Why do so many people quote "You will likely be in a lower tax bracket in retirement"

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marcopolo
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by marcopolo » Mon May 21, 2018 4:54 pm

LaurieAnnaT wrote:
Mon May 21, 2018 4:16 pm
My husband and I planned on taking social security at 70. We planned on living forever so that we would be paying taxes at married filing jointly rates on our social security and RMDs.

Never, in 100 years, did I think that my big strong husband would die at age 63. So yes, I will most definitely be in a higher tax bracket starting next year. That sucks.

There has to be one of the most common situations in retirement - one spouse dies, leaving the surviving spouse in a single taxpayer tax bracket.
I am so sorry for your loss at such a young age.

You are right, I think this is a blind spot many (myself included) have when planning for the future.
I have recently been spending some time getting my wife familiar with our investments, planning, how to manage nuts and bolts of finances if something were to happen to me, etc.. Despite that, I don't think I have paid nearly enough attention to how my early demise would affect taxes, SS, etc. for her. It is, in fact, difficult to contemplate our own mortality.

Thank you for reminding me to pay more attention to this aspect of planning. Best of luck to you
Once in a while you get shown the light, in the strangest of places if you look at it right.

Cash is King
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Cash is King » Mon May 21, 2018 5:26 pm

A good read . The outcome of paying the early penalty was surprising.

https://www.madfientist.com/how-to-acce ... nds-early/

golfCaddy
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by golfCaddy » Mon May 21, 2018 6:39 pm

willthrill81 wrote:
Mon May 21, 2018 4:04 pm
dknightd wrote:
Mon May 21, 2018 3:31 pm
You might be in a higher tax bracket, or a lower tax bracket. It is impossible for us to predict.
We cannot predict it precisely, of course. But we can probably do a lot better than random chance.
Partly, it depends on how close to retirement you are. If you plan to retire tomorrow, you can count on taxes not changing at least until another president takes office. If you expect to retire in 25 years, speculation about future tax rates, where brackets begin and end, and the size of the standard deduction in real dollars all start to enter crystal ball territory.

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Mon May 21, 2018 7:46 pm

CnC wrote:
Mon May 21, 2018 10:36 am
marcopolo wrote:
Mon May 21, 2018 9:03 am
CnC wrote:
Mon May 21, 2018 8:59 am
There is one more monkey wrench that pre tax has.

Early retirement. If I retire at 50-55 as planned, I will have 5-10 years that my 401k pretax is untouchable.

To me the pretax has a pretty limited window of being useful. Ages 60-70. After 70 you are forced to take an increasingly large amount out each year regardless of need and before 60 you can't take any out due to large penalties.
Look up "Roth Conversion Ladder". I think you still come out ahead because if you can afford to retire in early 50s, you were likely in high tax bracket. It is quite likely that conversions after early retirement are at lower rate than your marginal rate pre-retirement.
We are in a medium tax bracket. ±200k for a family of 4 mfj.
I have looked at the conversions granted my math could be off but I don't see how you even put a dent in your traditional 401k via Roth conversions and stay in a lowish tax bracket.

Now this is in future money when I'm going to hopefully retire but I have bumped up the tax brackets accordingly.

Say after typical stock growth me and dw have 4 mil in our combined 401ks tax deferred.

Say it's growing at 7% nominal at retirement.
At today's tax brackets indexed for inflation the 24% bracket will start at 260,000. +38k in standard deductions. Let's round that up to 300k


300,000/4,000,000 you are looking at 7.5% converted and a growth of 7% so you are only putting a little tiny dent in your pretax. On top of that you still have living expenses so I really have no clue how someone can plan on converting the majority of their money at low tax brackets.

I mean sure if we have poor returns compared to historical norms then yes you can convert a larger percentage. But that 18.5k a year in indexed for inflation. Over the next ±20 years we will be putting over 1 million into the 401k's not including growth.
Please explain to us how do you get 300K income out of 4 million.

Klangfool

LaurieAnnaT
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by LaurieAnnaT » Mon May 21, 2018 7:59 pm

marcopolo wrote:
Mon May 21, 2018 4:54 pm

You are right, I think this is a blind spot many (myself included) have when planning for the future.
I have recently been spending some time getting my wife familiar with our investments, planning, how to manage nuts and bolts of finances if something were to happen to me, etc.. Despite that, I don't think I have paid nearly enough attention to how my early demise would affect taxes, SS, etc. for her. It is, in fact, difficult to contemplate our own mortality.

