FANOFJESUS
Thinks s/he gets paid by the post
My taxes are around $300 a year so not a big deal either way.
Poll:Spending estimates should include income taxes
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jazz4cash
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I never made that mistake, but I am "wired" to add tax to every expenditure anyway, be it sales, state and local income, etc. I never got over the weird feeling of paying 99 cents for a item priced at 99 cents when visiting DE because they don't have sales taxes there.
I have spoken to several retirees that did not realize their pension and other retirement income was not subject to the FICA tax burden which made them very happy.
I have spoken to several retirees that did not realize their pension and other retirement income was not subject to the FICA tax burden which made them very happy.
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I have a spending RATE that EXcludes things, including income tax.
The rate is applied and that accounts for almost all spending. The income tax is 'below the line' because it can be wildly different, depending on events planned for the long term. So right now, income taxes are artificially low, but once I get past PPACA, the annual amounts will rise. I have spreadsheets with monthly cash flow for a few years out, and one yearly plan from now until "sunset". That latter one shows lumpy income tax over the years, based primarily on how much I'm pulling from pre-tax accounts.
The rate is applied and that accounts for almost all spending. The income tax is 'below the line' because it can be wildly different, depending on events planned for the long term. So right now, income taxes are artificially low, but once I get past PPACA, the annual amounts will rise. I have spreadsheets with monthly cash flow for a few years out, and one yearly plan from now until "sunset". That latter one shows lumpy income tax over the years, based primarily on how much I'm pulling from pre-tax accounts.
swakyaby
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I found that I overestimated how much taxes I would pay once I stopped having earned income. I allowed for 20% of my spending to be included as taxes, when it actually fell to 5% combined federal and state taxes. But I foresee that this will change once I begin RMDs.
When I "estimate" my taxes, I do so by using the actual tax table calculations including figuring in deductions. I have my spreadsheet setup to do this automatically with formulas in rows of different time periods (i.e. ages), and the taxes are pretty low in early retirement where I intentionally manage my MAGI to keep it low, but taxes go up significantly in later retirement (65+) when I'll get SS and increase my 457B drawdown.
Tax law can change at the state or federal levels over such a long time frame, so I just base it off current tax law hoping it won't change too much for the worse. My state currently doesn't tax SS or retirement plan income, so that's always a concern that could change in this high ever-increasing tax state.
Tax law can change at the state or federal levels over such a long time frame, so I just base it off current tax law hoping it won't change too much for the worse. My state currently doesn't tax SS or retirement plan income, so that's always a concern that could change in this high ever-increasing tax state.
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pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Before tIRA withdrawals or Roth conversions our taxes are minimal so in a sense they are included.
After tIRA withdrawals or Roth conversions taxes are about 10% of our spending, but I don't include them in spending since the tIRA withdrawals or Roth conversions are totally discretionary.
After tIRA withdrawals or Roth conversions taxes are about 10% of our spending, but I don't include them in spending since the tIRA withdrawals or Roth conversions are totally discretionary.
scrabbler1
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I split my income taxes into two parts. The first part is a "basic" part, which are the income taxes due on the taxable monthly and quarterly dividends I receive from my mutual funds. This income is the stable, reliable income I use to pay my expenses (including income taxes).
The second part is the "excess" part which are income taxes due on the irregular and more erratic cap gain distributions I get from my mutual funds, mainly the stock fund (bond funds rarely pay significant cap gain distributions). I don't worry about having the money to pay the taxes on these distributions because it comes from these unexpected windfalls. If my total expenses spike from these additional income streams, it's not a big deal and won't disrupt my budget.
As for any ACA premium subsidies, I consider them reductions in my medical expenses, not reductions in taxes due. In the 5 years I have been on ACA plans, in three of them I qualified for subsidies and in two of them I went over the cliff. The large and unexpected cap gain distributions put me over the cliff, so any tax subsidies I had to give back on the tax returns came from those same cap gain distributions which put me over the cliff.
The second part is the "excess" part which are income taxes due on the irregular and more erratic cap gain distributions I get from my mutual funds, mainly the stock fund (bond funds rarely pay significant cap gain distributions). I don't worry about having the money to pay the taxes on these distributions because it comes from these unexpected windfalls. If my total expenses spike from these additional income streams, it's not a big deal and won't disrupt my budget.
As for any ACA premium subsidies, I consider them reductions in my medical expenses, not reductions in taxes due. In the 5 years I have been on ACA plans, in three of them I qualified for subsidies and in two of them I went over the cliff. The large and unexpected cap gain distributions put me over the cliff, so any tax subsidies I had to give back on the tax returns came from those same cap gain distributions which put me over the cliff.
ncbill
Thinks s/he gets paid by the post
Given our low required annual 'spend' income taxes will be too low (0% federal, 5% state, assuming we remain here) to bother.
From same pod I guess.Same here, I track my spending to be sure I'm not going crazy but there is no budget/estimate.
We are naturally born cheapies, so it's actually hard to spend too much.
But we only track to the extent we look at checking account out lays & go go "OK". All spending goes thru the checking account one way or another.
replyguy
Dryer sheet wannabe
Don't forget property taxes if you are a homeowner.
