25x expenses and taxes?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
am
Posts: 4232
Joined: Sun Sep 30, 2007 9:55 am

25x expenses and taxes?

Post by am »

When we use 25x expenses as a ballpark for retirement portfolio, this is after taxes? Should the portfolio than be some percentage larger based on assumed taxes? For those of us 15-20+ years away, a huge unknown. But say you need 80-100k in todays dollars. How large a portfolio would be reasonable?
livesoft
Posts: 85971
Joined: Thu Mar 01, 2007 7:00 pm

Re: 25x expenses and taxes?

Post by livesoft »

Taxes are an expense, but with only $80K to $100K a year withdrawal from portfolio, taxes should be very minimal if not zero.

To be clear: 25X includes taxes, so just make sure your expenses also include taxes.
Wiki This signature message sponsored by sscritic: Learn to fish.
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: 25x expenses and taxes?

Post by steve_14 »

I go with 30x first year's expenses, and I make sure that number covers all my spending items, including all taxes.
Topic Author
am
Posts: 4232
Joined: Sun Sep 30, 2007 9:55 am

Re: 25x expenses and taxes?

Post by am »

So for 80-100k of which half will come from taxable long term gains and munis and half from IRAs, what would be a safe % to assume above my income needs?
User avatar
Tortoise
Posts: 367
Joined: Sat Aug 08, 2009 3:24 am
Location: San Jose

Re: 25x expenses and taxes?

Post by Tortoise »

I take it as 25x all expenses, in which taxes are part of the expense. You do know that the 25x expenses is using a 4% withdrawal rate, right? There has been a lot of recent talk and articles that this is too high for some people, just right for others, and too low for others.

My wife and I are expecting to have a portfolio value between $2.4 and $3 million when we retire in 9 years. Using a 3% SWR that would give us between $72,000 and $90,000 each year, with possible annual adjustments for inflation, although maybe not if the market has some bad years. This also does not account for the additional Social Security benefits we will be getting.
"Always do right. This will gratify some people, and astonish the rest." --Mark Twain
cherijoh
Posts: 6591
Joined: Tue Feb 20, 2007 3:49 pm
Location: Charlotte NC

Re: 25x expenses and taxes?

Post by cherijoh »

livesoft wrote:Taxes are an expense, but with only $80K to $100K a year withdrawal from portfolio, taxes should be very minimal if not zero.

To be clear: 25X includes taxes, so just make sure your expenses also include taxes.
Livesoft, you appear to be assuming that the $80 - $100K/year is coming out of a taxable account (and thus only involve paying cap gains and dividend tax) - if it is in a Traditional IRA, I wouldn't call the taxes minimal! :(

Also, us single folks hit the 25% marginal tax bracket pretty quickly.
ourbrooks
Posts: 1575
Joined: Fri Nov 13, 2009 3:56 pm

Re: 25x expenses and taxes?

Post by ourbrooks »

Look at the total rate, not the marginal rate. Even if you are withdrawing $100,000 a year from a retirement account and you have no significant deductions, you'll still probably end up paying no more than $10,000-$15,000 in taxes. Even if you bump up the 25x figure to account for 15% in taxes, it really doesn't make much of a difference, given that the original 25X figure is only good +/- 50%.

A larger concern is probably inflation; even with 2% inflation, if you start your retirement in 15 years, you'll need 35% more money than you would today.
Cautious Man
Posts: 3
Joined: Sun Mar 11, 2012 11:58 pm

Re: 25x expenses and taxes?

Post by Cautious Man »

I do it a bit differently but this gets to a similar proof of the 25x.

This assumes all withdrawals are taxable. If not it only gets better…lower multiple.

If my residual expenses (excluding taxes) are say 100k per year beginning at 65, I do a five row spreadsheet all in real dollars as follows:

Beginning year Investment
+Real Rate of return
-Withdrawals
-Taxes
=Ending balance

With a 2% real rate of return (say 30% equities at 4.5% and 70% bonds at 1%...reasonable to me over 25-30 years) and an estimated 20% tax rate (fed and state) and a withdrawal reduction every 10 years of the 100k by 10% (90k at 75 and 81k at 85), the real rate of return will generally cover your taxes.

If you take out the columns 25 years to age 90 (good enough), thats when you run out of money. At a 25x multiple or $2,500,000. Practically you will pay taxes on the real return plus inflation but that only shortens the end date by one or two years. A pinch higher real rate or one or two more turns on the multiple will cover this.

You can easily play around with different variables in this model. If you want to go to age 95 you may juice up the equity side or add a turn or two to the multiple. Also if you go to say 200k a year in residual expenses your tax rate will obviously increase and you will have to adjust your assumptions accordingly. But I believe the 100k example is a good starting point for many people and can visually (mathematically) show someone how the 25x estimate is calculated.
User avatar
Sheepdog
Posts: 5783
Joined: Tue Feb 27, 2007 2:05 pm
Location: Indiana, retired 1998 at age 65

Re: 25x expenses and taxes?

Post by Sheepdog »

Calculating your retirement fund needs assuming a 4% withdrawal and adjusting for inflation is probably wrong today because the 4% "rule" was developed when interest rates on bonds were much higher. It worked for me to determine my savings needs 16 years ago before I retired in 1998, but I doubt it would work now. 3.5% would be the maximum, in my opinion. (Multiply your expected annual expenses by 28.6 would be a better estimate today of how much you need saved.) Even 3% would be safer in your plan. (Multiply your expected expenses by 33.3.). However, if you don't increase your distributions for inflation, but instead take out 4% of what you have on Dec. 31 every year and can adjust your spending according to that distribution, 4% would be fine....even higher. That does include taxes, yes.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
User avatar
Ged
Posts: 3944
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: 25x expenses and taxes?

Post by Ged »

It's very difficult to predict taxes, but for me anyway it turned out that post-retirement is 1/4 of what pre-retirement was. A lot of that is due to immediately prior to retirement my income was at lifetime max; my expenses are less than 1/2 of that and I was saving like crazy.

I'd say really it's pretty difficult to predict taxes 20 years prior to retirement. Or for that matter expenses. So I would just try to estimate the taxes you will have to pay on the income stream you want in order to cover the rest of your expenses as you go along. When you near retirement the uncertainty in the estimate will decrease.
Post Reply