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What tax rate to use in estimating needs for FIRE?
04-17-2013, 01:47 PM
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#1
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Full time employment: Posting here.
Join Date: Feb 2011
Posts: 852
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What tax rate to use in estimating needs for FIRE?
What do you think is a good number to use in estimating tax burden in retirement? I hear repeatedly that taxes go down significantly with retirement. I think I have a good idea of our spending of after tax money as far as one can estimate such things, but when using any calculation of SWR you have to estimate the PRE tax amount of money. SO what is a fair number to use? Feel free to give ranges, as in --If your expenses are between $XX and $YY USE z% and use w% if some other range, etc.
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04-17-2013, 02:11 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2008
Location: No fixed abode
Posts: 8,764
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It would all depend on how you're getting the money. If pensions and SS, it will be pretty much a match to the tax tables. But if you are drawing down from cash you could be in the 0% bracket no matter how much you spend. If you are drawing down by selling stocks, 15% or less is a fair bet (as things stand right now). It shouldn't be too hard to estimate a good bracket to use. Of course, if you're a while away from ER and just looking for a number to be safe, I'd use whatever tax bracket you'd be in based on the amount you are withdrawing - ie. $100k I'd use 25%. It's a significant overestimate, but that's how I like to do things during calculations. Be ridiculously conservative and you're fairly sure to be safe.
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"Good judgment comes from experience. Experience comes from bad judgement." - Anonymous (not Will Rogers or Sam Clemens)
DW and I - FIREd at 50 (7/06), living off assets
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04-17-2013, 02:14 PM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,204
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My goal is to stay below the income level that would push us beyond the 15% bracket. I assume you realize effective tax rates are always lower than your marginal rate. We paid a ridiculous 4% in taxes for 2012 because about half our income was dividends and LTCG taxed at 0%. There is no stock answer, depends not only how much you take as income each year but what your income sources are (fully taxable to not taxable at all, like Roth IRAs) and what deductions you'll have (if not standard).
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No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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04-17-2013, 02:21 PM
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#4
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Recycles dryer sheets
Join Date: May 2010
Posts: 497
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Quote:
Originally Posted by Midpack
My goal is to stay below the income level that would push us beyond the 15% bracket. I assume you realize effective tax rates are always lower than your marginal rate. We paid a ridiculous 4% in taxes for 2012 because about half our income was dividends and LTCG taxed at 0%. There is no stock answer, depends not only how much you take as income each year but what your income sources are and what deductions you'll have (if not standard).
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Me too midpack.......after years of being ....on taxes .I hit a magic spot and paid only 2 percent feds and 2.7 percent state.
zero percent on qualified dividends is cool. Looks like I will have the same thing for a year or two more. I was so happy I prepaid all of 2013.
__________________
You've got to ask yourself one question: Do I feel lucky? Well, do ya, punk?
Retired July '11 investments in very low cost index and mutual funds, balance once a year at best.
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04-17-2013, 02:59 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,202
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Quote:
Originally Posted by harley
It would all depend on how you're getting the money.
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This is it in a nutshell. You should have an idea of where your income will come from. Plug your pensions, tIRA withdrawals, dividends, stock sales, Roth conversions, etc into a tax program like turbo tax and see what it says.
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04-17-2013, 03:11 PM
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#6
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Thinks s/he gets paid by the post
Join Date: Nov 2012
Location: Madeira Beach Fl
Posts: 1,403
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18% seems to be good for a fair share.
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"A man is a success if he gets up in the morning and goes to bed at night and in between does what he wants to do" --Bob Dylan.
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04-17-2013, 06:40 PM
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#7
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Moderator Emeritus
Join Date: Jan 2007
Location: New Orleans
Posts: 47,473
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You are smart to be looking into this carefully. When I was planning for retirement, I felt overwhelmed by this problem. I used 25% in my computations because that sounded safe, but really did not know.
In my first three years of retirement my state+federal income taxes turned out to be 9.7% - 10.6% of my AGI. My income is from several sources, including dividends from my taxable account, equal monthly withdrawals from the TSP, and a tiny pension.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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04-17-2013, 06:41 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
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I am planning on 28% average tax rate after I FIRE.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
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04-17-2013, 07:15 PM
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#9
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Recycles dryer sheets
Join Date: Dec 2012
Posts: 93
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I find Turbo Tax's quickie estimator good for questions like this. See:
TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator
It is much less cumbersome than using the full tax prep software. You can plug in your rough numbers according to source and get a tax calculation in a minute. You can quickly change a number and see how it impacts the bottom line. This is the way to get a quick read on your personal circumstances.