I mentioned those as well earlier in the thread, but it's hard to believe people would actually forget those. The long term large home expenses are more easily overlooked since something like a new roof or furnace/central air might not come around for 20 years. I add $150/mo in my budget for those.
Something else to consider when you're elderly:
The need to "buy in" to seniorcare facilities/development. A buy-in can be as little as $3,000 or as high as $1.5 million (that figure is not for property purchase, but an actual amount to enter a nearby CCRC we are looking at).
When we started our search (which is proceeding at a leisurely pace, LOL), we did a conference call with our CFP to advise him of our [future] decision, and got an estimate from him as to how much could be immediately disbursed if we found something we wanted to 'jump on'. Anything beyond that would take a few more days for divestiture.
This gives the firm the 'heads-up' they like to have to manage taxes efficiently on the disbursal.
Our main source of income is a pension, so we have most of our tax bite taken out of that. We had to up that amount recently (thanks so much, tax reform - NOT) to make sure we come out reasonably even with the amount due next April.
The need to "buy in" to seniorcare facilities/development. A buy-in can be as little as $3,000 or as high as $1.5 million (that figure is not for property purchase, but an actual amount to enter a nearby CCRC we are looking at).
When we started our search (which is proceeding at a leisurely pace, LOL), we did a conference call with our CFP to advise him of our [future] decision, and got an estimate from him as to how much could be immediately disbursed if we found something we wanted to 'jump on'. Anything beyond that would take a few more days for divestiture.
This gives the firm the 'heads-up' they like to have to manage taxes efficiently on the disbursal.
Our main source of income is a pension, so we have most of our tax bite taken out of that. We had to up that amount recently (thanks so much, tax reform - NOT) to make sure we come out reasonably even with the amount due next April.
Most definitely taxes are included in expenses, but I’ve found they are the hardest piece for me to model. Many of the calculators (fidelity, I-orp for ex) project much higher taxes than I calculate. I think the differential is deductions and assumptions around returns. The latter is a bit of a mixed bag—higher returns mean you’re on one of the ‘good’ trajectories, but also mean more $ in taxes, so your spend increases. My guess is that this ends up building in more conservatism in your success estimates. Another tip is to make sure you understand what happens to SS income and taxes when each spouse dies. Filing as a single vs MFJ increases the tax burned significantly. Couple that with decreased SS and it can be a decent hit to plan.
I can see forgetting property taxes if they’re bundled into your mortgage. For us that’s not the case, so we’re very aware of the $ going out!
There are great online estimators for lifespan and costs of regular home maintenance stuff so you can make sure you’re accruing for these expenses. But many of these expenses don’t randomly occur across a given period of time. So if your house is 20yrs old and mostly original, odds are you’re going to be spending a decent chunk of $ in next 5 yrs on hvac, appliances, etc...
Dental expenses and healthcare expenses while on Medicare are the two that tripped me up.
On the one hand, you can plan for every possible scenario and be super conservative in your planning and you might never be able to retire. The flip side is that if you’re aiming for 95+ % success in firecalc the odds of ending up with far more than necessary are huge.
I can see forgetting property taxes if they’re bundled into your mortgage. For us that’s not the case, so we’re very aware of the $ going out!
There are great online estimators for lifespan and costs of regular home maintenance stuff so you can make sure you’re accruing for these expenses. But many of these expenses don’t randomly occur across a given period of time. So if your house is 20yrs old and mostly original, odds are you’re going to be spending a decent chunk of $ in next 5 yrs on hvac, appliances, etc...
Dental expenses and healthcare expenses while on Medicare are the two that tripped me up.
On the one hand, you can plan for every possible scenario and be super conservative in your planning and you might never be able to retire. The flip side is that if you’re aiming for 95+ % success in firecalc the odds of ending up with far more than necessary are huge.
audreyh1
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
And you didn’t do any spending estimates before you decided to retire early in order to decide whether you could in fact stop working?
I am using the same rate as I pay during working knowing that taxes in retirement will most likely be less when I retire, in (~2 years). I was actually asked by a retirement financial guy and when I showed him the budget breakdown with taxes included he was impressed.
Ready-4-ER-at-14
Full time employment: Posting here.
I don't consider taxes directly but I don't include the larger social security payment as income to more than make up for it.
All the spreadsheets I did for budgets and portfolio growth were a good exercise. I'm comfortable now going into year four that I have a handle on the tax effect on our budget. Now pretty Steady Eddie. As the market changes I could have a few less capital gains so the tax effect will be on the positive cash flow side.
GalaxyBoy
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Spending is spending.
Henry Lili
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Yes. "Spending" includes income taxes. It's a draw on capital no matter what it's spent on. Think of it like sales tax on a new car. It's a cost.
OnTheBeach
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I do not include tax payments in my expenses because my withdrawal rate is expenses / after tax net worth. If you calculate the withdrawal rate as expenses / pre tax net worth then you should include tax payments in your expenses.
A wrinkle is that my 403b requires a 20% tax withholding, although our rate is slightly over 9%. I use it as a sludge fund to do big projects and also contribute to the grandkid's college fund after I get the tax back. This year we'll also get the solar panel tax credit, so it's going to be a huge chunk of change this year.
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