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08-11-2019, 08:00 AM
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#21
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,376
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Quote:
Originally Posted by zesty
....That 6.5% over 30 years is effectively what my pension buyout would need to earn in order to equal the pension payments.
Either I take $14000 lump sum now and roll it into my IRA, or I keep the pension and wait 30 years to get paid $4500 a year in nominal dollars, regardless of inflation.....
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How are you getting the the 6.5%?
Also, are you sure that if you die before 65 you get nothing? My understanding is that some plans work that way but most do not.
That said, given the relatively small amount of the lump sum I would rollover the lump sum into an IRA.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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08-11-2019, 08:01 AM
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#22
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Full time employment: Posting here.
Join Date: Jul 2016
Location: gypsy traveller
Posts: 683
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I would take the buy out. Control your own future. It's also one less thing to keep track of...
I did this with both my own and my DW's pensions when the offer came.
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Would you take guaranteed 6.5% returns for 30 years (pension buyout)
08-11-2019, 08:05 AM
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#23
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Thinks s/he gets paid by the post
Join Date: Aug 2017
Location: Champaign
Posts: 4,729
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Would you take guaranteed 6.5% returns for 30 years (pension buyout)
Yes only b/c if DH passes or if pension fund fails in the future, we have the $.
__________________
"Do not go where the path may lead, go instead where there is no path and leave a trail."
Ralph Waldo Emerson
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08-11-2019, 08:40 AM
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#24
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,228
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The OP's personal tax rate may be lower in the future. As LRDave said, we don't have enough information to advise Roth vs. tIRA. OP might be high income now, and will be much lower in retirement. Spouting off that one should put it in a Roth without knowing any details isn't sound advice.
When I ran the immediateannuities.com calculator on buying a annuity that I wouldn't start collecting on for 30 years, I got $229 as the highest payment, so that would indicate taking the pension is better. It's a pretty small amount though, and you might be able to do better investing on your own, so I don't think it matters that much.
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08-11-2019, 08:59 AM
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#25
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Williston, FL
Posts: 3,925
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Quote:
Originally Posted by pb4uski
Wrong!
principal, not principle
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Good point, although English Grammar is quickly becoming the latest victim in the globalization trend.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
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08-11-2019, 09:02 AM
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#26
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,376
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True, but let's not help it along....
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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08-11-2019, 09:06 AM
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#27
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Thinks s/he gets paid by the post
Join Date: Aug 2010
Location: Back woods of Fennario
Posts: 1,170
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Quote:
Originally Posted by Senator
Do you really think tax rates are headed lower? The current tax rates are set to expire in 2025. Then go up.
For that matter, we really do not know enough about where the market is headed either. And nothing about inflation.
If you do not have enough money to pay taxes on a 14K rollover, you are a LONG ways from retirement. It can even be done over multiple years.
Tax-free withdrawals of both principle and earnings after your 30 years of letting it grow.
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I don't think we know much about OP's situation. Still working? Retired?
I am not referring to tax rates within the tax code. If the OP converts the $14K to a Roth, taxes will be paid at his/her current marginal tax rate. 25%? 28%? Who knows?
If rolled to a tIRA, what tax rate will OP withdraw it at when retired? 12%? 15%? Who knows?
We don't know OP's situation. But the issue is: What marginal tax rate is the Roth conversion going to take place at vs. what marginal tax rate will be applied to the tIRA withdrawals later.
For many of us, our lower marginal tax rates will be in the future - when retired and there is less income.
__________________
"Time wounds all heels...." - Groucho Marx
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08-11-2019, 09:10 AM
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#28
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Thinks s/he gets paid by the post
Join Date: Jan 2005
Location: northern Michigan
Posts: 2,215
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Quote:
Originally Posted by HarveyS
I would take the buy out. Control your own future. It's also one less thing to keep track of...
I did this with both my own and my DW's pensions when the offer came.
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+1. Not only one less thing to keep track of, but one less thing to worry about also. A lot of things can happen in 30 years.
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08-11-2019, 09:17 AM
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#29
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,376
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Quote:
Originally Posted by LRDave
....We don't know OP's situation. But the issue is: What marginal tax rate is the Roth conversion going to take place at vs. what marginal tax rate will be applied to the tIRA withdrawals later. ...
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+1 While a roll over to an IRA is sound advice, there is insufficient information to know whether it should be to a Roth or tIRA.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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08-11-2019, 09:23 AM
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#30
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Thinks s/he gets paid by the post
Join Date: May 2019
Posts: 2,821
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Quote:
Originally Posted by zesty
... with the stipulation that if you died early, the money was gone?
That 6.5% over 30 years is effectively what my pension buyout would need to earn in order to equal the pension payments.
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I will only speak in terms of real returns since I don't know what inflation will be.
For my fulls stash, I would definitely take guaranteed 6.5% real returns, heck even 5%, and maybe even 4% real returns.
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08-11-2019, 09:35 AM
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#31
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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Quote:
Originally Posted by GenXguy
I will only speak in terms of real returns since I don't know what inflation will be.
For my fulls stash, I would definitely take guaranteed 6.5% real returns, heck even 5%, and maybe even 4% real returns.
