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Old 01-10-2014, 09:10 AM   #41
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It does sound like I am confused. What I really mean is the lower income person likely will have higher after tax returns across their accounts, so they can have a higher SWR. Plus when SS kicks in, they will gain a larger percentage of it tax free.
Well, IMO, you are mixing/mashing terms, and that does make it confusing.

An SWR is an SWR. Spending (including taxes) is spending (including taxes).

Sure, if your spending rises later in life, and your taxes increase, your total spending increases. To maintain the same safety compared to a flat income person, you need a larger portfolio, or reduced spending in the early years to compensate.

Your portfolio doesn't 'know' about any other sources of income. A person drawing 4% from their portfolio and another 4% from other sources (SS/Pensions) will have a portfolio that looks exactly like another person drawing 4% from their portfolio and no other sources of income. What gets confusing, is some people will say the first person has an 8% WR, but that's not true - they withdraw 4% from the portfolio.

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I don't know exactly how to calculate it, but a guess of about .5% difference between someone living off $30,000 to $50,000 a year and someone living on $100,000 to $150,000 a year.
No, plug them into FIRECalc, initial amount has ZERO EFFECT on SWR%.

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Old 01-10-2014, 11:00 AM   #42
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Assume two taxable portfolios, both invested 100% in TIPS. Assume inflation is 2% and the TIPS are paying 3% (real return of 1%).

A person in a high tax bracket during retirement is only going to realize about a 2% to 2.5% return, or about 0% to 0.5% real.

A person in a low tax bracket will probably get the full 3%, 1% real return.

If they both settle on the same SWR at start of retirement, the person in the lower tax bracket will have the greater chance of success because they are getting a higher real return.
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Old 01-10-2014, 11:15 AM   #43
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Assume two taxable portfolios, both invested 100% in TIPS. Assume inflation is 2% and the TIPS are paying 3% (real return of 1%).

A person in a high tax bracket during retirement is only going to realize about a 2% to 2.5% return, or about 0% to 0.5% real.

A person in a low tax bracket will probably get the full 3%, 1% real return.

If they both settle on the same SWR at start of retirement, the person in the lower tax bracket will have the greater chance of success because they are getting a higher real return.
My assumption is the SWR is independent of taxes. Taxes only change what you spend it on. IE, if 3% is a SWR it has to cover food AND taxes (and fund ERs as well).
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Old 01-10-2014, 11:51 AM   #44
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I agree. Taxes are just an expense category that can vary over time just like medical. Just one slice of the expense pie that is baked from SWR.
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Old 01-10-2014, 12:04 PM   #45
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I agree. Taxes are just an expense category that can vary over time just like medical. Just one slice of the expense pie that is baked from SWR.
If taxes affect the rate of growth of a portfolio, how can they just be considered an expense and not be included in expected returns of said portfolio?
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Old 01-10-2014, 12:07 PM   #46
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The withdrawal rate will be the same for all brackets. The lower tax bracket person may get the full 3%. The higher tax bracket person may only get 2.5% and the government will get .5%.
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Old 01-10-2014, 12:49 PM   #47
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If taxes affect the rate of growth of a portfolio, how can they just be considered an expense and not be included in expected returns of said portfolio?
For taxable accounts, where one has to pay taxes on cap gains and dividends, it does reduce the return. And if one is in the 15% bracket, then there's no tax.

Still, if you have to pay taxes, most people would just account for the taxes in the portfolio return, and not in the WR. Then, when you draw 3.5% WR from it, you get to spend the entire 3.5%.

In my case, which is similar to that of many posters here, we have both before and after-tax accounts. The money drawn from before-tax accounts would be fully taxed, and with the WR of 3.5% I would have less than 3.5% to spend.
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Old 01-10-2014, 03:45 PM   #48
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Thanks. It makes me feel better to see others ignoring SWR entirely. I've worked hard for a year and a half to get to the point where I have reliably accurate predictions (yes, I know: oxymoron) of each year's income and out-go, projected out to a reasonable estimate of longevity. I know some people are tweaked by the idea of riding the edge (i.e., using mid-line assumptions and 90% confidence levels instead of conservative assumptions and 95% confidence levels) but, as I mentioned in a thread on assumptions recently, taking the more conservative tack would effectively undercut our dreams of a comfortable retirement. Quite frankly, I'd rather have reality do that than do it to ourselves, i.e., I would rather adjust to unforeseen excessive misfortune rather than live life prepared to withstand any such misfortune unaffected.

To be fair, though, we secretly have a conservative tack built into footings under the foundation of our retirement plan. We live in a relatively high-cost area, the Boston metro area. Our retirement plan is based on expenses in that context. In another thread folks are discussing moving for retirement, generally for tax savings that some states offer, but also in the interest of reducing living expenses. For various reasons, I know that there his hidden strength in our retirement plan, not evident from the more risky assumptions and approaches we've used to get to a green light, in that we can move and thereby reduce our living expenses by 35% easy.
I should add that being the paranoid person I am, there is one more calculator I intend to run in a couple of months that I've heard/read really good things about (ESPlanner). I don't expect to differ substantially from the 5/6 calculators I've already run, but it does provide more detail and is more robust, giving me the final confidence I need to pull the plug end of year.

