Trying to understand 'investment income'

[Cheesehead]

Let's say you start with $1 million and withdraw $30k in the first year and in that first year inflation is 2%, the second year you withdraw $30,600 ($30,000 * (1+2%)). Then repeat.. the following year... if inflation in the second year is 2.5% then the third year withdrawal is $31,365 ($30,600 * (1+2.5%)).

Regarding the balance... it is whatever it is.

While this is the way it would work in theory, as a practical matter many of us do it a bit differently.

Thanks PB4uski, You have a good way of explaining things! I never knew which came first, the chicken or the egg.

Question 1: When we talk inflation, is that just the CPI number? It seems real inflation is higher.

Question 2: The formula you use for WR considering inflation, is there an online calculator for that? How do I know if it dipped into the principle, just by adding up the totals of all accounts?

I received the paperwork from Fidelity to set up the withdrawals and it is complex, each account needs it's own form and then list every position, over two people. I do not see if there is a way to ask them to just sweep off the "cream", meaning just the cap gains, dividends, etc. If that is possible then the principle is only reduced by inflation, correct?

Thanks

 

[pb4uski]

To the best of my knowledge, inflation was not defined specifically in the Trinity Study, which is the study that came up with the "4% rule". My experience has been different... inflation has "felt" negligible during the 5 years that I have been retired.. I transfer the same amount from my online savings to my local bank as I did 5 years ago.. but I do occasional special transfers when my local bank account is getting low so perhaps that is masking my personal inflation. I think you could probably use 2-3% safely.

I don't use a formula for WR... I do it backwards... I take what I need and then periodically assess whether we continue to have "enough" using my own spreadsheet model, Firecalc, Quicken Lifetime Planner, etc.

Not sure how it works with Fidelity, but with Vanguard it is simple to change your elections for whether dividends are reinvested or paid in cash on-line.. I would be surprised if Fidelity is different. You could use a MM account within your IRA for liquidity, have all distributions directed to that and then schedule an automatic monthly transfer to your local bank for spending... then just monitor the balance in that MM account and rebalance as needed to replenish that MM account if it gets too low. Sounds complicated but after doing it for a year it will be easy peasy for you.

 

[Dreamer]

This thread has definitely been a good education for me. Thanks to all.

+1 Thanks to you for asking this question and thanks to everyone for answers that I can understand.

I think this is going to be the first year that we withdraw from our tax deferred accounts. I am trying to wrap my head around how to do this also. I also need to start thinking about RMDs and tax brackets at that time and see if we need to start withdrawing anything now.

 

[marko]

I also need to start thinking about RMDs and tax brackets at that time and see if we need to start withdrawing anything now.

As an FYI, I found that my RMD will be just about the same as what I usually withdraw anyway. As such, I haven't had to do much planning about it.

Also, people sometimes talk about RMD's like it's the big bad wolf. Remember that you don't have to spend that extra amount! You can just put what you don't need in an after tax fund/account.

 

[REWahoo]

As an FYI, I found that my RMD will be just about the same as what I usually withdraw anyway. As such, I haven't had to do much planning about it.

Same here.

 

[travelover]

............Also, people sometimes talk about RMD's like it's the big bad wolf. Remember that you don't have to spend that extra amount! You can just put what you don't need in an after tax fund/account.

I think that it depends on your circumstances. I've been retired for 10 years and have happily lived on my pension only. I'll take SS at 70 and start RMDS at 70 1/2. That will substantially increase my tax bracket and my taxes. And, yes, I probably will not spend the RMD withdrawals or even all the SS, but the taxes are still going to take some getting used to.

I know, a good problem to have.

 

[REWahoo]

I know, a good problem to have.

+1

I'm truly thankful I'll likely be facing an RMD tax "problem" in a few years.

 

[Rustward]

A problem that we are looking forward to having . . .

 

[audreyh1]

To the best of my knowledge, inflation was not defined specifically in the Trinity Study, which is the study that came up with the "4% rule".

The Trinity Study used historical inflation when it showed the survival of various asset allocations over 30 years. So yes, inflation was defined.

 

[Chuckanut]

This has probably been stated a million times, but I don't see it coming through here:

Gosh, LOL, why not just simplify the entire explanation by saying "Money is fungible"?

Seriously, a good point.

 

[marko]

+1

I'm truly thankful I'll likely be facing an RMD tax "problem" in a few years.

+1
I'm sure there's been a study on the difference between 30 years of gains on a non-tax deferred account and a tax deferred.

