Annual Retirement Spending

[nodrog]

This must be an FAQ. The number that I enter for "Annual Retirement Spending" and items entered as "Expenses" in the additional items are all displayed in CURRENT DOLLARS and AFTER TAXES using the TAX RATES that I have entered in Investment and Income.

I am just confirming because when I run this say with Annual Retirement Spending of $100K and my tax rate is 30% the program says median withdrawal of $100K. This doesn't seem to account for the amount that needs to come out to pay the 30% tax? I have this set up to model all of my money in taxable portfolio.

What am I missing?

PS: thanks for this terrific program. It is the best I have found on the Internet. I would like to do some modeling using scenarios like "Die Broke" but I can play around to figure this out.

nim

[jimr]

The taxable portfolio is carried at a 100% cost basis. That means annual portfolio growth is taxed when it happens, so no taxes are due when funds are withdrawn from the portfolio.

[nodrog]

Got it! I am trying to model the scenario where some of my retirement income comes from an IRA and some from investments in a passive corp. The passsive corp pays capital gains and I pay income tax on the income from it. I assume the IRA is "tax deferred". But I am not sure how to treat the money in the passive corp? Putting the passive corp money in to the tax deferred box handles the income tax I pay but I don't think it accounts for the cap gains I will play.

Any thoughts on how to use FRP to handle my situation?

Anyway, the more I understand about this program the more I realize what a unique resource it is. Thanks!

[jimr]

There are multiple ways to handle this sort of thing. You could reduce the value of the investment before you add it to the taxable portfolio to try to get more precision around the tax handling differences between the model and reality. This is really more of an art than a science, but I'd suggest trying a few different approaches, with some more conservative and some less conservative, then comparing the results. In other words, do a sort of manual sensitivity analysis to see how much the tax implications of this investment actually impact your overall results.

With this sort of tool, sometimes we fret to get more and more precision on inputs that don't matter much while missing big imprecision in an input that really matters. I'm not saying this is what you're doing here, but imo it's important to try to margin all your inputs (one at a time) to figure out which ones are the most impactful on results.

[TomS]

Another option would be to just increase your annual spending/expense budget by some guesstimated amount, and perhaps increase it by whatever the CG tax would be on the taxable amount of your portfolio’s estimated RoR is. It won’t be totally precise, but at least you’ll have something in there for state and fed income taxes. There are lots of tax estimating tools online that should get you in the ballpark.