Thank you for reminding me to pay more attention to this aspect of planning. Best of luck to you
I've been the one to pay the bills and both my husband and I were involved in our investing, so I can handle the nuts and bolts of my finances just fine, thank goodness!

The problem I ran into is that my husband handled anything related to the house and yard and vehicles. Within three weeks of his passing, I needed to figure out about mowing the lawn, for example. I've mowed before, with our old mower. But that was only when my husband was out of town. He cleaned the underside of the mower when he got home. He also told me which gas can contained fuel for the mower before he left. Right now I have no idea which gas can has which gas/oil combination - we own a lawn mower, a single stage snowblower, a two stage snowblower, leaf blowers and grass trimmers. Plus, I have no idea how to clean a lawn mower. My solution: a lawn service.

Next problem: How to change the furnace filter. All I know is that it's a hammock filter and I have to cut the filter material to fit. I'm hoping YouTube will show me the steps.

I hate that I have to figure these things out. I know my husband would have shown me what to do, or documented the steps, if he had any idea that he would die so young. Oh well... I will figure things out.

sc9182
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by sc9182 » Mon May 21, 2018 8:25 pm

LaurieAnnaT wrote:
Mon May 21, 2018 7:59 pm
marcopolo wrote:
Mon May 21, 2018 4:54 pm

You are right, I think this is a blind spot many (myself included) have when planning for the future.
I have recently been spending some time getting my wife familiar with our investments, planning, how to manage nuts and bolts of finances if something were to happen to me, etc.. Despite that, I don't think I have paid nearly enough attention to how my early demise would affect taxes, SS, etc. for her. It is, in fact, difficult to contemplate our own mortality.

Thank you for reminding me to pay more attention to this aspect of planning. Best of luck to you
I've been the one to pay the bills and both my husband and I were involved in our investing, so I can handle the nuts and bolts of my finances just fine, thank goodness!

The problem I ran into is that my husband handled anything related to the house and yard and vehicles. Within three weeks of his passing, I needed to figure out about mowing the lawn, for example. I've mowed before, with our old mower. But that was only when my husband was out of town. He cleaned the underside of the mower when he got home. He also told me which gas can contained fuel for the mower before he left. Right now I have no idea which gas can has which gas/oil combination - we own a lawn mower, a single stage snowblower, a two stage snowblower, leaf blowers and grass trimmers. Plus, I have no idea how to clean a lawn mower. My solution: a lawn service.

Next problem: How to change the furnace filter. All I know is that it's a hammock filter and I have to cut the filter material to fit. I'm hoping YouTube will show me the steps.

I hate that I have to figure these things out. I know my husband would have shown me what to do, or documented the steps, if he had any idea that he would die so young. Oh well... I will figure things out.
Laurie: Sorry for your tremendous loss.

As much as your current/single brackets may have increased significantly, doesn't expenses go down slightly? Hope you guys planned for., and since received any term/life insurance payout - guessing such payouts are tax free. Effective average tax scenario might pan out better if including insurance payout.

Also, possibly receiving SS survivor benefits !?

You may have figured financial side of things, mebbe you need/could-afford hired help towards household chores such as lawn care, periodic house cleaning, and such. No substitute for handy husband though!

Regards

LaurieAnnaT
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by LaurieAnnaT » Mon May 21, 2018 10:07 pm

sc9182 wrote:
Mon May 21, 2018 8:25 pm
As much as the brackets have increased, doesn't expenses go down slightly? Hope you guys planned for., and since recieved any term/life insurance payout - guessing such payouts are tax free. Effective average tax scenario might pan out better if including insurance payout.

Also, possibly receiving SS survivor benefits !?

You may have figured financial side of things, mebbe you need/could-afford hired help towards household help such as lawn care, periodic house cleaning, and such. No substitute for handy husband though!

Regards
First, a little more background. We have no children. I stopped working in 1999. My husband retired in 2016. We were avid savers and did exceptionally well with our investments. My husband was 63. I'm 1½ years older - 65. At this point in our lives we did not need life insurance. We were planning on taking social security when we turned 70.

Yes, some expenses will decrease - no more health insurance for my husband, a lot less eating out. But we also had a ton of house projects which had been put off until my husband retired. We were going to start on those this year - painting, re-carpeting, a new furnace, attic insulation, fixing a water issue in the basement, etc. I will hire folks to do those projects - I don't have the experience and I want the projects to be done in a reasonable amount of time.

