Author Topic: Quick question about annual retirement spending  (Read 1676 times)

Milkshake

  • Stubble
  • **
  • Posts: 198
Quick question about annual retirement spending
« on: July 26, 2018, 12:02:24 PM »
Just wanting some clarification here, when you say "I'll be spending $XX,XXX in retirement" and this is the number you base your 4% rule on, does that include your mortgage (PITI)? Or since that will go away (eventually), do you plan on your spending minus the mortgage?

Cranky

  • Handlebar Stache
  • *****
  • Posts: 1680
Re: Quick question about annual retirement spending
« Reply #1 on: July 26, 2018, 12:05:22 PM »
It had better include your mortgage if you expect to have one.

terran

  • Handlebar Stache
  • *****
  • Posts: 1929
Re: Quick question about annual retirement spending
« Reply #2 on: July 26, 2018, 12:08:36 PM »
Alternatively, it would be reasonable to ignore the mortgage in terms of your withdrawal rate, and then add the remaining balance to your required stash. It has to be included somehow, but it would be silly to do something like include the income requirement to pay a mortgage that's in year 29 of 30 (will be paid off the year after you fire).

Remember to include things like property tax and insurance premiums that may currently be paid as part of your mortgage.

Milkshake

  • Stubble
  • **
  • Posts: 198
Re: Quick question about annual retirement spending
« Reply #3 on: July 26, 2018, 12:23:43 PM »
Alternatively, it would be reasonable to ignore the mortgage in terms of your withdrawal rate, and then add the remaining balance to your required stash. It has to be included somehow, but it would be silly to do something like include the income requirement to pay a mortgage that's in year 29 of 30 (will be paid off the year after you fire).

Remember to include things like property tax and insurance premiums that may currently be paid as part of your mortgage.

This makes sense. I like this idea.

I ask because the Case Study Spreadsheet seems a little liberal in when it estimates we are FI, and it has a section for "non-mortgage spending", so I was trying to understand if that was what it was calculating.

terran

  • Handlebar Stache
  • *****
  • Posts: 1929
Re: Quick question about annual retirement spending
« Reply #4 on: July 26, 2018, 12:30:47 PM »
Oh, I forgot: also don't include the value of your house in your net worth for withdrawal calculations. Sometimes people are tempted to do that, and it only works if you're planning to sell the house and add the proceeds to your investments (in which case you need to add a mortgage or rent back in to your spending). It can only count towards either reducing expenses or increasing the amount you can withdraw, not both.

Milkshake

  • Stubble
  • **
  • Posts: 198
Re: Quick question about annual retirement spending
« Reply #5 on: July 26, 2018, 12:42:25 PM »
^ Good point, definitely worth noting.

It seems like the spreadsheet is giving an estimate needed for FI that is like $150k short of what I would say the 4%/25x rule is. I'm not ready to do a full case study yet, but just kind of soundboarding to see if anyone else notices anything unexpected with the case study spreadsheet.

Or do you use cFiresim/Firecalc more than the Case Study sheet?

soccerluvof4

  • Magnum Stache
  • ******
  • Posts: 4974
  • Location: Artic Midwest
  • Retired at 50
    • My Journal
Re: Quick question about annual retirement spending
« Reply #6 on: July 26, 2018, 01:40:32 PM »
And the Obvious....If you sold the house you need to live somewhere so for me since I have no mortgage my home is paid for I just exclude it from my numbers because if I sold today unless I found something of lesser value I dont feel I can really figure in the equity. People play with numbers all different ways. I do of course include all the costs to maintain , property tax etc..but not the value when I was getting to my Fire'd number

DreamFIRE

  • Handlebar Stache
  • *****
  • Posts: 1596
Re: Quick question about annual retirement spending
« Reply #7 on: July 26, 2018, 01:49:27 PM »

The spending in retirement needs to account for taxes as well.

