Does Retire Withdraw Rate Account for Taxes and Inflation?

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Random Walker
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Does Retire Withdraw Rate Account for Taxes and Inflation?

Post by Random Walker »

I know we typically discuss a 3% or 4% withdrawal rate at retirement. I'm wondering if one is looking at a lump sum and converting that into a presumed monthly income to sustain them for rest of life, does this rule account for taxes and inflation? A few thousand dollars a month calculated as one twelfth of 3% of a lump sum looks great, but taxes and inflation can make it look small fast.

Dave
The Wizard
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Post by The Wizard »

So perhaps a bigger lump sum is needed then?
I'm not trying to be flippant, but compare pre-retirement gross income to projected post-retirement gross income. They are both taxable from what you say, so it's an apples vs apples comparison.
If $5K per month was adequate pre-retirement, then $4K per month might be enough during retirement. Depending...
ted123
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Re: Does Retire Withdraw Rate Account for Taxes and Inflatio

Post by ted123 »

Random Walker wrote:I know we typically discuss a 3% or 4% withdrawal rate at retirement. I'm wondering if one is looking at a lump sum and converting that into a presumed monthly income to sustain them for rest of life, does this rule account for taxes and inflation? A few thousand dollars a month calculated as one twelfth of 3% of a lump sum looks great, but taxes and inflation can make it look small fast.

Dave
You'll find that different people mean different things, but I think the academic studies typically assume an x percent initial withdrawal rate yields a dollar amount that then grows with inflation.

Taxes are paid out of that amount, so, yes, the amount that you can actually consume is smaller.
sscritic
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Post by sscritic »

Any 3% or 4% rule is about the survival of the money, not of the person. If you have $50,000 that you need to last for 30 years, you should start by taking out about $2000 a year. That has nothing to do with whether you can survive on $2000 a year, taxes or no taxes.
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Orion
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Post by Orion »

Taxes are a derivation that is left to the student. ;) If the money is coming from a taxable account, then they'll probably be quite low (compared to when you were employed.). From a Roth IRA - even lower. From a conventional IRA, they'll generally be higher than the other locations due to the distribution being treated as income.

The taxable account is the hardest to guess since the tax is on the investment performance, not the withdrawal.
YDNAL
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Re: Does Retire Withdraw Rate Account for Taxes and Inflatio

Post by YDNAL »

Random Walker wrote:I know we typically discuss a 3% or 4% withdrawal rate at retirement. I'm wondering if one is looking at a lump sum and converting that into a presumed monthly income to sustain them for rest of life, does this rule account for taxes and inflation? A few thousand dollars a month calculated as one twelfth of 3% of a lump sum looks great, but taxes and inflation can make it look small fast.

Dave
RW,

There are sooooo many variables.... The best laid schemes of mice and men / Go oft awry!

Yeah!.. whatever you withdraw, Uncle Sam is always lurking; and the withdrawal should keep up with inflation in order to pay the inflated bills.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
livesoft
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Post by livesoft »

In the original studies, the investments had no expenses, so the sustained (not safe!) withdrawal rate includes those expenses, taxes, the works.
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HomerJ
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Post by HomerJ »

4% studies do include increasing your withdrawals each year based on inflation...

Say you had $1 million - you'd withdraw $40,000 the first year. If inflation was 3%, you could withdraw $41,200 the next year, and so on.

And you would have a very good chance of your money lasting 30 years in this fashion...

Taxes come out AFTER you withdraw the money, and do affect how much of that $40,000 you get to actually spend, but aren't really relevant to the studies.
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grabiner
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Re: Does Retire Withdraw Rate Account for Taxes and Inflatio

Post by grabiner »

Random Walker wrote:I know we typically discuss a 3% or 4% withdrawal rate at retirement. I'm wondering if one is looking at a lump sum and converting that into a presumed monthly income to sustain them for rest of life, does this rule account for taxes and inflation? A few thousand dollars a month calculated as one twelfth of 3% of a lump sum looks great, but taxes and inflation can make it look small fast.
Most studies count inflation, but not taxes. If you have $1M in either a traditional or a Roth IRA, you can withdraw $40,000 a year, increasing with inflation, and have a low risk of running out of money. However, if you have a Roth IRA, that $40,000 is tax-free. If you have a traditional IRA, you will pay some tax on that $40,000; how much depends on what your other income is and how much you receive in Social Security (which may go from 0% to 85% taxable because of the withdrawal.)
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rmark1
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Post by rmark1 »

Adjusting Withdrawal Rates for Taxes and Expenses by Pye, 2001

http://spwfe.fpanet.org:10005/public/Un ... penses.pdf
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