The Shortcomings of SWR After Retirement

[clifp]

Quote:

Originally Posted by Midpack Debate may have been a poor choice of words, unintentionally. I was hoping the thread would elicit discussion about the best ways to optimize various retirement income sources - IMO it's an "underserved" topic here, that many of us could benefit from, self included. Though withdrawing taxable first, then deferred when RMD requires, delaying Soc Sec to 70 and the other fundamental concepts may indeed optimize retirement income for some, it's not always optimal - thanks to taxes among other variables. It's a tough exercise to get right, at least in my view - lots of variables and unknowns. That's what the first/bar chart was meant to get at...

I posed a similar question fairly recently.
It is really really hard to model all of the moving parts. Interest rates, market returns, inflation. Tax rates: on interest, on social security, on dividends and capital gains. Then include RMD on your IRA. Finally throw in ACA subsidies. You have nightmare for planning purposes.

I have some ability to control income by deciding when to recognize capital gains an loses. I finally decide that while I'l restart making some modest Roth conversion. For the most part I am just going to concentrate on minimizing my existing taxes. Decent chance I could be dead by the time my tax avoidance schemes kick in my 70s.

I know it ain't optimal but it is easier.

[teejayevans]

I would try to balance between taxable, roth, and IRA if possible, that way you have choices, each year you can decide how much from each based on that year's tax laws, etc.

[haha]

Quote:

Originally Posted by Midpack Though withdrawing taxable first, then deferred when RMD requires, delaying Soc Sec to 70 and the other fundamental concepts may indeed optimize retirement income for some, it's not always optimal - thanks to taxes among other variables. It's a tough exercise to get right, at least in my view - lots of variables and unknowns. That's what the first/bar chart was meant to get at...

I think I have never thought too much about "withdrawing", because I have never withdrawn anything from any tax advantaged accounts until I was required to at age 70.

Although at times over the years my draw from taxable accounts exceeded the same period realized income, this was always short term and now my cash income tends to be considerably higher than what I need for a moderately frugal life that I enjoy. I have done some Roth transfers, but I haven't had the long period of low taxable income that many early retirees enjoy, so my Roth conversions cost me plenty in taxes. A couple years ago a poster whose name I have forgotten explained how it is a mistake to voluntarily accept ordinary income when you have LTCGs and dividends, because due to you being pushed into the 25% bracket, in effect favored categories which had been taxed at 0% will now be taxed at 15%, plus the ordinary income will be taxed at best at 15%, and some at least at 25%. So I quit doing conversions. That may change I suppose, though at the moment I don't see why it would.

I know many of us would feel adrift without our SWR spreadsheets. I feel that is derivative, and I pay attention to the safety of my portfolio as to capital value and income generation. If I am getting adequate income without much risk taking I think that is all I need to know. If I couldn't satisfy income needs, I would cut back or try to scare-up some earned income. And I refer to "much risk taking", not no risk taking. I am always amazed at the very conservative investors here who seem to not be particularly moved by risks to life and limb, like mountain biking, bungee jumping, parachuting, walking around in foreign countries where one is a stranger and may not read things very well, etc. Give me a little financial risk!

IMO risk aversion is a rational preference for low risk given the level of return possible. Some of this other stuff does not seem to be rational at all- it is just fear.

Ha

[Lsbcal]

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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?

Just a few thoughts. Tax brackets don't go up stepwise I seem to remember so there might be a bit of wiggle room between 15% and 25%. Also it depends on how many dollars get taxed at the higher marginal rate. If I made a bit of a mistake and $1k got taxed at the higher rate, that would be not so bad. But 10k would to me.

I do think that having a Roth income stream to draw from is a very nice thing. If one can manage it over some years maybe before SS kicks in.

My assumption has always been that marginal rates are going to go up in the future. Cannot prove it though.

[teejayevans]

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Originally Posted by Lsbcal My assumption has always been that marginal rates are going to go up in the future. Cannot prove it though.

I don't see the marginal rates going up, I see changes occurring around the edges, for example: for high earners, 85% of their SS is taxed, I expect this to be a 100% or they may change the way they adjust the brackets with inflation. BTW the SS limits used to decide whether SS is taxed at 50% or 85% are not adjusted for inflation, so this is a current example of how your taxes are going up. The bush tax cuts have been made permanent and there is no way they can raise them now.

[Lsbcal]

Maybe I should have said that I expect taxes will go up not down in the future. The point for me is that my tax planning can assume marginal rates are at a minimum, so no depending on some magical tax fairy going forward.

[haha]

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Originally Posted by teejayevans The bush tax cuts have been made permanent and there is no way they can raise them now.

This must be a joke.

Ha

[Midpack]

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Originally Posted by Lsbcal Maybe I should have said that I expect taxes will go up not down in the future. The point for me is that my tax planning can assume marginal rates are at a minimum, so no depending on some magical tax fairy going forward.

+1. I have higher federal tax rates in my future plans too, I'd rather minimize bad "surprises" in my plan, "good" surprises are welcome. Though we can't know how or when they will increase, there are many ways to increase tax revenue.

