How do you treat IRA/401k in Retirement Calculators?

[medelste]

Hi, I'm a fan of how FIRECalc works but it appears to have a limitation that I've seen in other retirement calculators: it simply asks for current portfolio assets, and not assets per account type. I have the largest chunk of my assets in 401k and Traditional IRA accounts, and so they are effectively about 25% smaller than they appear due to deferred federal and state taxes that I'll have to pay on withdrawal. Do you type your full portfolio into these calculators, or reduce the tax deferred portion by 25% or some other percentage, then type in the remainder?

Thank you!

 

[braumeister]

It's all the same to FIRECalc.

Look at the doc for the calculator (FIRECalc: Why another retirement calculator?) and it's explained:

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 Retirement Calculator - Parameter Form -- an outstanding tool!

 

[pb4uski]

My tax rate in retirement is low enough that I actually just ignore it in Firecalc, but I think many people include a provision for taxes in their expenses rather than reduce their assets for taxes.

25% is probably way too much. What I would suggest is that you do a pro forma tax return using your retirement income (SS, pensions, estimated interest and dividends on retirement accounts, HSA contributions, deductions, etc. as applicable) to get a more realistic sense of what your tax rate will be in retirement. In my case it was as easy as taking the tax return for the last year i worked and zeroing out my earnings and making a couple other adjustments. Income Tax Calculator - Tax-Rates.org is a handy calculator that covers both federal and state income taxes.

As an example, I went from around 25% (federal and state income taxes/income) the last year that I worked to a little over 2% last year, but I'm not yet drawing from tax-deferred accounts. Even if I was drawing from tax deferred accounts my federal and state income tax rate would only be ~11%, still substantially less than when I was working. The lower taxes (and especially 0% LTCG taxes) was one of the pleasant surprises of retiring.

Once you have a sense as to what your annual taxes will be you can do one of either two things. Add the taxes to your expenses (I suspect this is the most popular way to adjust for taxes) or tax your portfolio multiplied by (1-t) and ignore taxes in your expenses.

 

[REWahoo]

My tax rate in retirement is low enough that I actually just ignore it in Firecalc, but I think many people include a provision for taxes in their expenses rather than reduce their assets for taxes.

+1

I consider taxes to be an expense as it is easier for me to deal with if it is simply another expense category I budget for each year. Trying to deal with taxes through a reduction in asset value ads a layer of complexity I don't need (see my sig line).

 

[medelste]

Thanks, everyone!