I'd be curious to see if now having to pay that RMD turns out to be a winner or a wash. I'm guessing my 30+ years of tax deferred growth was a big factor in where I am now. Plus with a lifetime of high wages I'm now in a lower tax bracket.

While it's sort of "pay now or pay later" I suspect that my RMD tax bill will be incredibly offset by the taxes I didn't have to pay for 30 years.

 

[pb4uski]

The Trinity Study used historical inflation when it showed the survival of various asset allocations over 30 years. So yes, inflation was defined.

And what specific measure did the use for "historical inflation"? There are multiple measures of inflation... which specific one did they use?

 

[NW-Bound]

...people sometimes talk about RMD's like it's the big bad wolf. Remember that you don't have to spend that extra amount! You can just put what you don't need in an after tax fund/account.

It's because it reminds people that the $1M in that IRA/401k account is not really $1M but something significantly less, particularly for people who have not been drawing it and live solely on SS and pension.

And it makes them feel not so rich, and it makes them sad, and mad.

Having just done my 2016 tax, I was reminded that whenever I spend money from my stash, Uncle Sam gets a cut. That is not avoidable. I want to stay in the same tax bracket through the years, and that will take some planning. Paying sooner rather than later may be more advantageous.

 

[harley]

+1
I'm sure there's been a study on the difference between 30 years of gains on a non-tax deferred account and a tax deferred.

I'd be curious to see if now having to pay that RMD turns out to be a winner or a wash. I'm guessing my 30+ years of tax deferred growth was a big factor in where I am now. Plus with a lifetime of high wages I'm now in a lower tax bracket.

While it's sort of "pay now or pay later" I suspect that my RMD tax bill will be incredibly offset by the taxes I didn't have to pay for 30 years.

Also, I think a big reason the IRA money is a big winner for most people is the fact that once it's in the account it's hard to get hold of. So even if you end up paying more taxes due to RMDs, and I'd love to see the math on that too, just the fact that the money is put away and you would need to pay a penalty to get to it makes it a winner. Again, that's for most people, not necessarily the relatively disciplined saves that hang out here.

Having thought about it for a minute, I suspect that tax-wise the RMD would end up costing more than having saved the same amount (+ gains) in an after tax account. Not necessarily in your lifetime, but if you add in the taxes paid if there's any money left in the account after your passing I think the overall tax burden might be higher. But I'd be interested in seeing if I'm right about that. I'm sure it would depend on tax brackets during and after the working years. If they are the same, I suspect after tax wins. If the retirement/RMD years are a lower bracket, then that would probably be the winner.

 

[scrabbler1]

+1
I'm sure there's been a study on the difference between 30 years of gains on a non-tax deferred account and a tax deferred.

I'd be curious to see if now having to pay that RMD turns out to be a winner or a wash. I'm guessing my 30+ years of tax deferred growth was a big factor in where I am now. Plus with a lifetime of high wages I'm now in a lower tax bracket.

While it's sort of "pay now or pay later" I suspect that my RMD tax bill will be incredibly offset by the taxes I didn't have to pay for 30 years.

And remember the company match many of those tax-deferred dollars had when they first went into a 401k (which may have gotten rolled into an IRA).

In my case, when I sent $100 to my 401k back in the 1990s, my after-tax pay dropped by only $35 because of the taxes. So, without any company match, it cost me only $65 to have $100 invested. Good start. Then add to that the 75% company match on that $100 invested, giving me $175 invested overall. Wow, I thought, I see a $65 drop in my take-home pay and have $175 invested in my 401k, even if it is kept under a mattress in the 401k. (I use this same quick demo to convince others to take advantage of the tax-deferment and company match.)

When it comes time to take that money out of the 401k/IRA, it gets taxed at around 20%, so the $175 gets knocked down to $140. Yes, it has to wait 30 years, so it needs to grow at the rate of inflation to keep up. Still a no-brainer and a great deal. This is one of my reinforcements awaiting me when I turn ~60 in 6 years.

 

[W2R]

As an FYI, I found that my RMD will be just about the same as what I usually withdraw anyway. As such, I haven't had to do much planning about it.

My usual equal monthly withdrawals from the TSP will meet my RMD requirements with no problem, too. I turn 70+1/2 in 2018.

I did notice that by the time I am 83, those monthly withdrawals will exceed 1/120th of the total; so unless I lower them, the TSP will withhold 20% for taxes. I do estimated taxes quarterly so that could be a pain in the neck. Or not. I suppose I could always change my monthly withdrawal amount when that happens if I found it to be annoying.