WD rate: How do you think about taxes?

[WhenIsItTime]

Likely my first dumb question of many. I'm running Firecalc and other models intending to make 3-4% withdrawal rate work as gross spend before income taxes. I assume this is the right way, but often see folks counting on market making 6+ percent and then wonder.

Please confirm: when assuming WD rate, are you considering it before or after income tax/capital gains?

 

[W2R]

Likely my first dumb question of many. I'm running Firecalc and other models intending to make 3-4% withdrawal rate work as gross spend before income taxes. I assume this is the right way, but often see folks counting on market making 6+ percent and then wonder.

Please confirm: when assuming WD rate, are you considering it before or after income tax/capital gains?

With FIRECalc, your taxes are considered to be part of your spending. So, your withdrawal will need to cover your taxes too.

I consider my withdrawal money to include money that I will have to spend on taxes. For example, if FIRECalc says I can withdraw $30K, and that is what I withdraw.... then if my taxes are $8K, I will only have $22K left to spend on other things.

My capital gains and dividends go into a Vanguard money market account so these are just part of my investment portfolio total, the total by which I divide my withdrawal amount when computing my withdrawal rate.

 

[SevenUp]

Please confirm: when assuming WD rate, are you considering it before or after income tax/capital gains?

The classic "safe withdrawal rate" studies (Bengen; Trinity) ignored taxes and management fees as separate items. In other words, everything - including taxes, management fees, annualized irregular expenses (new car, new roof, etc.) - should be included in your "expenses" as that applies to "withdrawal rate."

 

[nvestysly]

Yep, taxes are included in your expenses as far as FIRECalc is concerned.

Give some real thought to how your taxes will change (probably lower) when you're retired. It's not uncommon for retirees to only need to set aside 10% (maybe less) for income taxes. Everyone's situation is different but it behooves you to do a little planning using tax software to see how your taxes will behave when you're living on dividends/interest/capital gains rather than "earned income."

At your age it may be prudent to use a SWR of less than 4%. DW and I chose to use a SWR in the range of 3% because we retired early (52 and 48 respectively) and wanted to err on the side of caution. You are even younger than I was when I retired and potentially have several big ticket items in your future (college for kids for example) so give some serious thought to SWR.

 

[USGrant1962]

You are correct, taxes are an expense that come out of your gross withdrawal.

In WR/SWR discussions I sometimes see folks thinking that taxes are somehow different than any other expense. They are not.

 

[scrabbler1]

I have a split view on how I deal with income taxes when budgeting in my ER.


I include in my budget a base amount of taxes associated with my mostly predictable dividend income. Beyond that, I am not really worried if my income taxes spike. This is because any additional income taxes due will arise only from unexpected income from cap gain distributions. This added income will provide the means to pay any added taxes due. If this causes my SWR to go up a little big, no big deal.

 

[gcgang]

How do I think about taxes? Alternating between patriotic and painful.

 

[Dtail]

Inclusion of taxes with Firecalc. However some other calculators such as Fidelity, one does not include taxes but inputs a tax rate which is then applied to one's investment portfolio.

 

[Offgrid Organic Farmer]

Everyone looks at this differently. Personally I would NEVER dip into my Net Worth to reduce it for any reason.

When your portfolio gives you a dividend, great! Pay taxes 'if ought be due' and put some of it back into the portfolio.

 

[WhenIsItTime]

Thanks for replies. Very helpful.

 

[Dtail]

Everyone looks at this differently. Personally I would NEVER dip into my Net Worth to reduce it for any reason.

When your portfolio gives you a dividend, great! Pay taxes 'if ought be due' and put some of it back into the portfolio.

Based on past posts, that's because you don't have to. Even though DGF nad I are/will be getting SS, we will need to live off our mainly TIRA investments.
I would say that many others need to also, even though their WR% might be low.

 

[Offgrid Organic Farmer]

Based on past posts, that's because you don't have to. Even though DGF nad I are/will be getting SS, we will need to live off our mainly TIRA investments.
I would say that many others need to also, even though their WR% might be low.

I paid into my SS policy too. One day I hope to get paid SS.

I hope that everyone who pays into SS for 40-quarters [or more] will one day get paid from SS.

 

[Dtail]

I paid into my SS policy too. One day I hope to get paid SS.

I hope that everyone who pays into SS for 40-quarters [or more] will one day get paid from SS.

My point is more that many folks on this site need to dip into their net worth via investment assets in order to live their lifestyles.

 

[Gumby]

With FIRECalc, your taxes are considered to be part of your spending. So, your withdrawal will need to cover your taxes too.

I consider my withdrawal money to include money that I will have to spend on taxes. For example, if FIRECalc says I can withdraw $30K, and that is what I withdraw.... then if my taxes are $8K, I will only have $22K left to spend on other things.