Milkshake

  • Stubble
  • **
  • Posts: 198
Re: Quick question about annual retirement spending
« Reply #8 on: July 26, 2018, 02:28:57 PM »
All good points.

The spending in retirement needs to account for taxes as well.
I assumed taxes were included in the Case Study Spreadsheet?

DreamFIRE

  • Handlebar Stache
  • *****
  • Posts: 1596
Re: Quick question about annual retirement spending
« Reply #9 on: July 26, 2018, 03:39:20 PM »
The spending in retirement needs to account for taxes as well.
I assumed taxes were included in the Case Study Spreadsheet?

I was responding to the original post and referring to total spending of 4% of your stash needs to include taxes, such as the spending you would enter into cFireSim.  If you're using something that calculates taxes separately, then just be sure not to count taxes twice, but that money for taxes still has to come from the stash.  I use my own spreadsheet and cFireSim, so I don't know how the spreadsheet you mentioned handles it.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 2165
  • Age: 50
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Quick question about annual retirement spending
« Reply #10 on: July 26, 2018, 11:13:05 PM »
Like @spartana, I paid off my house before I FIRE'd.

I do include property taxes and insurance in my spending number.  I do not include the value of my house in my FIRE stash number.

Everyone says to include taxes in one's spending number for purposes of the 4% rule, and that is true.  But if one is spending modestly, it isn't that hard to pay zero(*) in both federal and state income taxes.  And of course if one isn't working one is not paying SS or Medicare taxes.

(*) It is actually not unreasonable to not only pay zero to the federal and state governments but also receive a refund check from them.  This is a negative effective tax rate and happened to me in 2016 and 2017 for federal and 2017 for state.  I anticipate similar results in 2018.

MDM

  • Walrus Stache
  • *******
  • Posts: 9406
Re: Quick question about annual retirement spending
« Reply #11 on: July 26, 2018, 11:16:23 PM »
It seems like the spreadsheet is giving an estimate needed for FI that is like $150k short of what I would say the 4%/25x rule is. I'm not ready to do a full case study yet, but just kind of soundboarding to see if anyone else notices anything unexpected with the case study spreadsheet.
Always interested to hear if there is an issue with the CSS.

The calculation for "required stash" in Calculations!B193 is (B189-B165)/B167+B191.  In words, that is
[(all non-loan expenses, including taxes, in retirement) - ("guaranteed" income such as pension, SS, etc.)] / (safe withdrawal rate) + (total principal due on any outstanding loans).

At least, that is what it is supposed to be doing - and is consistent with previous discussion in this thread.

Could you give details on how you see the $150K difference?  Thanks!

Milkshake

  • Stubble
  • **
  • Posts: 198
Re: Quick question about annual retirement spending
« Reply #12 on: July 30, 2018, 07:22:29 AM »
Always interested to hear if there is an issue with the CSS.

The calculation for "required stash" in Calculations!B193 is (B189-B165)/B167+B191.  In words, that is
[(all non-loan expenses, including taxes, in retirement) - ("guaranteed" income such as pension, SS, etc.)] / (safe withdrawal rate) + (total principal due on any outstanding loans).

At least, that is what it is supposed to be doing - and is consistent with previous discussion in this thread.

Could you give details on how you see the $150K difference?  Thanks!

I can't look at it again until later tonight when I get home, but I'll verify that I haven't made a mistake somewhere. If I can't find my user error, I'll let you know!

DreamFIRE

  • Handlebar Stache
  • *****
  • Posts: 1596
Re: Quick question about annual retirement spending
« Reply #13 on: August 26, 2018, 02:06:03 PM »
Everyone says to include taxes in one's spending number for purposes of the 4% rule, and that is true.  But if one is spending modestly, it isn't that hard to pay zero(*) in both federal and state income taxes.  And of course if one isn't working one is not paying SS or Medicare taxes.

