Author Topic: CFIRESIM Does Not Account for Taxes? Seems Like a Huge Gap in the Analysis  (Read 3732 times)

NYCMiniBee133

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I was reading the FAQ for CFIRESim http://www.cfiresim.com/docs/faq.php. It says to insert your spending amount as a gross amount and that it does not distinguish between taxable and non-taxable accounts. I read this as: we do not figure taxes as we apply historical growth rates to your nest egg.

This is a huge huge issue for those of us retiring well before the usual age, as most of our investable assets are in taxable accounts. If it says in year 1 our nest egg has grown my 20%, after taxes it may have only grown by 10% or 15%. Has anyone discussed this? It looks like I'll have to build my own spreadsheet and run my own simulations unless we assume we're parking money in an index fund and not liquidating any of it until we need to spend....kind of tricky when you're supposed to be rebalancing your portfolio annually.

Fastfwd

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It's fine as long as you calculate everything before tax.

ie:
I withdraw 40k before tax and plan to live on 40k before tax
or
I withdraw 40k before tax because I know taxes are 25% and plan to live on 30k after tax.

dude

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You are running your scenarios based on spending levels/expenses.  Taxes is but one of those expenses.  That's the way I've always done it.

Spork

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You are running your scenarios based on spending levels/expenses.  Taxes is but one of those expenses.  That's the way I've always done it.

Me as well.  And I run it with the (possibly incorrect) assumption that "taxes will be the same or less after retirement."

Mississippi Mudstache

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Right. Taxes are an expense. For some people. I don't pay income tax now, and I don't expect to in the future.

brooklynguy

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This is a huge huge issue for those of us retiring well before the usual age, as most of our investable assets are in taxable accounts.

I think the opposite is true:  around here, the prototypical early retiree has most of his/her investments in tax-advantaged accounts, which is why there are so many posts devoted to the financial gymnastics needed to gain penalty-free access to those investments during early retirement.

In any event, whatever tax liability you do project to have in early retirement should be treated as an expense when you're doing cFIREsim analyses (it doesn't matter whether those dollars are spent on taxes or lentil beans), but it would also be a good idea to exploit the deep knowledge base in the FIRE community on how to minimize that tax liability (potentially down to zero, or even below zero).

Mississippi Mudstache

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This is a huge huge issue for those of us retiring well before the usual age, as most of our investable assets are in taxable accounts.

I think the opposite is true:  around here, the prototypical early retiree has most of his/her investments in tax-advantaged accounts, which is why there are so many posts devoted to the financial gymnastics needed to gain penalty-free access to those investments during early retirement.

In any event, whatever tax liability you do project to have in early retirement should be treated as an expense when you're doing cFIREsim analyses (it doesn't matter whether those dollars are spent on taxes or lentil beans), but it would also be a good idea to exploit the deep knowledge base in the FIRE community on how to minimize that tax liability (potentially down to zero, or even below zero).

I thought about mentioning this as well. Even in our single-earner household, we have access to more than $40,000/yr in pre-tax savings, which is as much as we can manage to save in a year. I don't have any savings in a taxable account - not a penny.

  • 401k - $18,000
  • 401k match - $4,950
  • HSA - $6,450
  • 2 IRAs - $11,000
Total pre-tax savings - $40,400. Of course, this is why I don't pay any income tax (actually, I get a little back once you figure up my tax credits).

Shane

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Why pay taxes when you can legally never pay taxes again?

http://www.gocurrycracker.com/never-pay-taxes-again/

Eric

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If cFIREsim accounted for taxes, it probably wouldn't exist.  It would still be in the development phase.  Can you imagine how much extra work it would be to incorporate every single possible tax scenario into the framework?  And even then, how much more cumbersome it would be to use?

Like others said, taxes are an expense.  They're an expense that varies greatly from person to person, so the best way to do it is to figure out your own personal tax amounts and count that as you would any other expense.

kendallf

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This is a huge huge issue for those of us retiring well before the usual age, as most of our investable assets are in taxable accounts. If it says in year 1 our nest egg has grown my 20%, after taxes it may have only grown by 10% or 15%.

You realize you don't get taxed, even on your taxable account, until you sell something (either to live on, or to rebalance)?  The adjustments to rebalance should be relatively minor and can be done with current savings allocation (before retirement) or by picking what to sell (when in retirement).  Even if you have a relatively small tax advantaged account, do your rebalancing there and treat your entire stash as one portfolio.  See this Bogleheads thread for more on this.

https://www.bogleheads.org/forum/viewtopic.php?t=119494

Part of planning using CFiresim is to have a rough prediction of your spending needs after retirement.  Then you can figure what your likely capital gains rate will be.  See the excellent series of posts by Jeremy at gocurrycracker linked above to help minimize this.

Cheddar Stacker

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Taxes are an expense. For some people.

Awesome.

forummm

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cFIREsim also doesn't include extra costs you might have in retirement like health insurance. Or your new hobby. Just add those in along with any taxes you anticipate paying into your spending level.

kpd905

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I withdraw 40k before tax because I know taxes are 25% and plan to live on 30k after tax.

Do you have a pension? Otherwise you should not pay anywhere near 25% tax on $40k.

dude

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You can also ballpark your taxes (federal anyway) using a calculator such as this one:

http://www.calcxml.com/calculators/federal-income-tax-calculator

What I've done is remove federal taxes from my current spend, then I trial & error various numbers above my spend to get an idea of what figure I'd need pre-tax to net my planned spend in retirement.  For example, if my spend, not including fed taxes, right now is $65K, then using this calculator, I calculate that I'd need $79K pre-tax (federal) to net me $65K.  It's not perfect, but it gets you in the neighborhood (and you can figure that if you itemize deductions, you'll require even less pre-tax, since you'd only be using itemized if the deductions exceeded the standard deduction).

Fastfwd

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I withdraw 40k before tax because I know taxes are 25% and plan to live on 30k after tax.

Do you have a pension? Otherwise you should not pay anywhere near 25% tax on $40k.

I'm in Quebec,Canada where the top marginal tax rate is almost 50% and possibly higher next year. 40k would be 19%. I get free healthcare so not a bad deal for FIRE.