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Confused - Taxes and Inflation?
Old 08-04-2007, 10:02 PM   #1
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Confused - Taxes and Inflation?

I've lurked for months on the board. Thanks to everyone for the great information here. I have been playing around with FIRECalc which is super (thank you Dory!) but I'm confused on what to put for my Annual Spend amount. I know that FIRECalc doesn't include taxes but how do I figure the correct taxable amount from my savings into my annual spend?

For example, my plan is to RE with $2,750,000 of which 2,250,000 will be in taxable accounts. I figure my annual spend at $60,000 before taxes.

As I spend down the taxable amount the taxes I owe on it will go down as well. How do I figure that when I figure up my annual spend?

Also, the average inflation rate historically is in the 3% range but for the period between 1967-1985 it averaged 10%. Is anyone else concerned that inflation will jump up that much again? Assuming a 3-3.5% inflation rate my portfolio has a 100% rate of success. Assuming a 6% inflation rate and I need almost 2 million more for my starting point. If I RE with $2.75 as planned and inflation rears its ugly head again my chances of success are not good. Does anyone else worry about inflation like this? Am I silly to worry about it? I just don't want to RE and then wind up eating cat food.


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Old 08-05-2007, 04:51 AM   #2
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You are just about at my point of both assets and considerably above my spending level. However, I have been spending less than 2% SWR (adjusted each year). I have been doing this for about 28 years based on a pension and virtually all fixed rate investments (CD's). I lived through the late 70's and early 80's with the inflation rate that occurred then. I cannot tell the future BUT it has worked fine for 28 years for me/us. I would not ignore inflation but just treat it like any other thing you have no control over and live your life. (BTW a 4% SWR for what you indicated a your nest egg is initially $110,000; so if you only need $60,000 you should have very significant amounts to save or invest as time goes on).

Stay tuned there will be many along shortly with much more in depth and more detailed advice.

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Old 08-05-2007, 01:16 PM   #3
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Thanks R. I appreciate it. It's good to hear from someone who was retired when the inflation was so high.

As far as the annual spend, I'm not much of a spender, but I'm in Southern California and the cost of living is pretty high here. I may not need the full $60,000 each year but I would rather overestimate than underestimate at this point. The $60,000 I need is before taxes but I may need to withdraw $100,000 or so each year to pay taxes. I think. That's the part I'm confused on.

Thanks again!
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Old 08-05-2007, 02:16 PM   #4
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You can't do much about inflation except figure out how to deal with it. You didn't say whether you expected additional annuities (pension), and of course there is the mother of all annuities, SS. You also didn't say how many years you're planning to live >, but that is a factor if you are 45 and want to stop working now. $2.75 MM is a pretty good pile. If CA is the problem, there are solutions to that you know.
Can't you see yourself in the nursing home saying, " Darn! Wish I'd spent more time at the office instead of wasting time with family and friends."
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