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Who would not take 6.5% real return? I am spending less than 1/2 of that.
Even 6.5% nominal return feels like a fair price. But if I take that, I lose the excitement when the market goes nutty, both up and down.
At 6.5% real return, the deal is good enough for me to go look for excitement elsewhere.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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08-11-2019, 09:50 AM
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#32
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Recycles dryer sheets
Join Date: Jul 2013
Posts: 123
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Quote:
Originally Posted by pb4uski
How are you getting the the 6.5%?
Also, are you sure that if you die before 65 you get nothing? My understanding is that some plans work that way but most do not.
That said, given the relatively small amount of the lump sum I would rollover the lump sum into an IRA.
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6.5% was roughly the amount the $14k would need to compound at to get me to about $90k. Taking 1/20th of the $90k each year would get me $4500 a year for 20 years, assuming no return or inflation.
But that is a quick and naive calculation as some have pointed out, and it's actually worth more than the pension because if I died at say 70, the return of the pension would've actually been negative. So it is probably more like 2-3%.
As for the dying before 65, I assumed I'd get something but now I'm not sure. I've scoured the documents they sent me and I see nothing about it so I might send an email and ask them.
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08-11-2019, 10:56 AM
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#33
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Recycles dryer sheets
Join Date: Jul 2013
Posts: 123
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Quote:
Originally Posted by pb4uski
You are confusing the payout rate with the rate of return... the rate of return is about 2% or 2 1/2%.... you can get a fair idea of rates of return by looking at the IRR of longer period certain annuities... the other 4 1/2% or 4% is simply a return of principal.
Below an example of a 65 yo female in CA with a $100,000 premium.
Note that the benefit for a 10 year period certain annuity is $909/month... for a $100,000 premium that equates to a 1.76% rate of return... so if you put $100,000 into a savings account that earned 1.76% APR and withdrew $909/month after 10 years your money would be gone.
For a life annuity, the payout is $509 per month so the payout rate is 6.1% ($509*12/$100,000). The return depends on how long the annuitant lives... if they die early the return is negative... if they live long at the most the return is the payout rate of 6.1%... if they live 30 years (to age 95) the return is 4.6%.
Below are the year by year returns deoending on how long you live:
Lump Sum 100,000 | Monthly benefit 509 | | | Age n IRR p (death) | 65 0 | 66 1 -98.3% 0.780% | 67 2 -80.4% 0.840% | 68 3 -59.8% 0.894% | 69 4 -44.2% 0.943% | 70 5 -33.1% 0.990% | 71 6 -25.1% 1.038% | 72 7 -19.3% 1.095% | 73 8 -14.8% 1.163% | 74 9 -11.4% 1.241% | 75 10 -8.7% 1.330% | 76 11 -6.5% 1.428% | 77 12 -4.8% 1.533% | 78 13 -3.3% 1.639% | 79 14 -2.1% 1.743% | 80 15 -1.1% 1.850% | 81 16 -0.3% 1.967% | 82 17 0.4% 2.096% | 83 18 1.1% 2.231% | 84 19 1.6% 2.367% | 85 20 2.1% 2.509% | 86 21 2.5% 2.662% | 87 22 2.9% 2.823% | 88 23 3.2% 2.978% | 89 24 3.5% 3.122% | 90 25 3.7% 3.258% | 91 26 3.9% 3.394% | 92 27 4.1% 3.526% | 93 28 4.3% 3.638% | 94 29 4.5% 3.723% | 95 30 4.6% 3.779% | 96 31 4.8% 3.801% | 97 32 4.9% 3.785% | 98 33 5.0% 3.723% | 99 34 5.1% 3.611% | 100 35 5.2% 3.445% |
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Thanks a lot! I had assumed that I'd live until 85 when coming up with the numbers but hadn't quantified the returns for different lifespans.
Also you're right, the pension is gone after I die whereas the IRA would still be around, so that is actually a lower effective return for the pension.
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08-11-2019, 12:41 PM
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#34
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Williston, FL
Posts: 3,925
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Quote:
Originally Posted by LRDave
I don't think we know much about OP's situation. Still working? Retired?
I am not referring to tax rates within the tax code. If the OP converts the $14K to a Roth, taxes will be paid at his/her current marginal tax rate. 25%? 28%? Who knows?
If rolled to a tIRA, what tax rate will OP withdraw it at when retired? 12%? 15%? Who knows?
We don't know OP's situation. But the issue is: What marginal tax rate is the Roth conversion going to take place at vs. what marginal tax rate will be applied to the tIRA withdrawals later.
For many of us, our lower marginal tax rates will be in the future - when retired and there is less income.
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All true. We do not know if he will be alive. Or where he will be living, or if he will be in LTC. Maybe he will be in prison. Or living in Mexico. Or if the Pension will be broke. Somethings you have to assume, like the fact he is likely an average person working in a decent job that has a pension and will likely stay out of prison, LTC and still be alive. Likely his income will increase as he gets closer to retirement age. The 6.5% increase in a pension is due to less years of collecting, not growth or capital gains.
