Author Topic: Counting taxes as "expenses" per my financial advisor's advice?  (Read 3016 times)

ECCAmA

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Counting taxes as "expenses" per my financial advisor's advice?
« on: January 08, 2016, 04:51:08 PM »
Hi all - first post, but I'm a lurker on the forums! I have a question that's been nagging at me for a while and I can't really seem to find a straight answer. My husband and I invested some money through Vanguard's Personal Advisor Program and when the advisor asked us to total up our annual expenses, he said to include taxes in the total. This seems weird to me and it ends up really affecting our "annual spending rate" - am I supposed to be planning for spending $60k/year in retirement or $90k? Can anyone comment on whether you should consider taxes in your annual spending rate and why my advisor might have said that?

Gin1984

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Re: Counting taxes as "expenses" per my financial advisor's advice?
« Reply #1 on: January 08, 2016, 05:18:45 PM »
Well, first why do you think you will be 50% in TAXES?  Second yes you should.

beltim

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Re: Counting taxes as "expenses" per my financial advisor's advice?
« Reply #2 on: January 08, 2016, 05:23:37 PM »
Well, first why do you think you will be 50% in TAXES?  Second yes you should.

30k in taxes on 90k in income is 33%, not 50%.  This is reasonable for a 90k income with state and/or property taxes included.

But yes, the OP should include taxes.

ShortInSeattle

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Re: Counting taxes as "expenses" per my financial advisor's advice?
« Reply #3 on: January 08, 2016, 05:27:58 PM »
You may end up paying taxes in retirement depending upon where you pull the money from. So your spend in retirement could be more than 60k.

For example, if you want to spend 60K in retirement out of your 401(k) you'll need to pull enough out to cover that 60K *plus* any taxes you owe on your withdrawal.

So in one sense your advisor is correct - you need to plan for taxes.

But it's slightly more complicated than "copy your current tax amounts" because:
- Your tax rate may be lower in retirement.
- Depending on where you pull your $$ from tax rates can differ.  (dividends vs tax-deferred withdrawals)
- What you spend *now* won't necessarily be what you spend when you retire.  (some expenses go away, others may get added)

I hope this helps. I'm sure others may have more to add.

SIS

ECCAmA

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Re: Counting taxes as "expenses" per my financial advisor's advice?
« Reply #4 on: January 08, 2016, 05:42:40 PM »
I guess that's what I'm trying to figure out - shouldn't we be trying to make an educated guess about what our taxes will be in retirement instead of basing future spending future projections on our current taxes? I get the concept of planning for taxes, but it just didn't seem to make sense to base estimated future expenses on our higher tax rate now.

Eric

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Re: Counting taxes as "expenses" per my financial advisor's advice?
« Reply #5 on: January 08, 2016, 05:49:04 PM »
Yes, calculate your taxes based on your future expenses.  The greater your savings rate, the bigger your discrepancy will be.

For instance, if you make $100k, but spend $90k, your taxes will be very similar in retirement.  If you make $100k, but spend $40k, they will be very different.

I like the taxcaster calculator for a good estimate:

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

Keep in mind the different tax structure of different investments, as SiS mentioned.

beltim

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Re: Counting taxes as "expenses" per my financial advisor's advice?
« Reply #6 on: January 08, 2016, 07:17:16 PM »
Yes, calculate your taxes based on your future expenses.  The greater your savings rate, the bigger your discrepancy will be.

I agree completely.  I also think it's important to point out that different investments are taxed differently, and they're not always taken into account correctly on calculators.  Taxcaster, for example, does not properly evaluate some long term capital gains and qualified dividends taxes in certain tax brackets.

seattlecyclone

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Re: Counting taxes as "expenses" per my financial advisor's advice?
« Reply #7 on: January 09, 2016, 06:46:45 AM »
I guess that's what I'm trying to figure out - shouldn't we be trying to make an educated guess about what our taxes will be in retirement instead of basing future spending future projections on our current taxes? I get the concept of planning for taxes, but it just didn't seem to make sense to base estimated future expenses on our higher tax rate now.

Yes, plan for how much tax you'll pay on your expected retirement withdrawals, not current taxes. These two numbers may be similar for most people who save a small percentage of their income and thus plan to have the same amount of income during retirement, but this assumption does not typically hold true for Mustachians.

ECCAmA

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Re: Counting taxes as "expenses" per my financial advisor's advice?
« Reply #8 on: January 09, 2016, 11:11:01 AM »
Thanks everyone! This is helpful context.

deborah

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Re: Counting taxes as "expenses" per my financial advisor's advice?
« Reply #9 on: January 09, 2016, 12:24:52 PM »
You may also have more in taxes than just on what you spend in retirement. For instance, if your investments earn more than you need, the tax man will take a proportion of their earnings. And if you were to sell some of your investments, you would need to pay CGT on that too.