I, too, live in a a very high-cost area and will downsize to a considerably low-cost locale (even thinking about a small farm). Retirement will also involve volunteering in things I feel strongly about, which may lead to a paying job, may not, depends solely on the impact I can make. Wonderful thing about those of us financially independent is we have options, and options is what it's all about IMHO.
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Old 01-10-2014, 09:20 PM   #49
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If taxes affect the rate of growth of a portfolio, how can they just be considered an expense and not be included in expected returns of said portfolio?
Taxes affect the growth rate of the portfolio because they are an expense, and expenses affect the growth rate of a portfolio.

If I require 10k per year in prescription drugs that is also an expense that will affect the expected returns, since I'm taking out 10k more per year out of that portfolio every year.
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Old 01-11-2014, 07:36 AM   #50
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I wouldn't use FIRECalc for a 50 year span - there aren't enough scenarios. I use 30 years and then try and figure out if my WR (when I'm 81 yo) will be less than 5% with the remaining minimal portfolio (assuming I also get 70% of SSI)..
That is a good point, I've always just run 50 because it seemed the safest but looking at various time spans for my numbers is kinda funny in firecalc it goes back up after 45 years.

Success rate:
30 years 98.2%
35 years 95.4%
40 years 95.1%
45 years 94.9%
50 years 97.8%
55 years 97.7%
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Old 01-11-2014, 08:09 AM   #51
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For taxable accounts, where one has to pay taxes on cap gains and dividends, it does reduce the return. And if one is in the 15% bracket, then there's no tax.

Still, if you have to pay taxes, most people would just account for the taxes in the portfolio return, and not in the WR. Then, when you draw 3.5% WR from it, you get to spend the entire 3.5%.

In my case, which is similar to that of many posters here, we have both before and after-tax accounts. The money drawn from before-tax accounts would be fully taxed, and with the WR of 3.5% I would have less than 3.5% to spend.
Other way round, seriously. My withdrawal is absolutely pre-tax, and I get to spend what remains after paying taxes.

None of the portfolio survival models take into account taxes. They are all based on pre-tax returns. If you do otherwise, you are ignoring the models and any pretense of "safety".

Therefore, any taxes incurred by the portfolio have to be paid out of the withdrawal.

If you have a tax efficient portfolio, you get to spend more of what you can safely withdraw.
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Old 01-11-2014, 08:16 AM   #52
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If taxes affect the rate of growth of a portfolio, how can they just be considered an expense and not be included in expected returns of said portfolio?
It taxes are paid for out of what is withdrawn each year, then they have no direct affect on the portfolio performance. Only the annual withdrawal affects the performance.

And all models work this way - for good reason it's much simpler.

Given the widely varying tax situations, among retirees, it's too difficult to model after tax SWRs.
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Old 01-11-2014, 09:13 AM   #53
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Well, you pay the tax man now, or in my case, I paid him earlier.

I just looked and saw that my portfolio still has 26% of it in after-tax accounts. As that portion is not sufficient to support 3.5%WR, I have been drawing on principal in that portion. However, I have a lot of headroom in the 15% tax bracket to not having to pay any taxes on cap gains and dividends, and still have enough room left to do some Roth conversion and pay a bit of tax on that.

The Federal 15% bracket of $72,500 for a couple plus the standard deduction and exemption means one can pay little tax up to near $100K of investment income! Is that fair? I do not think so, but that's what the law is.

The way our progressive tax system works, a guy who earns (by working, not investing) $200K one year then nothing the next is nailed with AMT, while his neighbor who earns $100K each year escapes with relatively low taxes. Ask me how I know, a guy who had had sporadic income from part-time consulting work.

Roth conversion is a good way to do "income averaging", and I will be sure to make full use of it to avoid high progressive tax in a future year when I may need a higher WR than normal.
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Old 01-11-2014, 11:10 AM   #54
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The Federal 15% bracket of $72,500 for a couple plus the standard deduction and exemption means one can pay little tax up to near $100K of investment income! Is that fair? I do not think so, but that's what the law is.
This is exactly what we plan to be, and I think it would be really interesting to see how many people have this situation, where high net worth and living off investment income higher at least 50% higher than median household yet having zero to little tax liability by limboing under the 15%.

Surely higher proportion on this forum (things like roth conversions aside) but I mean out of all households in the United States.
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Old 01-11-2014, 12:26 PM   #55
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It taxes are paid for out of what is withdrawn each year, then they have no direct affect on the portfolio performance. Only the annual withdrawal affects the performance.

And all models work this way - for good reason it's much simpler.

Given the widely varying tax situations, among retirees, it's too difficult to model after tax SWRs.
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This is exactly what we plan to be, and I think it would be really interesting to see how many people have this situation, where high net worth and living off investment income higher at least 50% higher than median household yet having zero to little tax liability by limboing under the 15%.

Surely higher proportion on this forum (things like roth conversions aside) but I mean out of all households in the United States.
I went to hell and back trying to estimate future taxes last year. Finally, settled on median of taxes between FIDO/ORP. Not the most scientific way, and probably overestimating, but any future difference between real and overestimated means more fun $ in my case.
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Old 01-12-2014, 10:37 AM   #56
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That is a good point, I've always just run 50 because it seemed the safest but looking at various time spans for my numbers is kinda funny in firecalc it goes back up after 45 years.

Success rate:
30 years 98.2%
35 years 95.4%
40 years 95.1%
45 years 94.9%
50 years 97.8%
55 years 97.7%
Yes, 1966 is the specific killer. Run a scenario that excludes 1966, and success % starts increasing.

-ERD50
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