Hi from California

[jernich]

I joined this site after following a forgotten path of links. I like the premise of FIRECalc, but on digging through the descriptions could find no mention of tax assumptions whatsoever. This surprised me as I think it's one of the top few most important assumptions.

So how does FIRECalc handle my tax payments? I have the impression that the multiple scenarios calculated for each submission are pre-tax results. If that's the case, then it seems to me that the algorithm isn't really very useful. It would be far too optimistic If that's not the case, how do I account for tax payments? Change spending to spending*(1+tax rate)? I'll need to raid the IRA annually to make these payments so it's critical to model them in somehow.

Also, a suggestion. In the income tab it would be useful to add an entry for retirement consulting income for some assumed time span.

 

[Onward]

FIRECalc doesn't do taxes, so you have to estimate your tax payments and include them in the withdrawal amount you give to FIRECalc.

 

[hnzw_rui]

Tax is going to vary a ton based on filing status, deductions, type of account (taxable, tax-deferred, Roth) and a whole myriad of other things (short or long term capital gains and losses, taxation of SS benefits, etc).

Personally, I just add 20% effective federal income tax and 7% effective state income tax (based on my latest tax return) to my target spending. Well, more like I divide my target spend by 73% (100 - 20 - 7) to figure the amount I need before taxes.

 

[jernich]

Thanks to both of you for replying so quickly. Your answers are I guess what I assumed I had to do. It's kind of a pity though, because although tax can be so complicated and variable for different people, an assumed rate should really be an input variable. The algorithm knows what SS and other pension income is coming in, and calculates IRA withdrawals to meet spending requirements, so I think an assumed rate should work within the limits of accuracy of the model itself.

 

[hnzw_rui]

Thanks to both of you for replying so quickly. Your answers are I guess what I assumed I had to do. It's kind of a pity though, because although tax can be so complicated and variable for different people, an assumed rate should really be an input variable. The algorithm knows what SS and other pension income is coming in, and calculates IRA withdrawals to meet spending requirements, so I think an assumed rate should work within the limits of accuracy of the model itself.

Are you sure you're talking about FIRECalc and not i-ORP? FIRECalc just runs Monte Carlo simulations on the success rate of your planned withdrawals based on market history. i-ORP is the one that calculates RMDs and stuff. The number that i-ORP gives you is already the after-tax estimate.

 

[jernich]

Yes, I was asking about FIRECalc, because neither the instructions nor the FAQ's have anything to say at all about the subject of taxes. I've never used i-ORP.

 

[hnzw_rui]

I've looked at each page of FIRECalc and didn't see where you can put in your IRA balance. As far as I'm aware, FIRECalc just treats your portfolio balance as a whole. No differentiation between taxable, tax-deferred (401k, traditional IRA, etc) and Roth.

 

[jernich]

Ah.... OK that's what I've missed. In my case all investments are IRA and I was assuming that's how the algorithm was designed. But right, investments can be in all different forms. So in my case I'll just have to add an assumed tax payment to spending. Thanks!

 

[CaliforniaMan]

FIRECalc is simply a tool to estimate a Safe Withdrawal Rate based on historical records. Whether the money you withdraw is spent on taxes, food, travel or a new Bentley doesn't affect that rate.

I estimate my taxes on a spreadsheet and what is left of the SWR goes into my spending account for food, travel and new Bentleys. Not too many Bentleys yet though

 

[hnzw_rui]

Ah.... OK that's what I've missed. In my case all investments are IRA and I was assuming that's how the algorithm was designed. But right, investments can be in all different forms. So in my case I'll just have to add an assumed tax payment to spending. Thanks!

SWR isn't the only thing you need to consider. Since you mentioned IRA and taxes, I'm assuming most if not all of your funds are tax deferred. If so, you'd also have to watch for RMDs once you turn 70.5. Make sure you take the right amount or else, penalties are pretty hefty (50%) and that's on top of regular taxes.

 

[jernich]

FIRECalc is simply a tool to estimate a Safe Withdrawal Rate based on historical records. Whether the money you withdraw is spent on taxes, food, travel or a new Bentley doesn't affect that rate.

I estimate my taxes on a spreadsheet and what is left of the SWR goes into my spending account for food, travel and new Bentleys. Not too many Bentleys yet though

My retirement plan has a column for used Chevrolets No Bentleys unless I'm on the top FIRECalc curve!

 

[jernich]

SWR isn't the only thing you need to consider. Since you mentioned IRA and taxes, I'm assuming most if not all of your funds are tax deferred. If so, you'd also have to watch for RMDs once you turn 70.5. Make sure you take the right amount or else, penalties are pretty hefty (50%) and that's on top of regular taxes.

Thanks for the reminder. I do have RMD incorporated into my spreadsheet but it's something I'll need to be aware of months in advance. In my cad it looks like it will only kick in if IRA performance has been stellar, so it will be a good problem to have!

 

[Major Tom]

FIRECalc just runs Monte Carlo simulations on the success rate of your planned withdrawals based on market history.

FIRECalc does indeed run simulations on the success rate of your planned withdrawals based on market history. These are not Monte Carlo simulations though - that is another thing entirely.

I'm guessing you know this and didn't intend to type that, but I just wanted to point it out.

 

[hnzw_rui]

FIRECalc does indeed run simulations on the success rate of your planned withdrawals based on market history. These are not Monte Carlo simulations though - that is another thing entirely.

I'm guessing you know this and didn't intend to type that, but I just wanted to point it out.

Yeah, I know. I should've just dropped the "Monte Carlo" while I was editing my post. Granted, if you choose random performance in the Your Portfolio tab, that is Monte Carlo. Granted, the Monte Carlo sim (10% return, 12% std dev) seems more brutal than historical data.

