As I have been researching my target FIRE portfolio, I wanted to understand the tax implications of rebalancing. I used data shown on Harry Browne's website for the Permanent Portfolio as a reference. Mr. Browne, like everybody else (including FIREcalc), assumes "no taxes." Well, I don't have a huge tax deferred portfolio so that isn't a good assumption for me.
Source of data: http://harrybrowne.org/PermanentPortfolioResults.htm
I assumed:
1 million USD portfolio
4% withdrawal rate with 3% inflation per year
2.5% dividends on stock
10% cap gains taxes and 15% interest taxes
25% in each of the Permanent Portfolio buckets (gold, stocks, bonds, cash) starting in 2000.
I'm not sure how to insert an html table, so manually:
2000 Start End
Stock: 250,000 222,000
Bond: 250,000 288,000
Gold: 250,000 233,750
Cash: 250,000 246,250
Taxes paid on dividends and bond/cash interest: $5125.
Now I need to rebalance to 25% per asset class, which involves selling about 40,000 worth of bonds with the impact of 4,000 more in Tax. Total tax paid in 2000 = $9,175
Each asset class now has 246,487.50
2001 End values
Stock: 210,993.30
Bonds: 237,120.98
Gold: 249,938.33
Cash: 238,070.34
Taxes paid on dividends and cash/bond interest: $4609.32
I have to sell some bonds and some gold to re-balance, resulting in $2303 more tax
Each asset class now has $234,030.73. Total tax paid for 2001: $6913
2002 End values:
Stock: 176,161.79
Bonds: 269,602.10
Gold: 287,777.52
Cash: 204,796.35
Taxes paid on dividends and cash / bond interest: $1840
Another bad year for stocks. Selling a lot of bonds and gold to buy more stocks and fill up the cash bucket. Total tax paid this year: $10,661,92
I didn't make allowances in these calculations for deducting losses against the gains, although when looking at this it didn't seem to make much difference (buying stock every year, selling bonds every year, and a big gold sale in 2002). Thus there was no opportunity to significantly offset gains with losses when rebalancing
In each of these 3 years, total tax paid was 9175, 6913, and 10662, or 23%, 17%, and 26.7% of a 40,000 withdrawal, respectively. I would need to either raise my withdrawal rate to cover this, or learn to live on significantly less, neither of which is a welcome thought.
Source of data: http://harrybrowne.org/PermanentPortfolioResults.htm
I assumed:
1 million USD portfolio
4% withdrawal rate with 3% inflation per year
2.5% dividends on stock
10% cap gains taxes and 15% interest taxes
25% in each of the Permanent Portfolio buckets (gold, stocks, bonds, cash) starting in 2000.
I'm not sure how to insert an html table, so manually:
2000 Start End
Stock: 250,000 222,000
Bond: 250,000 288,000
Gold: 250,000 233,750
Cash: 250,000 246,250
Taxes paid on dividends and bond/cash interest: $5125.
Now I need to rebalance to 25% per asset class, which involves selling about 40,000 worth of bonds with the impact of 4,000 more in Tax. Total tax paid in 2000 = $9,175
Each asset class now has 246,487.50
2001 End values
Stock: 210,993.30
Bonds: 237,120.98
Gold: 249,938.33
Cash: 238,070.34
Taxes paid on dividends and cash/bond interest: $4609.32
I have to sell some bonds and some gold to re-balance, resulting in $2303 more tax
Each asset class now has $234,030.73. Total tax paid for 2001: $6913
2002 End values:
Stock: 176,161.79
Bonds: 269,602.10
Gold: 287,777.52
Cash: 204,796.35
Taxes paid on dividends and cash / bond interest: $1840
Another bad year for stocks. Selling a lot of bonds and gold to buy more stocks and fill up the cash bucket. Total tax paid this year: $10,661,92
I didn't make allowances in these calculations for deducting losses against the gains, although when looking at this it didn't seem to make much difference (buying stock every year, selling bonds every year, and a big gold sale in 2002). Thus there was no opportunity to significantly offset gains with losses when rebalancing
In each of these 3 years, total tax paid was 9175, 6913, and 10662, or 23%, 17%, and 26.7% of a 40,000 withdrawal, respectively. I would need to either raise my withdrawal rate to cover this, or learn to live on significantly less, neither of which is a welcome thought.