My capital gains and dividends go into a Vanguard money market account so these are just part of my investment portfolio total, the total by which I divide my withdrawal amount when computing my withdrawal rate.

W2R is correct, as always. When you run FIRECalc, you should gross up your spending to account for taxes. The vast majority of my nest egg is in tax deferred accounts, so I count all withdrawals as fully taxable ordinary income (to be conservative) , but you can adjust as necessary to accommodate the mix between taxable and non-taxable withdrawals and for the differences between capital gains and dividend income.

 

[RunningBum]

I treat taxes on capital gains differently than I guess most do. I reduce the value I give stocks by the estimated tax liability I'll have when I sell. Selling $50K worth of a fund at no gain (or a loss) nets me more than selling $50K worth of a fund at a large LTCG. I feel like I should account for that. It goes back to when I had stock options with a nearly 50% future tax liability and it seemed that was by far the easiest way to track the value they actually had to me.

Taxes on dividends and CG distributions are budgeted expenses.

 

[Koolau]

Yep, taxes are just another expense that you include in hour WD. Having said that, there are a multitude of tricks you can play (or more accurately, you can game the system) when it comes to your taxes. Where you take your withdrawal (and when) often affects your effective tax rate. Ideally, you would lower your taxes as much as possible. Unfortunately, most of us never get to zero taxes. YMMV

 

[Offgrid Organic Farmer]

My point is more that many folks on this site need to dip into their net worth via investment assets in order to live their lifestyles.

If you need SS to survive, then you are not 'Retiring Early'.

I would think that to 'Retire Early' you need to do it before you are old enough to be eligible for SS.

 

[Dtail]

If you need SS to survive, then you are not 'Retiring Early'.

I would think that to 'Retire Early' you need to do it before you are old enough to be eligible for SS.

Let's see how many posts it takes......
Not talking about SS. I was saying that many folks need to spend some of their investment assets i.e. stocks/bonds/cash etc in order to live their lifestyle.

 

[Offgrid Organic Farmer]

Let's see how many posts it takes......
Not talking about SS. I was saying that many folks need to spend some of their investment assets i.e. stocks/bonds/cash etc in order to live their lifestyle.

Okay that is fair.

A high COL may need more than what your SS will provide. So even with SS you may still need cash flow from investments. But that is after you have turned 65.

If you want to Retire Early, you need that same level of cash flow without SS.

 

[Chuckanut]

I'm enjoying this discussion.

 

[Dtail]

Okay that is fair.

A high COL may need more than what your SS will provide. So even with SS you may still need cash flow from investments. But that is after you have turned 65.

If you want to Retire Early, you need that same level of cash flow without SS.

We retired early at 57 and 56. We are pulling from investments before 65 yo.

 

[WhenIsItTime]

Okay that is fair.

A high COL may need more than what your SS will provide. So even with SS you may still need cash flow from investments. But that is after you have turned 65.

If you want to Retire Early, you need that same level of cash flow without SS.

I'm actually planning how to RE (late-40's) without counting retirement assets (SS, 401k, Roth) in my WD rate. That way my retirement assets are cushion and help mitigate risk of 20 years until accessible w/o penalty. Fortunately, I am in a position where i can get there without impacting my lifestyle.

 

[TwoByFour]

I wrote my own RIP (retirement income planner) tool and it includes taxes, but as others have said, many RIP tools assume tax to be an expense. I used actual tax tables for ordinary income and capital gains so it is always calculating the correct tax. In practical terms though our effective tax rate since we retired has been about 10%. It is low because a lot of our income is from cap gains. When SS kicks in, our tax bracket will change and so will the effective rate, unfortunately. The real killer is when I have to start taking RMDs from the IRA in two years. It will be a double whammy of the delayed SS and the RMDs. Income goes up but a whole lot of that ends up going towards taxes because of the new bracket. Not sure how the new tax law will affect all of this.

 

[googily]

Or, even if they don't "need" to, they have no interest in leaving a huge nest egg, especially if there are no direct heirs.

Some of us are trying to figure out how to spend during retirement so that we don't go broke too soon but so that the check to the funeral home bounces. [emoji16]

My point is more that many folks on this site need to dip into their net worth via investment assets in order to live their lifestyles.

 

[pb4uski]

If you need SS to survive, then you are not 'Retiring Early'.

I would think that to 'Retire Early' you need to do it before you are old enough to be eligible for SS.

Okay that is fair.

A high COL may need more than what your SS will provide. So even with SS you may still need cash flow from investments. But that is after you have turned 65.

If you want to Retire Early, you need that same level of cash flow without SS.

The first amendment is a wonderful thing.

Did you trek up Mount Sinai to get these grand proclamations that if you need SS then you are not retiring early or in order to retire early you need the same level of cash flow without SS? (Not even sure what that last one really means).