With 30 years left to go, I assume he is still working today. At 30 years, $14K invested in the historical S&P with a 7% yield, every 10 years the amount will double. At 10 years $14K is $28K, at 20 years, it's $56K and at 30 years it's $112K. At a withdrawal of $375 a month, that amount will continue forever, and leave a lump sum.
We know Federal tax rates are headed up in 2025, the current rates expire then. Most of the presidential candidates want to end the lower rates earlier, and have large spending plans that will involve higher taxes, from someone. The Federal and many state, city and local budgets are in the red, and getting more red. Tax rates will be headed up, almost guaranteed. I do not think you can count on lower tax rates as you get older, unless you are planing on living in poverty. (If that is the case, you could have retired at after high school)
Some of the best money I ever invested is in my Roth, as I put in a bunch when they were first enacted. I could live many years on it.
I am counting on a 50%+ federal tax rate for the average person. That is in my plan.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
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08-11-2019, 01:16 PM
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#35
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gone traveling
Join Date: Mar 2015
Posts: 3,508
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Quote:
Originally Posted by Senator
We know Federal tax rates are headed up in 2025,
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Unless they don't.
Quote:
Tax rates will be headed up, almost guaranteed.
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If you are saying "tax rates will increase at some point in time", then sure. It's like saying "We are headed for a recession."
Quote:
I am counting on a 50%+ federal tax rate for the average person. That is in my plan.
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LOL! I guess that's a plan.
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08-11-2019, 01:18 PM
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#36
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Recycles dryer sheets
Join Date: Jul 2013
Posts: 123
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Quote:
Originally Posted by Senator
All true. We do not know if he will be alive. Or where he will be living, or if he will be in LTC. Maybe he will be in prison. Or living in Mexico. Or if the Pension will be broke. Somethings you have to assume, like the fact he is likely an average person working in a decent job that has a pension and will likely stay out of prison, LTC and still be alive. Likely his income will increase as he gets closer to retirement age. The 6.5% increase in a pension is due to less years of collecting, not growth or capital gains.
With 30 years left to go, I assume he is still working today. At 30 years, $14K invested in the historical S&P with a 7% yield, every 10 years the amount will double. At 10 years $14K is $28K, at 20 years, it's $56K and at 30 years it's $112K. At a withdrawal of $375 a month, that amount will continue forever, and leave a lump sum.
We know Federal tax rates are headed up in 2025, the current rates expire then. Most of the presidential candidates want to end the lower rates earlier, and have large spending plans that will involve higher taxes, from someone. The Federal and many state, city and local budgets are in the red, and getting more red. Tax rates will be headed up, almost guaranteed. I do not think you can count on lower tax rates as you get older, unless you are planing on living in poverty. (If that is the case, you could have retired at after high school)
Some of the best money I ever invested is in my Roth, as I put in a bunch when they were first enacted. I could live many years on it.
I am counting on a 50%+ federal tax rate for the average person. That is in my plan.
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I think a federal sales tax, like the VAT, is more likely than a 50% federal income tax for the average person.
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08-11-2019, 01:19 PM
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#37
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,726
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Please keep politics out of the discussion.
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08-11-2019, 01:29 PM
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#38
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Thinks s/he gets paid by the post
Join Date: May 2019
Posts: 2,821
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Quote:
Originally Posted by NW-Bound
Who would not take 6.5% real return? I am spending less than 1/2 of that.
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I don't know the answer to that - people sometimes surprise me with their choices. This thread might be an indication. Heck, I would settle for 5% real, and maybe even 4% or less real based on my short FIRE horizon.
I'm planning on spending an average of about 2.7% in FIRE to cover all my required expenses and significant discretionary spending, but sometimes plans change.
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08-11-2019, 01:33 PM
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#39
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Gone but not forgotten
Join Date: Jul 2012
Location: Peru
Posts: 6,335
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Since I don't invest, looking at probabilities gets me confused.
I am not much good at numbers, but FWIW... Federal IBond results
Jan 2001 $10,000 June 2019 $14,627 Inflation
Jan 2001 $10,000 June 2019 $27,848 IBond
I think that may be a compound interest rate of about 5.&%
We don't know what the future may hold, but feel relatively safe with the US Government guarantee.
The $70K we spent on I Bonds in 2001 and 2003, are returning about $1100/mo. now
Just one thing to look at.
__________________
If you want others to be happy, practice compassion. If you want to be happy, practice compassion.
--Dalai Lama XIV
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08-11-2019, 01:34 PM
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#40
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Thinks s/he gets paid by the post
Join Date: May 2019
Posts: 2,821
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Quote:
Originally Posted by Senator
I do not think you can count on lower tax rates as you get older, unless you are planing on living in poverty. (If that is the case, you could have retired at after high school).
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My personal tax rate (all income/payroll taxes) is about 30% effective, and I'm projecting it to be closer to 4% of my drawdown during FIRE while increasing my discretionary spending much much higher than it is now. My effective tax rate for my total drawdown will be even less than that in early retirement, but the average increases due to SS and greater 457/401 distributions later in retirement, but overall, I'm still looking at about 4% on average throughout retirement.
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