 

[Major Tom]

Yeah, I know. I should've just dropped the "Monte Carlo" while I was editing my post. Granted, if you choose random performance in the Your Portfolio tab, that is Monte Carlo. Granted, the Monte Carlo sim (10% return, 12% std dev) seems more brutal than historical data.

You know, I had forgotten about the random performance option in FIRECalc. I have always focused so much on the main historical data option, I had never given that one much attention.

Anyway, apologies for the interruption everyone - I'll let you get back to the main topic of this thread

 

[rodi]

I'm a fan of using a variety of tools.

Firecalc is great for figuring out how much you can withdraw (or how much you need to save) and have your portfolio survive the worst case historical market performance. But as you pointed out -it ignores taxes. It also doesn't have a mixed portfolio option for international stocks (probably because the database for that is less available.)

i-orp is great for figuring out tax strategies. The developer posts here and accepts input. It even includes stuff like the ACA cliff point limitations if you want. It's great for figuring out the optimum roth conversions to minimize your taxes when you hit the RMD point. A great tool.

Fidelity RIP is another tool - you can customize the inputs and it shows you after tax spending.

Quicken lifetime planner - a deterministic tool (fixed growth, fixed inflation assumptions) but allows for modeling taxes, one time expenses, savings targets (like kids college), mortgage payoffs, etc.

I run ALL of these tools - and kind of aggregate the outputs into my plan. They each exposed different issues when I first started planning - and made me rethink my assumptions. That was very useful.

 

[Lakewood90712]

Manhattan Beach ? starter homes usually over 1.5 million, that is high income territory. Inasmuch as taxes are a big issue, especially here in the socialist workers paradise of California, may be wise to retain a good CPA. Mine is well worth the fees charged, and even has free chocolate bars with the 1040 form molded in Send me a PM if you would like a referral

 

[hnzw_rui]

I'm a fan of using a variety of tools.

Firecalc is great for figuring out how much you can withdraw (or how much you need to save) and have your portfolio survive the worst case historical market performance. But as you pointed out -it ignores taxes. It also doesn't have a mixed portfolio option for international stocks (probably because the database for that is less available.)

i-orp is great for figuring out tax strategies. The developer posts here and accepts input. It even includes stuff like the ACA cliff point limitations if you want. It's great for figuring out the optimum roth conversions to minimize your taxes when you hit the RMD point. A great tool.

These are the two I use. FIRECalc for figuring out how much I need to save to hit my first year target spend. i-orp for taxes, Roth conversions and spending models.

Alas, don't have Quicken or a Fidelity account so don't have access to those.

 

[MBAustin]

We've moved this thread to the FIREcalc Support forum as the discussion is about FIREcalc.

 

[jernich]

I'm a fan of using a variety of tools.

Firecalc is great for figuring out how much you can withdraw (or how much you need to save) and have your portfolio survive the worst case historical market performance. But as you pointed out -it ignores taxes. It also doesn't have a mixed portfolio option for international stocks (probably because the database for that is less available.)

i-orp is great for figuring out tax strategies. The developer posts here and accepts input. It even includes stuff like the ACA cliff point limitations if you want. It's great for figuring out the optimum roth conversions to minimize your taxes when you hit the RMD point. A great tool.

Fidelity RIP is another tool - you can customize the inputs and it shows you after tax spending.

Quicken lifetime planner - a deterministic tool (fixed growth, fixed inflation assumptions) but allows for modeling taxes, one time expenses, savings targets (like kids college), mortgage payoffs, etc.

I run ALL of these tools - and kind of aggregate the outputs into my plan. They each exposed different issues when I first started planning - and made me rethink my assumptions. That was very useful.

At the risk of asking a dumb question.....
How do you use FIRECalc for estimating withdrawals? I see a cloud of curves in the output. Do you mean you eyeball an average from those to estimate a mean portfolio value year by year?

I use Quicken's planner as well, but as you say it's deterministic so generally only good for a base case, or for examining the effects of different assumptions. I'll have to try i-orp. Like you I want to look at all models. My favorite though is the spreadsheet I built which does a true equity performance Monte Carlo (based on S&P500 going back to 1950) and allows all kinds of input variables which I've added as I become aware of them.

 

[jernich]

Manhattan Beach ? starter homes usually over 1.5 million, that is high income territory. Inasmuch as taxes are a big issue, especially here in the socialist workers paradise of California, may be wise to retain a good CPA. Mine is well worth the fees charged, and even has free chocolate bars with the 1040 form molded in Send me a PM if you would like a referral

High income... unless you don't have any which is essentially the case with me. I got lucky by buying in here 15 years ago. I do have a local CPA but thanks for the offer!

 

[rodi]

At the risk of asking a dumb question.....
How do you use FIRECalc for estimating withdrawals? I see a cloud of curves in the output. Do you mean you eyeball an average from those to estimate a mean portfolio value year by year?

I use Quicken's planner as well, but as you say it's deterministic so generally only good for a base case, or for examining the effects of different assumptions. I'll have to try i-orp. Like you I want to look at all models. My favorite though is the spreadsheet I built which does a true equity performance Monte Carlo (based on S&P500 going back to 1950) and allows all kinds of input variables which I've added as I become aware of them.

I meant running "what-if" scenarios to see at what point your withdrawals were high enough to make the scenario fail.

There's also a tab labeled "investigate" that allows you to set a success rate (can be 100%) and it spits out the spend amount. You can then subtract out your other income sources (SS, pensions, rent, whatever) to see what the withdrawal could be.