FIRECalc What Portfolio Number?

[Swetch]

I want to include my tax deferred assets in the "Portfolio" amount. Should I include the actual deferred amount or should I subtract the projected taxes and use the net number?

 

[REWahoo]

You can subtract your estimated taxes or, as many of us do, input the deferred amount and consider taxes to be an expense and part of your annual spend amount.

 

[Swetch]

Thanks. To be clear, if I enter the full tax deferred amount, then I should include taxes in my annual spending number such as...


If spending (not including taxes) is $90,000
then
Spending (including estimated 18% effective tax rate) = $109,756


Is that right?

 

[Dtail]

Thanks. To be clear, if I enter the full tax deferred amount, then I should include taxes in my annual spending number such as...


If spending (not including taxes) is $90,000
then
Spending (including estimated 18% effective tax rate) = $109,756


Is that right?

That is correct.

 

[USGrant1962]

Yes, it is best to consider taxes as an expense in FIRECalc. The problem (for every retirement calculator) is estimating/assuming what those will be.

 

[Gumby]

I've always grossed up my spending for taxes. Since I have to assume something, I assume tax brackets will stay the same (adjusted for inflation) and that I can control my IRA distributions to control my tax bracket (at least until RMDs kick in)

 

[donheff]

When doing your ballparks on expenses, keep in mind that your taxes may rise significantly when RMDs kick in and will keep rising as RMDs grow.

 

[Rianne]

Wouldn't spending models matter? I look at the tax expense over the lifetime of our portfolio, thinking in terms of the "buckets" we're spending from. Also makes backdoor Roth contributions attractive before tax increase. It's gonna happen.

 

[Swetch]

I've always grossed up my spending for taxes. Since I have to assume something, I assume tax brackets will stay the same (adjusted for inflation) and that I can control my IRA distributions to control my tax bracket (at least until RMDs kick in)

In estimating future taxes to account for them as an expense, should I use actual tax bracket percentages or effective tax rate instead? Seems to me that effective would be more sensible within the math.

 

[Swetch]

Wouldn't spending models matter? I look at the tax expense over the lifetime of our portfolio, thinking in terms of the "buckets" we're spending from. Also makes backdoor Roth contributions attractive before tax increase. It's gonna happen.

I have a similar concern. My bucket 1 is all taxed money but there is 24 years in that bucket. The bucket 2 is tax deferred and 16 years of life. It's coincidental though that our spending will dramatically decrease in the bucket 2 years, not because of the available money but because we will likely be too old to do the things we did in the bucket 1 years. I guess we'd have to find a way to average the numbers over 40 years.


We are planning to retire at the end of this year. We will both be 51 years of age. I'm fairly certain will we do plenty of Roth conversions between ages 52 and 72 to keep RMD and taxes down.

 

[Time2]

I think you should put the whole amount into Firecalc.
Then figure taxes on what your yearly withdrawals / spending is.
You don't pay taxes on those deferred accounts until you take it out, so calculate it on the out go.
Just my 2 cents, if you tax it before you add it to Firecalc it would seem to get complicated when you start adding other types of income to your tax form. i.e. taxable dividends, interest, LTCGs, short term Capital gains, etc.

 

[nvestysly]

I agree that taxes are an expense and should be considered as such when using FireCalc or any other retirement planner. However...

Taxes (calculating taxes) are complicated as you know. For instance, if you simply look at the AGI number on our tax return you'd think we were in the 12% bracket. But... when the income from dividends, capital gains, etc. is considered, along with the variety of exemptions and deductions, we pay zero federal tax. I was surprised by this initially until I dug into the details. Of course, this won't apply to everyone in the same way due the complexity of the U.S. tax code. I wish it were simpler, hoping someday for the "postcard" tax return. For now, with existing laws I guess with live with paying zero!

My point is, yes, taxes are an expense. But take a deep dive into your tax scenario to really know how much you'll have to pay, if any.

 

[SecondCor521]

In estimating future taxes to account for them as an expense, should I use actual tax bracket percentages or effective tax rate instead? Seems to me that effective would be more sensible within the math.

Depends on how complicated you want to get. But if you're just doing the simple gross up method you mentioned in an earlier post where you take (1+tax rate)*spending = grossed up spending, I would use effective tax rate.

It's coincidental though that our spending will dramatically decrease in the bucket 2 years, not because of the available money but because we will likely be too old to do the things we did in the bucket 1 years. I guess we'd have to find a way to average the numbers over 40 years.

Note that FIREcalc has a way for you to adjust spending in retirement. On the "Other Income/Spending" tab, enter an off chart spending reduction (or several) at the bottom of that screen. This will have the effect that you could spend, say, $100K for the first 10 years of retirement, then $60K for the next 5 years, then $40K for the next 20 years, or whatever you want.

I used it to get a more realistic picture when I had child support that was a large percentage of my FIRE spending and that I knew was ending at a certain future date. And for me, since it was a fixed amount, I could uncheck the inflation adjustment box and feel like it was reflecting my actual situation better.

 

[Montecfo]

In estimating future taxes to account for them as an expense, should I use actual tax bracket percentages or effective tax rate instead? Seems to me that effective would be more sensible within the math.

Effective.
But unless you do a detailed calculation using actual rates/brackets you do not know your effective rate.

And of course your effective rate will vary with income and income composition.

For me, a decent approach is to guess at a high effective rate, which hopefully will contemplated some rises in rates over time.