Reducing tax to 0% can require significant restrictions on spending even with a tax optimized drawdown, and it can be pretty much impossible in many cases.  I responded to a couple similar posts in another thread, which are appropriate in response here.  This is a copy/paste from that thread:

Regarding taxes: I thought the idea would be that your taxes should be minimal if you’ve set everything up well?

Are you forgetting state taxes?  These differ from state to state.  Curry Cracker may live in a state with very different taxation or without a state income tax, could be married, or minimizing his spending to require less income.  I already know I could do those things.  But, everyone's situation is different.

Minimizing taxes and "no" taxes are not the same thing.  A single person can't shield as much federal income from taxes as easily as a couple or family, and remember, the chart includes "fat" singles with $50K/yr spending.  If you're relying more on pre-tax 401Ks etc., pension, and/or SS, you'll have more taxable income.  Many members will be in that situation, even if not initially.  And many states allow very little shielding of income from taxation with very small deductions while taxing long term gains/dividends as ordinary income, so you need to factor that in also in many states.  Then there's taxable pension and SS benefits that many people receive.  That's very different than the still-young MMM "family" spending only "half" that "fat 50K" amount of a single person.  I don't know if he includes taxes, but that is irrelevant what one individual (err family) might do due to his (their) particular circumstances and taxation.  The common advice on this forum is to include taxes as part of your FIRE spending because it's another expense to pay from your drawdown, even more likely if you're a on a fat budget that requires more income or if receiving taxable pension/SS.  I agree with that, and it shouldn't be ignored.

I've been setting up my planned drawdown to optimize for lower taxes for years as mentioned in previous posts on this forum but will still generate about $24/yr in income as a single person while projecting fat expenses up to $50K/yr.  So for the first 15 years of FIRE, I'll be paying paying about 1.6% of my drawdown in taxes - all state income tax, about $66/mo if they don't raise it again.  No federal tax - 0%.  In 15 years, I'll have even more taxable income with taxable SS/pension income, so then my total state and federal tax combined will be 4.6% of my drawdown and SS benefits combined.  More SS benefits are taxable every year because the thresholds that are used for triggering the taxable amounts are not indexed to inflation, so I am accounting for those changes 16 years in advance (planning FIRE in 1 year).  I could lower or eliminate all income taxes, at least for the first 15 years, but that would also mean moving to a different state (which I might for other reasons) or lowering my spending to a much lower amount, but that wouldn't make sense to put such a spending restriction on myself when my stash is already more than enough to fund a fat spending FIRE and cover the 1.6% to state income tax prior to reaching SS age and 4.6% total taxes after SS age.  I would rather spend a little more and enjoy retirement with more travel and entertainment than intentionally reduce spending just to cut taxes further leaving a huge amount of stash unspent.  Compared to the high taxes I'm paying now, 1.6% is trivial.

Many people are not setup for tax optimization as I am while still wanting to spend for "fat" FIRE, and along with pension income or even SS, they may have to pay much more in income tax than me, depending on the state also.

Between qualified dividends and LTCG taxes should be zero to minimal

Ahh, no, you forgot that many of us have state income taxes that tax these as ordinary income with very little deduction.  See my previous post where I break down why I will still have to pay 1.6% of my drawdown due to state income taxes.

Quote
also no SS taxes on unearned income.

I wasn't referring to SS/FICA taxes in FIRE.  I'm referring to income tax that needs to be paid from the stash/retirement income, not regular jobs.  Many people will have taxable pension or SS income as well.  However, despite no FICA tax, SS benefits are taxable at certain income levels and are becoming taxed more every year as explained in this post:

https://forum.mrmoneymustache.com/welcome-to-the-forum/what-age-to-take-social-secuirty/msg1928490/#msg1928490

Cassie

  • Walrus Stache
  • *******
  • Posts: 5522
Re: Quick question about annual retirement spending
« Reply #14 on: August 26, 2018, 04:33:33 PM »
We include everything in our yearly budget .