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04-28-2013, 06:56 AM
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#1
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Confused about dryer sheets
Join Date: Mar 2013
Posts: 4
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Firecalc and taxes
Hello,
I am new to this group and truly appreciate all the great conversations in various thread. I have learned a lot since I joined.
I haveva firecalc question and apologize if it was answered before. I am playing with firecalc. For the expenses, I am putting after taxex yearly expense. Do you know if firecalc takes taxex under consideration with the calculations? I.e 401k withdrawels will be subject to income tax.
Than You.
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04-28-2013, 06:57 AM
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#2
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Thinks s/he gets paid by the post
Join Date: May 2011
Location: South Eastern USA
Posts: 1,068
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I do not believe it does.
__________________
All that glitters is not gold. -G. Chaucer, W. Shakespeare
All that is gold does not glitter. -J.R.R. Tolkien
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04-28-2013, 07:04 AM
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#3
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Confused about dryer sheets
Join Date: Mar 2013
Posts: 4
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Do you suggest a way around this, i.e how can I include taxex in calculations? For example if my after tax expenses are 30k yearly, should I be increasing it by 25% and make it before tax while entering this number?
Thans again.
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04-28-2013, 07:14 AM
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#4
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Thinks s/he gets paid by the post
Join Date: Jul 2012
Location: Mississippi
Posts: 1,894
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I also believe it does not consider taxes. You can include taxes as part of spending but it could change significantly over a retirement span. The following is from the firecalc intro...
Why don't you have a space for taxable portfolio and another space for nontaxable portfolio?
FIRECalc ignores taxable versus nontaxable portfolios right now. Since it only uses historical data to determine how a portfolio would behave, with no guesses by anyone about what will happen to inflation, market performance, and so forth, and we don't have historical tax rates for the period for which I have market data, I can't add tax planning without changing the philosophy of the program. Just planning on x% tax rates would make all the historical examples meaningless, when changing tax rates would have at least some effect on the market returns.
If I can figure out how to do this in a way that would not corrupt the results, I'll do it. For now, I prefer to leave the tax planning portion to programs like www.i-orp.com -- an outstanding tool!
Try the i-orp calculator for tax input.
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04-28-2013, 07:22 AM
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#5
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Confused about dryer sheets
Join Date: Mar 2013
Posts: 4
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Thank you ver much for the responses, much appreciated.
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04-28-2013, 07:51 AM
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#6
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Full time employment: Posting here.
Join Date: Feb 2011
Posts: 852
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You have to include taxes as part of your expenses. I cannot figure out how to link to other threads on here using the iPad App, but I recently started a thread about what tax rate people use in their calculations. The best suggestion was to use an online tax estimator like TurboTax to see. It turns out that it really is an amazing range of rates depending on how much of your money you are taking from where. My effective tax rate is likely to be about 12% or less in retirement (Federal AND State). With each state being different of course.you have to know how your state treats the different income sources.
30% tax rate is possible but would mean you are taking a HUGE amount of money out of your tax deferred accounts. Remember money you take out of your currently taxed savings is only potentially subject to being taxed (Federally) on the part of the withdrawal which is dividend or capital gains (return of principle does not get taxed or even counted to determine you tax bracket) and currently only subject if you end up above the 15% marginal tax bracket which is something like $70,000 right now.
Example-(ignoring Social Security and pensions as sources of income and ignoring exemptions and carry over capital losses from prior tax years which allow you to deduct from these crude numbers):
You need $100,000 a year. You made $30,000 in dividends from a taxable account. From your taxable account you sell some stock to generate $35,000 but the capital gain is $10,000 of it, the rest return of your principle. You take $41,176 from your IRA or 401k. Total to spend = $100,000. Federal taxes owed = 15% of that last $41.176 only. Federal tax rate on the total is 6.18%. Take all $100,000 of it from your IRA or 401k and you would owe 15% Federally, so you would have to take out $117,647 to be left with $100,000 to spend. (assuming you owe ZERO State taxes-which is not likely in most states)
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04-28-2013, 07:55 AM
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#7
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Full time employment: Posting here.
