The Shortcomings of SWR After Retirement

[steelyman]

Quote:

Originally Posted by MooreBonds It's not that you have to be uber-obsessed with it. However, think of it as a GIGANTIC return of your minimal time investment. How long would it take you to do a few simple "what-ifs" in a spreadsheet, with a few columns, each column with different variables of capital gains, IRA withdrawals, and SS income. Even if you spent 40 hours one week crunching all of the possibilities (and even that would be an extreme amount of time), most early retirees could easily wind up efficiently allocating and timing their 'earning' of different income sources, and possibly save thousands of dollars in taxes. All for just 20-40 hours of work. That works out to anywhere from $30/hr (tax free) up to HUNDREDS of dollars per hour. And that's just for one year. If you figure it out to carry out for 5-10 years, that suddenly becomes possibly THOUSANDS of dollars per hour benefit by doing some calculations that could save you plenty in taxes by timing certain things.

Or you could enjoy yourself, one of the benefits of knowing you're OK.

[redduck]

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Originally Posted by Major Tom Many of my former co-workers with whom I have stayed in touch with on Facebook are probably dismayed to find that in retirement, I have turned into a guy who posts cat pictures

As I understand it, many of your co-workers predicted this was going to happen.

[Major Tom]

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Originally Posted by redduck As I understand it, many of your co-workers predicted this was going to happen.

Hmmmm.....do we know each other, or is this going over my head?

[dtbach]

Quote:

Originally Posted by MooreBonds It's not that you have to be uber-obsessed with it. However, think of it as a GIGANTIC return of your minimal time investment. How long would it take you to do a few simple "what-ifs" in a spreadsheet, with a few columns, each column with different variables of capital gains, IRA withdrawals, and SS income. Even if you spent 40 hours one week crunching all of the possibilities (and even that would be an extreme amount of time), most early retirees could easily wind up efficiently allocating and timing their 'earning' of different income sources, and possibly save thousands of dollars in taxes. All for just 20-40 hours of work. That works out to anywhere from $30/hr (tax free) up to HUNDREDS of dollars per hour. And that's just for one year. If you figure it out to carry out for 5-10 years, that suddenly becomes possibly THOUSANDS of dollars per hour benefit by doing some calculations that could save you plenty in taxes by timing certain things.

And I get hundreds of dollars a year of entertainment reading of all the miriad possible ways of slicing and dicing how much to take out! vs just multiplying by .04 and going singing on my way. . .

[teejayevans]

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Originally Posted by W2R I enjoy going through my numbers for the past 4 years or so since retirement, and computing my withdrawal rate for each year using various methods. Why? I don't know. Fun with numbers, I guess.

Take Briggs Meyer test, you will probably come out as INTJ, see:
http://www.early-retirement.org/foru...ert-67956.html

[MDJO]

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Originally Posted by H2ODude Modeling future withdrawals gives me a headache. Primarily because I believe it is so dependent on what tax rates will be in the future. We have about 60% in tIRA's and at 62 would like to convert as much as possible, but given pension there's not a lot of room in the 15% bracket to move much before hitting the 25. And, we're in a 7% state IT state. Accountant's advice is to never pay any tax before you have to (other than that golden 15%) but I'm seriously considering moving amounts into Roths that will generate some large bills now rather than risk greater ones later. Anyone else think like that?

I like and follow your accountant's advice, but every situation is different.

[Independent]

Quote:

Originally Posted by MooreBonds It's not that you have to be uber-obsessed with it. However, think of it as a GIGANTIC return of your minimal time investment. How long would it take you to do a few simple "what-ifs" in a spreadsheet, with a few columns, each column with different variables of capital gains, IRA withdrawals, and SS income. Even if you spent 40 hours one week crunching all of the possibilities (and even that would be an extreme amount of time), most early retirees could easily wind up efficiently allocating and timing their 'earning' of different income sources, and possibly save thousands of dollars in taxes. All for just 20-40 hours of work. That works out to anywhere from $30/hr (tax free) up to HUNDREDS of dollars per hour. And that's just for one year. If you figure it out to carry out for 5-10 years, that suddenly becomes possibly THOUSANDS of dollars per hour benefit by doing some calculations that could save you plenty in taxes by timing certain things.

I'm not afraid of spreadsheets, so I'd be a good candidate for this. Yet, when I tried it I didn't see any clear "thousands of dollars in taxes" (other than moving some trad IRA to a Roth IRA, and it doesn't take a spreadsheet to figure that one out). I saw some close calls that depended on assumptions about future inflation, tax rates, and returns. No clear winners.

I always have this feeling that I must be missing something. How about an example for an early retiree without any cap gains potential, just interest bearing taxable accounts, an IRA, SS, and a pension?

[samclem]

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Originally Posted by Independent I saw some close calls that depended on assumptions about future inflation, tax rates, and returns. No clear winners.

