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WD rate: How do you think about taxes?
08-28-2018, 07:00 PM
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#1
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Recycles dryer sheets
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Posts: 445
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WD rate: How do you think about taxes?
Likely my first dumb question of many. I'm running Firecalc and other models intending to make 3-4% withdrawal rate work as gross spend before income taxes. I assume this is the right way, but often see folks counting on market making 6+ percent and then wonder.
Please confirm: when assuming WD rate, are you considering it before or after income tax/capital gains?
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08-28-2018, 07:15 PM
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#2
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Quote:
Originally Posted by WhenIsItTime
Likely my first dumb question of many. I'm running Firecalc and other models intending to make 3-4% withdrawal rate work as gross spend before income taxes. I assume this is the right way, but often see folks counting on market making 6+ percent and then wonder.
Please confirm: when assuming WD rate, are you considering it before or after income tax/capital gains?
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With FIRECalc, your taxes are considered to be part of your spending. So, your withdrawal will need to cover your taxes too.
I consider my withdrawal money to include money that I will have to spend on taxes. For example, if FIRECalc says I can withdraw $30K, and that is what I withdraw.... then if my taxes are $8K, I will only have $22K left to spend on other things.
My capital gains and dividends go into a Vanguard money market account so these are just part of my investment portfolio total, the total by which I divide my withdrawal amount when computing my withdrawal rate.
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Happily retired since 2009, at age 61. Best years of my life by far!
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08-28-2018, 07:24 PM
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#3
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Full time employment: Posting here.
Join Date: Jul 2014
Posts: 868
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Quote:
Originally Posted by WhenIsItTime
Please confirm: when assuming WD rate, are you considering it before or after income tax/capital gains?
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The classic "safe withdrawal rate" studies (Bengen; Trinity) ignored taxes and management fees as separate items. In other words, everything - including taxes, management fees, annualized irregular expenses (new car, new roof, etc.) - should be included in your "expenses" as that applies to "withdrawal rate."
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08-28-2018, 08:06 PM
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#4
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Full time employment: Posting here.
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Yep, taxes are included in your expenses as far as FIRECalc is concerned.
Give some real thought to how your taxes will change (probably lower) when you're retired. It's not uncommon for retirees to only need to set aside 10% (maybe less) for income taxes. Everyone's situation is different but it behooves you to do a little planning using tax software to see how your taxes will behave when you're living on dividends/interest/capital gains rather than "earned income."
At your age it may be prudent to use a SWR of less than 4%. DW and I chose to use a SWR in the range of 3% because we retired early (52 and 48 respectively) and wanted to err on the side of caution. You are even younger than I was when I retired and potentially have several big ticket items in your future (college for kids for example) so give some serious thought to SWR.
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08-28-2018, 08:11 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Dec 2016
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You are correct, taxes are an expense that come out of your gross withdrawal.
In WR/SWR discussions I sometimes see folks thinking that taxes are somehow different than any other expense. They are not.
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FI and Semi-ER March 24, 2017
Consulting to stay engaged
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08-28-2018, 08:38 PM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I have a split view on how I deal with income taxes when budgeting in my ER.
I include in my budget a base amount of taxes associated with my mostly predictable dividend income. Beyond that, I am not really worried if my income taxes spike. This is because any additional income taxes due will arise only from unexpected income from cap gain distributions. This added income will provide the means to pay any added taxes due. If this causes my SWR to go up a little big, no big deal.
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Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.
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08-28-2018, 10:55 PM
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#7
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Thinks s/he gets paid by the post
Join Date: Sep 2012
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How do I think about taxes? Alternating between patriotic and painful.
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08-29-2018, 05:43 AM
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#8
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Inclusion of taxes with Firecalc. However some other calculators such as Fidelity, one does not include taxes but inputs a tax rate which is then applied to one's investment portfolio.
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08-29-2018, 06:27 PM
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#9
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Full time employment: Posting here.
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Everyone looks at this differently. Personally I would NEVER dip into my Net Worth to reduce it for any reason.
When your portfolio gives you a dividend, great! Pay taxes 'if ought be due' and put some of it back into the portfolio.
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Retired at 42 and I have been enjoying retirement for 18 years [so far].
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08-29-2018, 06:52 PM
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#10
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Recycles dryer sheets
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Thanks for replies. Very helpful.
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08-29-2018, 07:55 PM
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#11
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Quote:
Originally Posted by Offgrid Organic Farmer
Everyone looks at this differently. Personally I would NEVER dip into my Net Worth to reduce it for any reason.
