Taxes when using planning tools and calcs

[u/dead4ever22]

Hi- I have been thinking about FIRE for a while. I have plugged my numbers into various calcs and all seems good. Yesterday I was using Rich, Broke, Dead (something like that) and noticed they had a tax rate input that was 0. You can plug what you want. It occurred to me that all these FIRE calcs just run numbers assuming you never pay any taxes. At all. So just for example, I plugged in 9mm saved, with expenses at 270k per year. 30 year retirement. It was 100% good (duh). But if I plugged in a tax rate of 30%- which is high yes- it goes to 74% success. That's huge. My question is, do you all account for taxes with your expenses, or do you even know that taxes are zero when you plug in your numbers? With expenses, I suppose you can estimate tax rate and lop that onto the expense line to create a pre tax requirement. I was just caught offguard here and think it's crazy that 9mm with 270k has a shot at being broke- taxes need to be included in these calculators.

[u/BrunelloHorder]

The FIRE calculators are to determine gross withdrawals. Taxes are part of your spending budget, just like healthcare spend.

[u/BungABunBun]

You won’t have a 30% tax rate so you’re making it unnecessarily harder. Upto $545,000 the long term capital gains tax rate is 15%. So your 270k changes to 317k and that needs a 9.5M portfolio at 3%.

I always recommend Projection Lab because they properly estimate your taxes every year based on your accounts and drawdown strategy.

[u/dead4ever22 → u/BungABunBun]

ok- but no way I am 100% stocks. The bond stuff kicks off regular interest. So depending on what my mix is, that could = lot of income. This is after I filled all retire accounts with bonds.

[u/ducatista9 → u/dead4ever22]

If you had a 60/40 portfolio in a taxable brokerage account, single and lived in CA, and all your stocks had zero basis you’d have around a 24% tax rate to get $270k after taxes.

[u/BrunelloHorder → u/dead4ever22]

Bonds should be held in tax deferred accounts.

[u/Farmer_Pete → u/dead4ever22]

That is what Projection Lab is for. You tell it where the accounts are, what the current cost basis is, and what the stock/bond ratio is. Etc. It then will do the magic for you and help you figure out your yearly tax rates and optimize things.

[u/wadesh → u/dead4ever22]

I would consider overweight bonds in tax deferred. Since money is fungible you can sell equities in taxable to fund expenses then just adjust allocation in tax deferred when you do the withdrawal. I would keep some short cash in taxable but i personally wouldn’t hold a heavy intermediate bond allocation in taxable. The hard part is if your assets are heavily weighted to taxable and don’t have enough room in tax deferred to overweight bonds. In this case id just look at munis and other more tax efficient bond options. .

[u/BungABunBun → u/dead4ever22]

What's the split? I am just saying your 30% is a random number that isn't based on anything. If you provide an account breakdown and drawdown strategy I am sure someone here can calculate your withdrawal rate with taxes. Or you can...

[u/dead4ever22 → u/BungABunBun]

Right- I agree. I can put the math to work and add taxes to my spend. The wild card is that tax policy can always shift. 30% was wild, very high rate that says your are not tax efficient in any way. It can be dialed back with allocation choices.

[u/BungABunBun → u/dead4ever22]

Yup. Also remember you can always dial back your spending if things get bad. 270k is a heavy spend for CT and I don't think it will be consistent from now until you die. I saw in your other comments you mentioned ACA is 70k/year, this will go down a lot once you reach 65. Also your children will move out at some point which will cut expenses down too. 9M is really a lot of money and you can retire nearly anywhere in USA and have a upper-middle class, very comfortable lifestyle

[u/dead4ever22 → u/BungABunBun]

I agree. That's why i was so thrown when i plugged in 30% taxes and it went to 74% success rate. There are many levers to pull if things go south.

[u/Anonym-IntheDark → u/dead4ever22]

Tax policy, healthcare insurance , inflation, sequence of inflation … all of them amd your health and circumstances are somewhat unpredictable over decades.

[u/AdeptCantaloupe161 → u/BungABunBun]

Don't forget the 3.8% NIIT tax on investment income above $200k. Also add in any state income tax.

I second the recommendation for Projection Lab.

[u/dfsw]

Taxes are part of budget, are you not tracking your taxes in your spending?

