Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Firecalc and taxes
Old 04-28-2013, 07:56 AM   #1
Confused about dryer sheets
 
Join Date: Mar 2013
Posts: 4
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.
__________________

__________________
Bali is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-28-2013, 07:57 AM   #2
Thinks s/he gets paid by the post
Brett_Cameron's Avatar
 
Join Date: May 2011
Location: South Eastern USA
Posts: 1,010
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
Brett_Cameron is offline   Reply With Quote
Old 04-28-2013, 08:04 AM   #3
Confused about dryer sheets
 
Join Date: Mar 2013
Posts: 4
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.
__________________
Bali is offline   Reply With Quote
Old 04-28-2013, 08:14 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Jul 2012
Location: Mississippi
Posts: 1,878
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.
__________________
rbmrtn is online now   Reply With Quote
Old 04-28-2013, 08:22 AM   #5
Confused about dryer sheets
 
Join Date: Mar 2013
Posts: 4
Thank you ver much for the responses, much appreciated.
__________________
Bali is offline   Reply With Quote
Old 04-28-2013, 08:51 AM   #6
Full time employment: Posting here.
urn2bfree's Avatar
 
Join Date: Feb 2011
Posts: 711
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)
__________________
urn2bfree is offline   Reply With Quote
Old 04-28-2013, 08:55 AM   #7
Full time employment: Posting here.
urn2bfree's Avatar
 
Join Date: Feb 2011
Posts: 711
Quote:
Originally Posted by urn2bfree View Post
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)
I forgot to add that I assume any interest income you make you make it in tax deferred accounts.
__________________
urn2bfree is offline   Reply With Quote
Old 05-14-2013, 01:24 PM   #8
Dryer sheet aficionado
 
Join Date: May 2013
Location: DC
Posts: 31
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?
__________________
allanlevy is offline   Reply With Quote
Old 05-14-2013, 01:25 PM   #9
Dryer sheet aficionado
 
Join Date: May 2013
Location: DC
Posts: 31
I found ORP did not run (file not found 404 error)
__________________
allanlevy is offline   Reply With Quote
Old 05-14-2013, 01:41 PM   #10
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,125
Quote:
Originally Posted by allanlevy View Post
...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?
None other than the obvious fact you've just answered your own question...
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 05-14-2013, 01:54 PM   #11
Recycles dryer sheets
 
Join Date: May 2011
Location: Twin Cities
Posts: 434
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.
__________________
Fishingmn is offline   Reply With Quote
Old 05-14-2013, 11:34 PM   #12
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 3,399
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.
__________________
Katsmeow is offline   Reply With Quote
Old 05-14-2013, 11:59 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,988
Quote:
Originally Posted by allanlevy View Post
I found ORP did not run (file not found 404 error)
Try i-orp....http://www.i-orp.com/

omni
__________________
omni550 is offline   Reply With Quote
Old 05-15-2013, 02:06 AM   #14
Dryer sheet aficionado
 
Join Date: May 2013
Location: DC
Posts: 31
Quote:
Originally Posted by Katsmeow View Post
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.
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.
__________________
allanlevy is offline   Reply With Quote
Old 05-15-2013, 04:21 AM   #15
Thinks s/he gets paid by the post
 
Join Date: Mar 2009
Posts: 1,437
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.
__________________
Retired in 2016. Living off dividends / interest and a mini pension. Freedom.
foxfirev5 is offline   Reply With Quote
Old 05-15-2013, 09:52 AM   #16
Full time employment: Posting here.
MuirWannabe's Avatar
 
Join Date: Oct 2009
Posts: 672
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
MuirWannabe is offline   Reply With Quote
Old 05-15-2013, 10:03 AM   #17
Thinks s/he gets paid by the post
 
Join Date: Mar 2011
Posts: 3,708
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
marko is online now   Reply With Quote
Old 05-15-2013, 10:15 AM   #18
Recycles dryer sheets
Willers's Avatar
 
Join Date: May 2013
Posts: 480
Quote:
Originally Posted by marko View Post

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.
+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.
__________________
Willers is offline   Reply With Quote
Old 05-15-2013, 10:18 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Taxes are just another expense.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 05-15-2013, 10:28 AM   #20
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,481
Quote:
Originally Posted by youbet View Post
Taxes are just another expense.
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.
__________________

__________________
MichaelB is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 02:53 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.