Social Security & Pension: enter net or gross?

[Bongleur]

Just realized that it makes a difference if you use your gross or net amounts for income sources.

I guess that since the program subtracts "income" from your target "spending" as its initial step that you need to enter the net amount after taxes.

But doesn't that create a recursive problem -- the "spending" amount you enter in step 1 is a gross figure, before taxes.

But if you enter the gross pension income amount, that clearly is an error.

So you need to enter in step 1 your desired income _after_ taxes, and enter net of tax amounts for any income sources outside of the portfolio.

But if the portfolio gains are taxable, then the output will be erronous because it is not allowing enough "extra" gain to pay the taxes due on the gross gain used for determining portfolio success.

Am I confused or right?

 

[kaneohe]

I would think it doesn't matter since you are interested in the difference between 2 numbers..........as long as you take the taxes into account somewhere and are consistent.

Add taxes as an expense item and use gross income.
Or don't include taxes as an expense item, but then use net income. Seems to me that the former is a more natural way to do it since for most dividends/interest/capital gains you don't withhold and even when you withhold from salary, it may not accurately reflect taxes due.

 

[Bongleur]

Oh...here is the thing. The web pages keep using the word "spending" in describing what Firecalc figures out.

To me, "spending" is what I can do AFTER I pay taxes.

But what you need to do is enter your desired _gross_ income, along with gross income sources. You will have less to _spend_ depending upon your tax rate.

It doesn't matter if the income sources you enter are taxable or not.

 

[Rustic23]

I enter both figures net of taxes. I admit it is not quite as accurate, as I estimate the tax amount, but it is close enough. Besides, there is a healthy pad in that spending number!

 

[kaneohe]

To me, "spending" is what I can do AFTER I pay taxes.
.

not sure what the semantic implications are of the statement above......sounds like you don't want to include taxes as spending.......even though you might write a check in April for the balance. Or maybe you count the Apr check as spending and don't consider withholding as spending.

You might have the same issue w/ withholding........do you count withholding for medical insurance as an expense or not? Seems to me that it doesn't matter as long as you account for it somewhere .......don't leave it out and don't double count it.

One reason why it might be useful to include the withholding for taxes and medical insurance as explicit spending items is that if you FIRE, they will become real spending items and you might forget that you have to pay them if they are buried in the net income.

 

[youbet]

Either use net income from pensions and SS and don't include income taxes as an expense or use gross income from pensions and SS and include income taxes as an expense.

I use gross income and include income taxes as an expense. And don't forget to include your estimate of what you'll owe Uncle for income taxes on passive income.