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Old 03-09-2012, 01:33 PM   #41
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RE: Danmar's way of looking at taxes - I've chosen to look at taxes as an expense because taxes ARE (to some extent) manageable. Also, tax rates are not guaranteed, so may be higher in the future (meaning, more planning for that potential expense NOW).

Finally, the OP needs to be aware of the tax implications of having tax deferred money in retirement funds. Managing these funds is important to limit the tax impact.
Making Roth conversions in retirement is an obvious example of managing taxes. When I make conversions (2 so far) I pay the taxes out of my savings and treat that withdrawal as an expense just like all other withdrawals, and if that tax payment was going to cause me to exceed my target SWR of 3% I don't believe I would do it.
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Old 03-09-2012, 02:30 PM   #42
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Good article, but a bit misleading as it implies you need to save $2M by the time you're 50 ($3.5M - $1.5M already spent). Obviously each year you are earning more (even if only through investments), and using that to pay current expenses.

Reminds me of the study that said Americans will spend on average $xx on medical care during retirement. Same problem...implies you need that much all at once.
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Old 03-10-2012, 08:19 AM   #43
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@ Koolau. Yes I agree that taxes must be actively managed and can change ovr time. But if I viewed them as expenses they would move my total spend all over the map. i feek it is the discretionary consumption type expenses like travel, autos, entertainment that I need to manage. The tax expenses will be directly related to decisions I take on my income.
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Old 03-10-2012, 10:25 AM   #44
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@ Koolau. Yes I agree that taxes must be actively managed and can change ovr time. But if I viewed them as expenses they would move my total spend all over the map. i feek it is the discretionary consumption type expenses like travel, autos, entertainment that I need to manage. The tax expenses will be directly related to decisions I take on my income.
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Making Roth conversions in retirement is an obvious example of managing taxes. When I make conversions (2 so far) I pay the taxes out of my savings and treat that withdrawal as an expense just like all other withdrawals, and if that tax payment was going to cause me to exceed my target SWR of 3% I don't believe I would do it.
Obviously, both methods are acceptable and working for both of you (Yeah!!). Your two replies in close proximity got me rethinking my Roth conversions. I still consider the taxes I pay on DW's SS and my pension as "expenses" - IOW, I'll never get that money back. But now I'm wondering if the tax to cover conversions should be considered an expense to count "against" SWR (as Alan does). IOW Roth conversions COULD be looked at as a recognition of the lower value of deferred money. Converted properly (accounting for tax brackets, etc.) the actual value of one's total ER savings doesn't really change - only the numerical values change.

Bah!! Humbug!! I gotta quit thinking so much. That's the danger of learning too much on this forum! But, thanks for both replies.

Returning you now to OP's original question. YMMV
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Old 03-10-2012, 10:33 AM   #45
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....Bah!! Humbug!! I gotta quit thinking so much. That's the danger of learning too much on this forum! ...
Thinking too much and crunching numbers is impacting my sleep. I rather consider scenarios than sleep =(
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Old 03-10-2012, 11:20 AM   #46
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It depends on one's situation. The "80%" that you frequently hear quoted and other rules of thumb commonly assume that you spend your entire take home check, which may be valid for most people, but is definitely not valid for many on these boards.

The best thing to do is to analyze what you spent for the two years before retirement and then make adjustments to that spending for things you think will change.

For us, I think our spending will be about the same as it was prior to retirement (after adjusting for now having only one house rather than two houses).
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To early retire you have to be able to save a large portion of your income, 20, 30, 40 or even 50%. So many people on here already live on a small percentage of their income. Then take off all the retirement savings like no mortgage etc and you can get down to really small numbers. I'm looking at needing 30% of my gross income in retirement. Medical costs might go up, that obviously depends on your insurance policy and health, but your retirement plan should account for that increased cost.
OP-

I think these two posts contains contain excellent advice, and when read together, point out an important mechanism that is often overlooked when discussing comparisons of retirement budget versus working income. That mechanism is the often significant income increases one experiences late in a working career. When that occurs, the "replacement rate" method of determining retirement budget becomes even more useless.

Our personal experience is that we currently save a lot more and pay much more (too damn much) in taxes than we did 10 even 5 yrs ago. But, we also "spend" only about 30-35% of our gross annual income.

So, I think PB4's and Nun's advice is good.

1. Calculate spending using a bottoms up method and do a reality check by comparing your recent actual spending history.
2. Save, save, save; and you will get to the point where you're spending a small % of gross income each year.
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Old 03-10-2012, 11:28 AM   #47
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You make a good point Huston55 in that if I look at my annual spending in relation to my income during the years just prior to retirement, it was about 30% as well.

Taxes and saving (and some discretionary spending) were making up the difference.
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Old 03-10-2012, 12:31 PM   #48
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You make a good point Huston55 in that if I look at my annual spending in relation to my income during the years just prior to retirement, it was about 30% as well.

Taxes and saving (and some discretionary spending) were making up the difference.
Same for us now: saving, taxes & spending are the three big categories of where the $$$ go.
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