6% of wage is being withdrawn from the General Fund to pay off the bonds. This is an 8 % of wage swing from the current situation. In 2042, or so, the burden can switch back from the tax payer to the worker as an additional 6% FICA tax or the benefit can be cut by about 30%.

So . . . .

If you are 55 or higher, your should be grandfathered and experience little change in social security law.

Those under 55 when changes in the law are enacted can expect to be harmed but Social Security will be there in the future because it is owed to too many to get rid of it.

Income tax must go up in the future and the long term swing is large (about +30% of your tax bill).

A best guess approximation for future tax rates is to assume that the incremental rates go up to 18%, 28%, 31%, 36% in 2011. Every 5 years thereafter, an additional 1% needs to be added to the incremental rates.
This only pays for the funds withdrawn from the SSA Trust fund.

Another reasonable estimate of future federal taxes is the AMT tax with the lower base value.

While on this subject, I would like to remind this group that taxation of social security is not adjusted for inflation and is done proportional to other taxable income. Thus, if your other income is approximately equal to your social security and you shift $1,000 from taxable to Roth withdrawal, you actually avoid taxation of $1,850. Because of this, all of us will pay incremental tax rates in retirement that are significantly higher than the tax rates avoided when we saved the money in a IRA or 401K.

Medicare is actually a worse problem but will probably be resolved as socialized medicine supported by a consumption tax.
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Old 07-29-2008, 04:59 PM   #13
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This is like dejavue for me. I have been through all parts of the gov trying to find someone who cared or could do something with regard to my pension troubles. IRS said you have been wronged but they do not handle that, go to PBGC, they said go to DOL, they said go to IRS. GET THE PICTURE.

Congress was going to do something but only limited the thefts of pension promises for the future and said for past transgressions, the courts will have to decide.

If I were to get anything done I would have to sue in Fedral court.

Follow the Amara vs Cigna case for a similar excercise taking 10 years to get a judgement only to have the remedies stayed until appeals are done.

SAY YOU WILL DIE BEFORE YOUE SEE JUSTICE.

SS will be means tested by 2012 for all persons on pay status.
Universal health savings account will be required by 2012 to include those in pay status for Medicare, read "limit placed on Medicare benefits"

If you saved all your life, The new Uncle Sam wants you... well at least your share of the "NEW CHANGE" to ALL SACRIFICE.
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Old 07-30-2008, 06:38 AM   #14
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Quote:
Originally Posted by Midpack View Post
I fully understand:
  • the future is uncertain,
  • no one knows for sure (or we'd all be rich),
  • and no plan showing greater than about 80% (or whatever numbers you like) probability of success is meaningful.
  • sorry, but I always see these replies and most if not all of us know them already.
...but since we're an RE crowd and therefore engaged in very long range planning with considerably uncertainty, what basis do folks use to meaningfully project:
  • when and how much will Social Security benefits decline,
  • when and how much will Medicare benefits decline,
  • when and how much will Federal (or State) income taxes increase,
  • when and how much will FICA increase.
I mean no disrespect to anyone and if you disagree with the bullets above in the first place, that's fine. And again I am not looking for a philosophical discussion, I am looking for financial/economic insights. Numbers and rationale and/or sources to investigate would be most welcome. I also realize I can just assume there will be no SS or Medicare (and I have modeled same), but I haven't quite lost faith to that extent despite reading The Coming Generational Storm. Thanks...
These are all personal replies:

Bullet 1: Mine will be increasing as I am on SS.
Bullet 2: Don't understand the question as I am on MEDICARE (and TRICARE for Life) - I do not pay anything beyond Medicare Part B Prem and, it may change, but I don't plan on that.
Bullet 3: Going down as State of OH is no longer taxing military retired pay stating in 2008. They also do not tax SS benefits so about 60% of my income is not subject to state taxes now.
Bullet 4: Once retired you do not pay FICA unless you go back to w%%k.

In any event, most of these things are fully out of our control and we just have to adjust to the changes.
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Old 07-30-2008, 07:31 AM   #15
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Quote:
Originally Posted by Midpack View Post
I fully understand:
  • the future is uncertain,
  • no one knows for sure (or we'd all be rich),
  • and no plan showing greater than about 80% (or whatever numbers you like) probability of success is meaningful.
  • sorry, but I always see these replies and most if not all of us know them already.
...but since we're an RE crowd and therefore engaged in very long range planning with considerably uncertainty, what basis do folks use to meaningfully project:
  • when and how much will Social Security benefits decline,
  • when and how much will Medicare benefits decline,
  • when and how much will Federal (or State) income taxes increase,
  • when and how much will FICA increase.
I mean no disrespect to anyone and if you disagree with the bullets above in the first place, that's fine. And again I am not looking for a philosophical discussion, I am looking for financial/economic insights. Numbers and rationale and/or sources to investigate would be most welcome. I also realize I can just assume there will be no SS or Medicare (and I have modeled same), but I haven't quite lost faith to that extent despite reading The Coming Generational Storm. Thanks...
Hi Midpack

My guesses below.

when and how much will Social Security benefits decline
They won't. The benefit will be means tested with payout slowly tailing off for upper income people. Probably 10 - 15 years from now.

when and how much will Medicare benefits decline,
They won't. This benefit too will be means tested - in fact, it already is. Copays and deductibles will also rise. Means testing is already in place so the premiums will rise yearly from now on. Copays and deductibles - probably increasing in 5 - 10 years.

when and how much will Federal (or State) income taxes increase
Federal - in 2011 cap gains will revert to 20% and dividends back to ordinary income. FICA will increase it's upper limit then as well. Congress needs to revisit AMT each year, so the new congress may increase marginal rates in exchange for extending AMT relief.
This would affect rates for 2010.

Michael
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Old 07-30-2008, 11:09 AM   #16
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For the younger folks who are assuming zero SS and Medicare.........

If you are not fond of working and anxious to RE, are you comfortable with the fact that assuming SS and Medicare will be non-existent for you and anything you do get will be "gravy" means you'll unnecessarily work extra years if SS and Medicare are there? That is, are you comfortable with the risk of working extra years only to find out you were working for "gravy' and fluff dollars not needed for a happy and secure RE?
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Old 07-30-2008, 12:20 PM   #17
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Responding to the specific questions.
SS will be means tested, but very little for me (I'm 61)
Medicare means testing will expand. I'll pay thousands more per year (but not tens-of-thousands).
Most of Bush tax cuts will expire.
(Note that, under current law, eventurally 85% of SS will be taxable income for most of us.)
FICA will go up for my kids, but not much.

But I tend to think about this in more general terms. Remember that a zebra does not need to be able to outrun all the lions, just the slower zebras. In a crude way, that applies to retirees. We're not going to let lots of old folks die for lack of food or basic medical care. If I'm in better financial shape than "most" old folks, I'll probably do okay.
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Old 07-31-2008, 08:52 AM   #18
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I have no idea when SS will decline. I retired this year but my plan was built to survive the following:

Elimination of SS
Loss of defined benefit pension due to start in 10 years
Reduction of portfolio value by 30%
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Old 07-31-2008, 08:59 AM   #19
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Originally Posted by jebmke View Post
I have no idea when SS will decline. I retired this year but my plan was built to survive the following:

Elimination of SS
Loss of defined benefit pension due to start in 10 years
Reduction of portfolio value by 30%
If your retirement can survive all of these things, you're probably as ready as can reasonably be...
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