When your portfolio gives you a dividend, great! Pay taxes 'if ought be due' and put some of it back into the portfolio.
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Based on past posts, that's because you don't have to. Even though DGF nad I are/will be getting SS, we will need to live off our mainly TIRA investments.
I would say that many others need to also, even though their WR% might be low.
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08-29-2018, 08:06 PM
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#12
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Quote:
Originally Posted by Dtail
Based on past posts, that's because you don't have to. Even though DGF nad I are/will be getting SS, we will need to live off our mainly TIRA investments.
I would say that many others need to also, even though their WR% might be low.
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I paid into my SS policy too. One day I hope to get paid SS.
I hope that everyone who pays into SS for 40-quarters [or more] will one day get paid from SS.
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Retired at 42 and I have been enjoying retirement for 18 years [so far].
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08-29-2018, 08:14 PM
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#13
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Quote:
Originally Posted by Offgrid Organic Farmer
I paid into my SS policy too. One day I hope to get paid SS.
I hope that everyone who pays into SS for 40-quarters [or more] will one day get paid from SS.
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My point is more that many folks on this site need to dip into their net worth via investment assets in order to live their lifestyles.
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TGIM
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08-29-2018, 08:16 PM
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#14
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Administrator
Join Date: Apr 2006
Posts: 23,041
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Quote:
Originally Posted by W2R
With FIRECalc, your taxes are considered to be part of your spending. So, your withdrawal will need to cover your taxes too.
I consider my withdrawal money to include money that I will have to spend on taxes. For example, if FIRECalc says I can withdraw $30K, and that is what I withdraw.... then if my taxes are $8K, I will only have $22K left to spend on other things.
My capital gains and dividends go into a Vanguard money market account so these are just part of my investment portfolio total, the total by which I divide my withdrawal amount when computing my withdrawal rate.
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W2R is correct, as always. When you run FIRECalc, you should gross up your spending to account for taxes. The vast majority of my nest egg is in tax deferred accounts, so I count all withdrawals as fully taxable ordinary income (to be conservative) , but you can adjust as necessary to accommodate the mix between taxable and non-taxable withdrawals and for the differences between capital gains and dividend income.
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08-29-2018, 08:22 PM
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#15
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I treat taxes on capital gains differently than I guess most do. I reduce the value I give stocks by the estimated tax liability I'll have when I sell. Selling $50K worth of a fund at no gain (or a loss) nets me more than selling $50K worth of a fund at a large LTCG. I feel like I should account for that. It goes back to when I had stock options with a nearly 50% future tax liability and it seemed that was by far the easiest way to track the value they actually had to me.
Taxes on dividends and CG distributions are budgeted expenses.
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08-29-2018, 08:33 PM
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#16
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Yep, taxes are just another expense that you include in hour WD. Having said that, there are a multitude of tricks you can play (or more accurately, you can game the system) when it comes to your taxes. Where you take your withdrawal (and when) often affects your effective tax rate. Ideally, you would lower your taxes as much as possible. Unfortunately, most of us never get to zero taxes. YMMV
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08-29-2018, 09:19 PM
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#17
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Quote:
Originally Posted by Dtail
My point is more that many folks on this site need to dip into their net worth via investment assets in order to live their lifestyles.
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If you need SS to survive, then you are not 'Retiring Early'.
I would think that to 'Retire Early' you need to do it before you are old enough to be eligible for SS.
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Retired at 42 and I have been enjoying retirement for 18 years [so far].
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08-30-2018, 06:29 AM
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#18
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Quote:
Originally Posted by Offgrid Organic Farmer
If you need SS to survive, then you are not 'Retiring Early'.
I would think that to 'Retire Early' you need to do it before you are old enough to be eligible for SS.
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Let's see how many posts it takes......
Not talking about SS. I was saying that many folks need to spend some of their investment assets i.e. stocks/bonds/cash etc in order to live their lifestyle.
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08-30-2018, 06:46 AM
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#19
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Quote:
Originally Posted by Dtail
Let's see how many posts it takes......
Not talking about SS. I was saying that many folks need to spend some of their investment assets i.e. stocks/bonds/cash etc in order to live their lifestyle.
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Okay that is fair.
A high COL may need more than what your SS will provide. So even with SS you may still need cash flow from investments. But that is after you have turned 65.
If you want to Retire Early, you need that same level of cash flow without SS.
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Retired at 42 and I have been enjoying retirement for 18 years [so far].
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08-30-2018, 08:33 AM
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#20
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I'm enjoying this discussion.
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