Critique my Withdrawal Plan?

[Midpack]

Here is my plan to retire in 2 years at 56. To view it you'll have to click on the attachment and then click again to expand it (at least I did). I have used what I consider conservative assumptions (ie, 6% return, SS at 50% of current estimates, life expectancy of 97, etc.) to increase the probability of success. I realize I'll have to re-amortize and adjust annually for market return fluctuations. We can live comfortably on this level of after tax expenses, and reduce by 30% when necessary. I don't expect anyone to analyze in detail, but anything fundamental jump out at the wizards here?

 

[73ss454]

On the top you show SS at 66 1/3 yet it shows around 18K starting at age 61 with about 18K. Then you jump up to 60K at age 70.

What am I doing wrong

 

[Midpack]

On the top you show SS at 66 1/3 yet it shows around 18K starting at age 61 with about 18K. Then you jump up to 60K at age 70.

What am I doing wrong

Ignore the SS@66/4. There's a non-COLA pension at 61, my wife's SS at 64 (when she's 62) and my SS at 70 all rolled up in that column.

 

[Htown Harry]

It seems unusual that the first two columns - containing expenses - are labeled "pre-tax". What's your thinking?

I believe it's more typical to see a projection method that evaluates expenses after taxes. Nest egg balance, rate of return, SS and pension payments and other calculations done for a given year, then taxes are subtracted to arrive at an after-tax income for that year. That value can then be compared to an after tax "cash" budget.

Am I missing something?

 

[baldeagle]

Midpack -- How are you treating MRDs? It doesn't look like they are in your spreadsheet.

 

[RockOn]

It's interesting to see how others go about it. I just figure a starting income/expenses and add a inflation factor. If I could ask, what are the main items you included with special expenses? Going out into your 90's with those seems a little strange to me.

 

[Midpack]

It seems unusual that the first two columns - containing expenses - are labeled "pre-tax". What's your thinking?

I spent more time focused on the numbers than accurately labeling columns, my mistake. The first two columns are actually cash after taxes, sorry.

How are you treating MRDs? It doesn't look like they are in your spreadsheet.

Right you are. I built the spreadsheet to deplete all taxable first and then go to tax deferred, didn't stop to consider RMD, so I'll have to deal with that. I am still trying to think through how to deplete taxable and deferred from a tax POV. On the one hand I keep my taxes down and let the deferred accounts grow by depleting taxable first, but I have to believe taxes will become ever more 'punitive' as the decades go by so maybe I should work deferred down before taxable is fully depleted anyway (and also deal with RMD).

If I could ask, what are the main items you included with special expenses? Going out into your 90's with those seems a little strange to me.

Mostly trading cars and travel. I'd agree we're less likely to keep spending on them in our 90's, but I was trying to be conservative to leave plenty of room to ratchet back.

The most difficult part to me was accurately estimating taxes, but I think I got it. Thanks all, anything else is welcome.

 

[jIMOh]

Right you are. I built the spreadsheet to deplete all taxable first and then go to tax deferred, didn't stop to consider RMD, so I'll have to deal with that. I am still trying to think through how to deplete taxable and deferred from a tax POV. On the one hand I keep my taxes down and let the deferred accounts grow by depleting taxable first, but I have to believe taxes will become ever more 'punitive' as the decades go by so maybe I should work deferred down before taxable is fully depleted anyway (and also deal with RMD).

I would factor RMDs in and run several what if scenarios

1) deplete taxable starting at age x, then start IRA withdraws at age y (question- will RMDs be in 25% tax bracket?)
2) use 72t and deplete IRAs in an attempt to withdraw in 15% tax bracket earlier, using taxable investments to make up spending difference between 15% withdraw and needed income
3) look to convert the IRAs to a Roth account before RMDs kick in. When depleting cash accounts, look to cap 15% tax bracket with Roth conversions each year from 56 to 70.5.

 

[baldeagle]

I second the suggestions of jIMOH. I am using his number 3.