Join Date: Feb 2011
Posts: 852
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Quote:
Originally Posted by urn2bfree
You have to include taxes as part of your expenses. I cannot figure out how to link to other threads on here using the iPad App, but I recently started a thread about what tax rate people use in their calculations. The best suggestion was to use an online tax estimator like TurboTax to see. It turns out that it really is an amazing range of rates depending on how much of your money you are taking from where. My effective tax rate is likely to be about 12% or less in retirement (Federal AND State). With each state being different of course.you have to know how your state treats the different income sources.
30% tax rate is possible but would mean you are taking a HUGE amount of money out of your tax deferred accounts. Remember money you take out of your currently taxed savings is only potentially subject to being taxed (Federally) on the part of the withdrawal which is dividend or capital gains (return of principle does not get taxed or even counted to determine you tax bracket) and currently only subject if you end up above the 15% marginal tax bracket which is something like $70,000 right now.
Example-(ignoring Social Security and pensions as sources of income and ignoring exemptions and carry over capital losses from prior tax years which allow you to deduct from these crude numbers):
You need $100,000 a year. You made $30,000 in dividends from a taxable account. From your taxable account you sell some stock to generate $35,000 but the capital gain is $10,000 of it, the rest return of your principle. You take $41,176 from your IRA or 401k. Total to spend = $100,000. Federal taxes owed = 15% of that last $41.176 only. Federal tax rate on the total is 6.18%. Take all $100,000 of it from your IRA or 401k and you would owe 15% Federally, so you would have to take out $117,647 to be left with $100,000 to spend. (assuming you owe ZERO State taxes-which is not likely in most states)
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I forgot to add that I assume any interest income you make you make it in tax deferred accounts.
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05-14-2013, 12:24 PM
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#8
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Dryer sheet aficionado
Join Date: May 2013
Location: DC
Posts: 31
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I am frankly quite disturbed by FIRECALC's ignoring taxes. Other than this it would be a great tool. But to ignore taxes and leave it to a user to estimate taxes as part of expenses is pretty bad. The reason it is bad is you can't estimate taxes for each of the approx 100 scenarios FIRECALC runs, and the tax will be a function of the scenario. That is each 30 year period has substantially different income streams. Each therefore would have different tax expenses. You can just estimate a single tax expense, and apply it, but then that doesn't differentiate all the scenarios FIRECALC calculates. But I guess there is no real alternative. Any thoughts?
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05-14-2013, 12:25 PM
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#9
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Dryer sheet aficionado
Join Date: May 2013
Location: DC
Posts: 31
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I found ORP did not run (file not found 404 error)
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05-14-2013, 12:41 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,021
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Quote:
Originally Posted by allanlevy
...you can't estimate taxes for each of the approx 100 scenarios FIRECALC runs, and the tax will be a function of the scenario. That is each 30 year period has substantially different income streams. Each therefore would have different tax expenses. You can just estimate a single tax expense, and apply it, but then that doesn't differentiate all the scenarios FIRECALC calculates. But I guess there is no real alternative. Any thoughts?
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None other than the obvious fact you've just answered your own question...
__________________
Numbers is hard
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05-14-2013, 12:54 PM
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#11
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Full time employment: Posting here.
Join Date: May 2011
Location: Twin Cities
Posts: 523
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I totally understand why they don't. Too many variables. It's not just taxable vs non-taxable accounts. You've got a whole variety of tax consequences to consider (on top of 40+ state taxes). Heck, my 9 rental properties make for a huge guessing game with the passive income and myriad of depreciation rules.
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05-14-2013, 10:34 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2009
Posts: 5,308
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Personally I like it that Firecalc doesn't estimate taxes. I prefer to estimate my own taxes which are based upon my spending and my particular deductions. I use Fidelity RIP but actually don't like that it estimates taxes since I think I can do better estimating my own taxes.