This is where I threw in the towel on fine-tuning any optimization. The results appeared to be highly sensitive to assumptions on these three things (and probably more), so sharpening the pencil still further seemed a waste of time. I'm just goingto do the common-sense things that don't cost much in order to reduce the chances to paying more in taxes later.
Another reason I quit trying to optimize things to the Nth degree: If I end up paying higher taxes many years down the road because my investments did well, I really won't cry about it. At that point my portfolio will have served its purpose, we "won", and having more taken in taxes when I'm 85 just won't be a big deal. It's a big deal now because we have a lot of miles still to travel and that money may be needed if we hit a rough spot anywhere along the way.

[ejman]

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Originally Posted by samclem This is where I threw in the towel on fine-tuning any optimization. The results appeared to be highly sensitive to assumptions on these three things (and probably more), so sharpening the pencil still further seemed a waste of time. I'm just goingto do the common-sense things that don't cost much in order to reduce the chances to paying more in taxes later. Another reason I quit trying to optimize things to the Nth degree: If I end up paying higher taxes many years down the road because my investments did well, I really won't cry about it. At that point my portfolio will have served its purpose, we "won", and having more taken in taxes when I'm 85 just won't be a big deal. It's a big deal now because we have a lot of miles still to travel and that money may be needed if we hit a rough spot anywhere along the way.

Good post. Given the availability of time after ER to indulge in these fun "what if" pursuits I think there is a great tendency to measure and try to model things things with the precision of a micrometer when life events are in fact delivered with all the delicacy of an ax.

[MooreBonds]

Quote:

Originally Posted by Independent I'm not afraid of spreadsheets, so I'd be a good candidate for this. Yet, when I tried it I didn't see any clear "thousands of dollars in taxes" (other than moving some trad IRA to a Roth IRA, and it doesn't take a spreadsheet to figure that one out). I saw some close calls that depended on assumptions about future inflation, tax rates, and returns. No clear winners. I always have this feeling that I must be missing something. How about an example for an early retiree without any cap gains potential, just interest bearing taxable accounts, an IRA, SS, and a pension?

Well, granted, if your entire portfolio consists of just 3 Vanguard ETFs and Social Security, then it may not be that involved.

But if you have a more complex portfolio (preferred stocks, individual stocks, etc.), some of which might be Qualified Dividends, maybe some MLPs, some individual REITs that more often than not spin off some Return Of Capital, a large IRA that you might want to either start drawing down now to reduce RMD size and tax bracket, or postpone and take SS now....all of that can be impacted by what you hold in your tax-deferred/ROTH accounts, and what you hold in your taxable account.

In my accumulation years, I put all of my large cashflow producing holdings into my tax-deferred accounts (business development companies, preferred stocks, high yielding individual stocks) to minimize my taxable income, but when I need to live off of the dividends, it will pay for me to spend just a little bit of time tweaking what I hold in which account to maximize the Qualified Dividends that are in my taxable account to live off of, and keeping the regular dividends in the tax-deferred accounts. But that is just one part of the overall tax puzzle.

Then add in the factor of health subsidies and 400% FPL, and you really have a spreadsheet fest of 'what ifs'.

[Midpack]

Interesting POVs. While I use spreadsheets to analyze, it's easy, I usually learn something worthwhile with each exercise, and it takes a trivial amount of time in the overall scheme of things given what's at stake in $. The OP took less than 45 minutes, and I thought it might interest others, though I did it for myself.

And there's a large playing field between 'multiply by 4% and be done with it' and 'analyzing to the nth degree' - few here probably go to either extreme, especially the latter. I think am somewhere in the middle, simply trying to make good fundamental choices as there are many variables and unknowns as we all know, and some known changes that occur from time to time, like tax code. By all means to each his/her own...

[samclem]

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Originally Posted by Midpack And there's a large playing field between 'multiply by 4% and be done with it' and 'analyzing to the nth degree' - few here probably go to either extreme, especially the latter. I think am somewhere in the middle, simply trying to make good fundamental choices as there are many variables and unknowns as we all know, and some known changes that occur from time to time, like tax code. By all means to each his/her own...

I agree--playing with i-orp, doing a spreadsheet, etc, is how I came to appreciate the importance of small differences in return, inflation, etc. If I hadn't seen these posts (and had similar discussions here over the years) and done the trials with spreadsheets I doubt I'd have really come to grips with it.
These exercises also reinforced (to me) the importance of being flexible as we execute the plan. Given the unknowns and unknowables, taking X% of the portfolio year-end-value (or some smoothed variant of the same thing) makes much more sense (to me) than setting a percent at year one and simply adjusting for inflation. That portfolio will be doing something, ignoring it isn't a good policy.