I ran the numbers every way I could think of ,and that was the one that kept the portfolio at the highest level for the rest of our lives. Since I track taxes in the spreadsheet, I can see that keeping away from the 25% bracket for as long as possible is a big factor in keeping portfolio value up.

 

[Midpack]

jiMOh, baldeagle: Thanks for the follow up. You've given me some new ideas for my spreadsheet and I need to research 72t and TIRA>Roth further.

Since both of you have grappled with taxes based on your posts, how do you project taxes for the future? I am using the Y-1 2007 tax table, and for each year and I simply inflate the taxable incomes (first two columns) and the base tax (column 3) and leave the marginal rates alone (ie, 10%, 15%, 25%, etc.). Problem is, I'm afraid taxes will become more 'punitive' than a 3.5% increase (my typical inflation assumption) in the next 30-40 years. So I'm thinking about adding 1-2% to inflation for the tax table "inflator." Wonder if you have/have seen a clever solution to future taxes?

 

[walkinwood]

Midpack,
I seem to be missing something, and can't figure out how you're calculating your tax amount. Taking 4% of your pre-tax income (71541) for age 56 doesn't equal 2118, so you're probably doing a more complex calculation. Just be sure to take into account the tax you'll pay on the unrealized capital gains when you withdraw from your taxable account.

You have probably already done this, but I suggest you put these numbers into FireCalc to be sure.

 

[Midpack]

Midpack,
I seem to be missing something, and can't figure out how you're calculating your tax amount. Taking 4% of your pre-tax income (71541) for age 56 doesn't equal 2118, so you're probably doing a more complex calculation. Just be sure to take into account the tax you'll pay on the unrealized capital gains when you withdraw from your taxable account.

You have probably already done this, but I suggest you put these numbers into FireCalc to be sure.

I am using tax tables (Y-1) but the estimated taxes are based on the taxable income column next to the pre-tax income column. I am accounting for dividends and capital gains in the taxable income column. And I did find an error in my tax calc this morning that is not reflected on the attachment in this string. But I have gotten some great feedback that I am incorporating...

 

[baldeagle]

Midpack said:

how do you project taxes for the future?

Here's what I do in my year-by-year spreadsheet forecast to age 100:

1. I assume that there will continue to be FIT brackets with rates of 10%, 15%, and 25%. I figure they will go up in the future, since they have rarely been this low for decades, and our gummint is digging us into a big hole, but I have nothing better to go on than what they are now.
2. Then I inflate those brackets annually by my inflation parameter. The parameter is whatever I want it to be, so I have used figures between 2% and 4% to do "what if" tests.
3. I similarly inflate the deductions we take (they are greater than the standard deduction), and the personal exemptions.
4. I similarly inflate SS and our spending needs.
5. Every year, I compute AGI and then compute taxable income by subtracting the deductions and exemptions.
6. Then I compute the tax based on how much of each bracket is filled or partially filled by the taxable income.

We do a simplified version of the above for SIT, knowing that they have always been (so far) a pretty constant %-age of taxable income.

Make sense?

 

[Midpack]

Midpack said:
Here's what I do in my year-by-year spreadsheet forecast to age 100:

1. I assume that there will continue to be FIT brackets with rates of 10%, 15%, and 25%. I figure they will go up in the future, since they have rarely been this low for decades, and our gummint is digging us into a big hole, but I have nothing better to go on than what they are now.
2. Then I inflate those brackets annually by my inflation parameter. The parameter is whatever I want it to be, so I have used figures between 2% and 4% to do "what if" tests.
3. I similarly inflate the deductions we take (they are greater than the standard deduction), and the personal exemptions.
4. I similarly inflate SS and our spending needs.
5. Every year, I compute AGI and then compute taxable income by subtracting the deductions and exemptions.
6. Then I compute the tax based on how much of each bracket is filled or partially filled by the taxable income.

We do a simplified version of the above for SIT, knowing that they have always been (so far) a pretty constant %-age of taxable income.

Make sense?

I do not reduce taxable income for deductions/exemptions - just another way that I build is some cushion. Otherwise I do exactly as you describe.