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05-14-2013, 10:59 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 3,433
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Quote:
Originally Posted by allanlevy
I found ORP did not run (file not found 404 error)
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Try i-orp.... http://www.i-orp.com/
omni
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05-15-2013, 01:06 AM
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#14
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Dryer sheet aficionado
Join Date: May 2013
Location: DC
Posts: 31
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Quote:
Originally Posted by Katsmeow
Personally I like it that Firecalc doesn't estimate taxes. I prefer to estimate my own taxes which are based upon my spending and my particular deductions. I use Fidelity RIP but actually don't like that it estimates taxes since I think I can do better estimating my own taxes.
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Wait! the statement seems wrong (to me) ---Remember money you take out of your currently taxed savings is only potentially subject to being taxed (Federally) on the part of the withdrawal which is dividend or capital gains (return of principle does not get taxed or even counted to determine you tax bracket) and currently only subject if you end up above the 15% marginal tax bracket which is something like $70,000 right now.
You are not "taking out" $ from your non-deferred account. It is generating income itself, whether you spend it or not. And that income is subject to tax (whether you spend it, or not). You don't get to choose a withdraw amount from it really. That is why estimating your taxes and applying that to the expense portion of FIRECALC to determine failure scenarios is such a problem. It is because each scenario, has its own historical performance, and consequently its own historical tax implications. By using your own estimate you are applying that estimates underlying tax bases, against all scenarios regardless of the return characteristics of the each scenario, each different. Then you use the aggregate failure rate from the MC simulation. That scares me. Its like combining apples and oranges. It generates an error margin, of size frankly I do not know. Should I worry about the size of this error margin?
I do of course acknowledge what you say that you like that you can apply your own tax rate and feel its more accurate. I see this, especially if your holdings are tax complex (eg rentals, RE, etc). But what is the error margin effect of estimating your taxes, and then applying that estimate to the expected spending, and having that then be used to generated 100+ failure rate scenarios, based on the non apples - apples tax rate of the given scenario vs the apples tax rate of the given scenario (not included in FC) and the non-apples tax rate of your single estimate not aligned with the scenario's tax characteristic based on its particular return characteristic.
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05-15-2013, 03:21 AM
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#15
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Thinks s/he gets paid by the post
Join Date: Mar 2009
Posts: 2,985
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I don't see how Firecalc could accurately estimate taxes. Nor would I want that feature. While tax planning is certainly important it's not what I seek with this tool. It's comprehensive approach to planning includes everything I need for a good overall plan.
__________________
Took SS at 62 and hope I live long enough to regret the decision.
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05-15-2013, 08:52 AM
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#16
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Thinks s/he gets paid by the post
Join Date: Oct 2009
Posts: 2,115
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Just add buffer for your feared error margin on taxes. It seems pretty straghtforward to me. Kind of the beauty of Firecalc.
__________________
“Of all the paths you take in life, make sure a few of them are dirt.” John Muir
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05-15-2013, 09:03 AM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2011
Posts: 8,419
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To me, this is pretty simple.
In the working world, when you think about your income, you don't think about your spending amount, you think about your total income which also accounts for taxes.
Same with FIRECALC. You need to know how much money you need to 'make' (withdraw) in order to cover your spending and taxes.
Will it be exact? No. But even in the paycheck world, there's always some difference between your plan and reality.
__________________
Living well is the best revenge!
Retired @ 52 in 2005
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05-15-2013, 09:15 AM
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#18
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Full time employment: Posting here.
Join Date: May 2013
Posts: 727
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Quote:
Originally Posted by marko
Same with FIRECALC. You need to know how much money you need to 'make' (withdraw) in order to cover your spending and taxes.
Will it be exact? No. But even in the paycheck world, there's always some difference between your plan and reality.
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+1 That's how I did it. I added my expected taxes into my income requirement number. It won't be exact, but if you are like my impression of most on this forum, you'll err on the high side and be happy when it is less.
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05-15-2013, 09:18 AM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2005
Location: Chicago
Posts: 13,186
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Taxes are just another expense.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
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05-15-2013, 09:28 AM
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#20
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,722
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Quote:
Originally Posted by youbet
Taxes are just another expense.
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Yup. (That's twice now. are we going for a record in agreements? )
FIRECalc tells us how much we can afford to spend. What we spend it on - taxes, mortgage, or beer - is unique to each of us.
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