[Independent]

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Originally Posted by MooreBonds Well, granted, if your entire portfolio consists of just 3 Vanguard ETFs and Social Security, then it may not be that involved. But if you have a more complex portfolio (preferred stocks, individual stocks, etc.), some of which might be Qualified Dividends, maybe some MLPs, some individual REITs that more often than not spin off some Return Of Capital, a large IRA that you might want to either start drawing down now to reduce RMD size and tax bracket, or postpone and take SS now....all of that can be impacted by what you hold in your tax-deferred/ROTH accounts, and what you hold in your taxable account. In my accumulation years, I put all of my large cashflow producing holdings into my tax-deferred accounts (business development companies, preferred stocks, high yielding individual stocks) to minimize my taxable income, but when I need to live off of the dividends, it will pay for me to spend just a little bit of time tweaking what I hold in which account to maximize the Qualified Dividends that are in my taxable account to live off of, and keeping the regular dividends in the tax-deferred accounts. But that is just one part of the overall tax puzzle. Then add in the factor of health subsidies and 400% FPL, and you really have a spreadsheet fest of 'what ifs'.

I thought this might be the case. We have a wide range of people on this board. Some are ER due to unusually high net worth, some are ER due to unusually careful LBYM. We have a wide range of investing complexity, from KISS to "some of everything".

I find myself agreeing with samclem today, but I also want to allow for the possibility that I've just missed something.

[rayvt]

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Originally Posted by ejman Good post. Given the availability of time after ER to indulge in these fun "what if" pursuits I think there is a great tendency to measure and try to model things things with the precision of a micrometer when life events are in fact delivered with all the delicacy of an ax.

I would think that if you do want to spent time and effort creating & working on/with spreadsheets, that fiddling with tax-related issues just doesn't have that much value. Seems to me that the effort would be better spent by examining ways to increase your investment returns and/or lowering risk -- such as things that folks like Mel Faber, Gary Antonacci, etc. write about.

I don't see the "save thousands on taxes", either. At 15% rate, $1000 is a $6700 difference in AGI. So for "many thousands", we're talking about differences in the range of $20K-$25K and up. Do people really have the ability to shave that much off of their AGI by twiddling with a spreadsheet?

[pb4uski]

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Originally Posted by rayvt ....I don't see the "save thousands on taxes", either. At 15% rate, $1000 is a $6700 difference in AGI. So for "many thousands", we're talking about differences in the range of $20K-$25K and up. Do people really have the ability to shave that much off of their AGI by twiddling with a spreadsheet?

If you are planning on managing your income for Obamacare health insurance subsidies beginning in 2014 then the implications of a little additional AGI are huge.

As an example, if I mess up and have $6,700 too much, then while the tax bite is only $1,000 the lost subsidy is $9,700 so that extra $6,700 in income costs me $10,700, 160% of the additional $6,700 in income!!

For me, if I were to increase my income with all 0% capital gains from 400% FPL to the top of the 15% tax bracket (~$40k of gains), while my additional federal income tax would be zero but between state income tax, lost state property tax relief and lost Obamacare subsidies the incremental economic cost is over $14k (~36% of the incremental income).

[NanoSour]

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Originally Posted by pb4uski If you are planning on managing your income for Obamacare health insurance subsidies beginning in 2014 then the implications of a little additional AGI are huge. As an example, if I mess up and have $6,700 too much, then while the tax bite is only $1,000 the lost subsidy is $9,700 so that extra $6,700 in income costs me $10,700, 160% of the additional $6,700 in income!! .

That's encouraging!

[dtbach]

ACA is going to make millions for tax advisers it appears. One more thing to game. I didn't realize that the cut off points would be so course as to gain/lose almost $10k!

[Midpack]

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Originally Posted by dtbach ACA is going to make millions for tax advisers it appears. One more thing to game. I didn't realize that the cut off points would be so course as to gain/lose almost $10k!

Enough to make you rethink post #44?

Admittedly, it's pointless to go to too far with so many unknowns, but IMO there is value in a sensible happy medium between nth degree and why even bother. Seems prudent to calculate what we can using knowns and reasonable assumptions, and updating when new knowns or assumptions come along. It doesn't take that much effort...

[dtbach]

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Originally Posted by Midpack Enough to make you rethink post #44? Admittedly, it's pointless to go to too far with so many unknowns, but IMO there is value in a sensible happy medium between nth degree and why even bother. Seems prudent to calculate what we can using knowns and reasonable assumptions, and updating when new knowns or assumptions come along. It doesn't take that much effort...

And being a hypocrite I have stuff on spread sheets, check in on VG and Fido regularly, listen to webcasts, etc. So yeah I spend time pouring over stuff. It's just I find that there is only so much you can juggle around (at least in my situation) so after all my research/spread sheet study/etc it has turned out to be a few basic moves and then to use the 4% rule (although again being a hypocrite, I adjust that also as needed)

[rayvt]

When I retired, I set up a spreadsheet to compute our annual withdrawals. A bit more complicated than most, since I also adjust the increase by using the Guyton-Klinger rules as well as inflation. Each January I refigure for the next year and get the monthly amount.

But we don't need the same amount each month -- more when we go on a cruise, less when we stay home.
So I have another worksheet where I track the actual withdrawals each month and the running average YTD and the necessary amount for the remaining months.