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04-17-2013, 07:15 PM
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#10
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Thinks s/he gets paid by the post
Join Date: May 2011
Location: South Eastern USA
Posts: 1,068
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I modeled the federal income tax calculations in my projection spreadsheets. I included escalation of the various tax parameters including bracket boundaries using the appropriate version of cpi and rounding rules.
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All that glitters is not gold. -G. Chaucer, W. Shakespeare
All that is gold does not glitter. -J.R.R. Tolkien
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04-17-2013, 08:09 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2009
Posts: 5,307
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I use Turbo Tax so I just created dummy returns for several future years to see how changing things would affect things. Basically for the next few years we will be in the 25% tax bracket. For this I mostly said the income, except for DH's SS, came from the IRA so tax would need to be paid on the money. When all was said and done then during that period the total tax ranged between 9% and 10% of the total income.
After I turn 62, I modeled me taking SS as well so our withdrawals from the IRA would go way down (I may or may not actually take it then). I found that the tax ended up being lower then more around 5% or so.
For me in doing projections I'm using 10% since that seems safe enough. It may end up being less as we may spend some from taxable accounts so that would reduce the IRA withdrawals.
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04-17-2013, 08:44 PM
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#12
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Recycles dryer sheets
Join Date: May 2011
Location: Austin
Posts: 375
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Some of the numbers make me laugh, because they are way off.
You just filed you tax return, so you know what is you average, just use that as good bet.
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04-17-2013, 08:54 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,004
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Quote:
Originally Posted by HillCountry
You just filed you tax return, so you know what is you average, just use that as good bet.
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You are overlooking the fact many LBYM people spend far less than they earn in their working years and will have significantly lower incomes in retirement. Our federal taxes declined by 45% after we retired.
Those who suggest using something like TurboTax to estimate future income and income sources are providing some good advice.
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Numbers is hard
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04-17-2013, 08:57 PM
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#14
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Administrator
Join Date: Apr 2006
Posts: 22,973
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I use an average rate of 15% in my spreadsheets.
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Living an analog life in the Digital Age.
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04-17-2013, 09:28 PM
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#15
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Thinks s/he gets paid by the post
Join Date: Apr 2012
Posts: 2,911
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Quote:
Originally Posted by Svensk Anga
I find Turbo Tax's quickie estimator good for questions like this. See:
TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator
It is much less cumbersome than using the full tax prep software. You can plug in your rough numbers according to source and get a tax calculation in a minute. You can quickly change a number and see how it impacts the bottom line. This is the way to get a quick read on your personal circumstances.
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Thank you for posting this. I have been wondering how best to estimate what I will pay in taxes in retirement, and Taxcaster will be a helpful tool. My income will be very straightforward - pension, social security, and Roth withdrawals, so this tool should do the trick.
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"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things you only hoped for." - Epicurus
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04-17-2013, 10:00 PM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2009
Posts: 6,682
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Part of my ER spreadsheet when I running the numbers in the years before I actually ERed included a projected income tax spreadsheet so I had good idea how much to include in the projected budget. Besides having less income, I also had added itemized deductions due to health insurance being partly deductible. Also, some of my investment income became taxable at 0% (federal) because it was Qualified Dividends and LTCG. Income taxes (federal plus state) are about 9% of my budget, not a huge portion but not trivial, either.
__________________
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.
"I want my money working for me instead of me working for my money!"
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04-18-2013, 02:07 AM
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#17
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Recycles dryer sheets
Join Date: May 2011
Posts: 325
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We have practically no earned income. Sold a lot of stock for CG's last year; that plus dividends and qualified dividends and other income was well over 100K and paid 10% Fed taxes
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04-18-2013, 06:55 AM
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#18
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gone traveling
Join Date: Jul 2007
Posts: 333
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15%
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04-18-2013, 08:12 AM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,204
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Quote:
Originally Posted by obgyn65
I am planning on 28% average tax rate after I FIRE.
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You might want to explain further for the OP, that implies a stratospheric annual income/spending level. That's higher than the infamous rich "1%" - and more than Warren Buffett's widely publicized effective FIT rate! Almost no individual pays that much in FIT.
And I thought you were living on a relatively modest annual spending by choice?
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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04-18-2013, 08:13 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,204
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Quote:
Originally Posted by HillCountry
Some of the numbers make me laugh, because they are way off.
You just filed you tax return, so you know what is you average, just use that as good bet.
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+1. Indeed...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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