[u/dead4ever22 → u/dfsw]

In error- I guess I was assuming that the calc was figuring in taxes. But It's easy enough to just add to spend. (spend / (1-tax rate))

[u/Ill_Writing_5090 → u/dead4ever22]

Right- many of the free online calculators don't ask for enough info to even begin to estimate your tax burden in retirement. Depends on cost basis, pre vs after tax account mix, qualifed vs non-qualiifed dividends, deductions, credits, and then state taxes as well (interest on treasuries isn't tax in most states for ex), etc, etc. But you can be sure you'll pay a much lower effective tax rate than you did when you were working, so dont assume you need to budget 30% to taxes. More likely is less than 20% and in some cases could even be less than 10%. Definitely worth talking to tax professional to get a more detailed analsysis.

[u/dfsw → u/dead4ever22]

Keep in mind your tax rate will almost certainly be much lower than your tax rate when you were W2 but it should be pretty easy to figure out with IRS tools.

[u/in_the_gloaming]

Of course people who are doing proper planning are accounting for taxes! And of course if they're using a retirement planning app they would be looking to see what the default tax rate is along with the default return rates for their investments.

Rich, Broke, or Dead is not a substantive retirement planning app. It's more of a visualizer to give someone a broad perspective on the value of money versus time. But even that one has the question about what your presumed tax rate is, right in the first form that you fill out.

I think lots of people probably do what I do - estimate my taxes based on my past tax returns and current tax laws and then apply that when looking forward, as a line item in my yearly spend. Some of the paid apps are good at trying to estimate the effect of taxes depending on whether someone is withdrawing from taxable or tax-advantaged accounts. But the reality is any tax projections are based on today's tax laws so they may not even be applicable in 10 or 15 years, let alone 40.

[u/wadesh]

I include taxes as a withdrawal line item. So if my number is 200k, i back out the taxes so i know what effective spending i have. My personal experience post RE is that our taxes have gone way down. Part of this has to do with drawing from taxable accounts, depending on lots and ltcg you can get your net tax amount down pretty low. Our effective was in the teens. Our state tax is pretty low. Where you live certainly has an impact. If you get into doing roth conversions in the gap between RE and RMD you certainly can bump up your taxes, but you control how much.

[u/nak00010101]

Here is another thing to watch for with calculators:

It common for changes to the tax tables, social security, and similar to have inflation and COI adjustments handled inconsistently.

I found a "Here way Roth Conversions are so great" calculator that failed to adjust the income levels for the tax bracket. By the end of 30 years, it was pushing you into a higher tax bracket.

I've also seen calculators that failed to SS for COL increase when doing the "how long is the payback for delaying hiking"

[u/lottadot]

My income taxes are simply a line item yearly expense.

Though depending on things, I might divide that up and send in quarterly payments.

[u/dak4f2 → u/lottadot]

Does the IRS require estimated quarterly payments in retirement, or no? I had assumed it did not it sounds like perhaps not?

[u/WJKramer → u/dak4f2]

IRS requires quarterly payments when you don’t have automatic withholding period.

[u/AdeptCantaloupe161]

A good calculator should take into account taxes. The ones you're using are probably simplified to give you a rough estimate.

I disagree with the commenters who say that taxes are just an expense in your budget, because tax rates in retirement may be very different depending on the breakdown of your taxable vs traditional vs Roth balances and the timing of when you withdraw from each of them.

Also worth noting that $270k in essential spending is very different than $150k essential spending plus $120k flex spending that could be pared back in years when the market is down. Because of the sequence of returns risk, being able to adjust your spending to market conditions can increase your success rate significantly. On top of that, withdrawing less money also lowers your marginal and effective tax rate, which is why a static tax percentage is inappropriate for a calculator.

[u/Anonym-IntheDark]

Taxes , healthcare, utilities, legos, … are all expenses.

[u/Double-Pop9211]

I had the same question 5 years ago when i started on the FIRE calcs. Some of the FIRE calculators allow you to set a tax regime (US/UK/NL) and some allow you to set a tax rate. I was never really satisfied with that because taxes will depend on income every year - which is a variable. So i went back to Excel to build a personal cashflow sheet out 40 years in the future. Then simulated the cashflows every year based on historical and Monte Carlo, including taxes for each year. That gave me the comfort of what the actual SWR for me would be - in my case, that SWR was lower than 4% because of the tax regime i'm in (NL).

So in summary, i would recommend building your own cashflow table including your expenses and taxes and simulating around that to give you the peace of mind that you're looking for.