[larrytbm]

Quote:

Originally Posted by H2ODude 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?

My financial advisor (and many others) has the same position, but I pushed past that attitude. Every January I move tIRA assets into maybe 6 Roths and just before filing taxes (April or Oct of the next year), I keep the best performers and recharacterize the worst. Other factors influence how much 'tax pain' I incure each year. Over 6 years total, I've paid about 10% taxes on the converted assets, but they have also gained about 60% in value. I'm close to an even balance between tIRA and Roth assets. But with reduced diversification of the tIRA it is becoming more difficult to make 'profitable' conversions each year. The good news is that I am no longer worried about huge RMD amounts in the future. And should I have an unexpected need for say $250k in a single year, it is available w/o tax. So I'm happy with my decision and the financial advisor now explains this strategy to other clients.

[teejayevans]

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Originally Posted by haha This must be a joke.

Nope, the point is I don't think they will raise the marginal tax rates (with exception of evil rich) and they will make stealth changes. in other words I wouldn't make any decisions today based on the fact that marginal rates will go up. They very well could decide in the future that people with Roth IRAs are rich and it's not fair they aren't paying their fair share and add it to the AMT calculations.
I would and have made Roth conversions, but only up to 15% limit, and only because I wanted some more tax diversity in my accounts (IRA/Roth/Taxable), not because of what I think will happen in the future.

[dtbach]

I guess I'm not as obsessed with the figuring, re-figuring, re-re figuring, etc. as some on here. I run firecalc about once a year. Says I can still take x.x%. I'm good.

[haha]

Quote:

Originally Posted by teejayevans Nope, the point is I don't think they will raise the marginal tax rates (with exception of evil rich) and they will make stealth changes. in other words I wouldn't make any decisions today based on the fact that marginal rates will go up. They very well could decide in the future that people with Roth IRAs are rich and it's not fair they aren't paying their fair share and add it to the AMT calculations. I would and have made Roth conversions, but only up to 15% limit, and only because I wanted some more tax diversity in my accounts (IRA/Roth/Taxable), not because of what I think will happen in the future.

Well, you may be right. When I heard that the Bush tax cuts are permanent, that is when I thought that you are likely joking. I don't think any positive tax change has ever been permanent before, but we can hope. (Well, I mean positive for those who pay more taxes than they receive payments from our dearly beloved uncle.)

Ha

[Major Tom]

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Originally Posted by dtbach I guess I'm not as obsessed with the figuring, re-figuring, re-re figuring, etc. as some on here. I run firecalc about once a year. Says I can still take x.x%. I'm good.

Yes but then what would people talk about here all day? I've already posted plenty of cat pictures

[dtbach]

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Originally Posted by Major Tom Yes but then what would people talk about here all day? I've already posted plenty of cat pictures

I like cat pictures!! And dogs too!! It is fun to see how convoluted you can get with this SWR stuff. I compare it to "measuring with a micrometer, marking with chalk and cutting it with an ax" Just way too many variables that are constantly changing. It's a moving target. I tend to use the KISS method. Run FIRECALC once a year and you are good to go.

[Major Tom]

I agree, but although I don't participate much in the detailed discussions regarding SWR, I do find them interesting to follow. I think that some people are attempting to stretch their portfolio further while for others, the main attraction is the exercise in analysis and statistics. None of it subverts the 25x - 50x annual income rule of thumb for us SWR types (as opposed to the more active investors here). It just adds to the knowledge base.

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

[Lsbcal]

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Originally Posted by dtbach I guess I'm not as obsessed with the figuring, re-figuring, re-re figuring, etc. as some on here. I run firecalc about once a year. Says I can still take x.x%. I'm good.

I can think of several reasons why people discuss and analyze this over several threads and time periods. Some reasons:
1) conditions are constantly changing
2) worry factor - some of us just cannot believe our good luck
3) some of us love to analyze ... and re-analyze
4) yearly re-targeting is a common business practice
5) it's fun to talk about and beats talking about the weather
6) optimization is a goal, maybe we won't achieve it but we can try

I happen to be a combo of the above. Yes, probably am obsessed.

[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.

[Major Tom]

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Originally Posted by Lsbcal I happen to be a combo of the above. Yes, probably am obsessed.

Me too, I think. When I was a lot younger, just before I got on board with the personal computer revolution, I would spend much time calculating how my savings would grow at various different savings rates and with different fixed interest rates. I used a pocket calculator and ran the calculation for each year for 30 and 40 year periods, tabulating the results as I went. Many pieces of paper were used, and I would often calculate and re-calculate the same scenarios, partially out of mild obsessiveness, and partially for the enjoyment of performing simple calculations.

It was always fun when I got to that magical 1,000,000 number!

I'm not a math whiz by any means, but I like numbers.

[Major Tom]

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Originally Posted by W2R Fun with numbers, I guess.

Aren't we weird?

[MooreBonds]

Quote:

Originally Posted by dtbach I guess I'm not as obsessed with the figuring, re-figuring, re-re figuring, etc. as some on here. I run firecalc about once a year. Says I can still take x.x%. I'm good.

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.