I will end up hiring folks to do the things my husband did so easily. Thank goodness I have the financial means.

But it would have been nice to have both of our social security checks at age 70. And it would be nice to file married filing jointly. I should have enough in investments for the rest of my life. The higher taxes and lower social security receipts just means less for my heirs, but, as they are nephews and nieces, they aren't expecting anything anyway.

CnC
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Mon May 21, 2018 11:02 pm

KlangFool wrote:
Mon May 21, 2018 7:46 pm
CnC wrote:
Mon May 21, 2018 10:36 am
marcopolo wrote:
Mon May 21, 2018 9:03 am
CnC wrote:
Mon May 21, 2018 8:59 am
There is one more monkey wrench that pre tax has.

Early retirement. If I retire at 50-55 as planned, I will have 5-10 years that my 401k pretax is untouchable.

To me the pretax has a pretty limited window of being useful. Ages 60-70. After 70 you are forced to take an increasingly large amount out each year regardless of need and before 60 you can't take any out due to large penalties.
Look up "Roth Conversion Ladder". I think you still come out ahead because if you can afford to retire in early 50s, you were likely in high tax bracket. It is quite likely that conversions after early retirement are at lower rate than your marginal rate pre-retirement.
We are in a medium tax bracket. ±200k for a family of 4 mfj.
I have looked at the conversions granted my math could be off but I don't see how you even put a dent in your traditional 401k via Roth conversions and stay in a lowish tax bracket.

Now this is in future money when I'm going to hopefully retire but I have bumped up the tax brackets accordingly.

Say after typical stock growth me and dw have 4 mil in our combined 401ks tax deferred.

Say it's growing at 7% nominal at retirement.
At today's tax brackets indexed for inflation the 24% bracket will start at 260,000. +38k in standard deductions. Let's round that up to 300k


300,000/4,000,000 you are looking at 7.5% converted and a growth of 7% so you are only putting a little tiny dent in your pretax. On top of that you still have living expenses so I really have no clue how someone can plan on converting the majority of their money at low tax brackets.

I mean sure if we have poor returns compared to historical norms then yes you can convert a larger percentage. But that 18.5k a year in indexed for inflation. Over the next ±20 years we will be putting over 1 million into the 401k's not including growth.
Please explain to us how do you get 300K income out of 4 million.

Klangfool
What don't you understand? I provided the math.

If you take 300,000 and divide it by 4 million you get 7.5%. that's pretty simple and I assume you understand that right?

I then simply used a typical yearly growth of 7% which is considerably lower than the average 60/40 portfolio average returns.
https://personal.vanguard.com/us/insigh ... llocations

Sure this is not a sustainable withdrawal rate but I am talking about conversions. So why not use typical.

The 300k was indexing the 24% rate for future dollars.

I ask again what is your question?

The Wizard
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Location: Reading, MA

Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by The Wizard » Tue May 22, 2018 3:56 am

CnC wrote:
Mon May 21, 2018 11:02 pm

If you take 300,000 and divide it by 4 million you get 7.5%. that's pretty simple and I assume you understand that right?

I then simply used a typical yearly growth of 7% which is considerably lower than the average 60/40 portfolio average returns.
https://personal.vanguard.com/us/insigh ... llocations

Sure this is not a sustainable withdrawal rate but I am talking about conversions. So why not use typical.

The 300k was indexing the 24% rate for future dollars.

I ask again what is your question?
So that $300k is your planned AGI in your 60s with significant Roth conversions prior to starting SS and RMDs at 70.5?

So what is your projected AGI after age 70.5 with zero further Roth conversions?
If it's $270k or more, then OK.
Otherwise, you may be paying too much tax upfront with overly large conversions...
Attempted new signature...

wrongfunds
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Tue May 22, 2018 7:29 am

Once again, we are talking about multi-generational chickens which are not yet born but we have started counting theirs eggs today!
OP is 32 years old today. All this discussion is completely insane.

CnC
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Tue May 22, 2018 8:14 am

wrongfunds wrote:
Tue May 22, 2018 7:29 am
Once again, we are talking about multi-generational chickens which are not yet born but we have started counting theirs eggs today!
OP is 32 years old today. All this discussion is completely insane.
That's why the mods shifted this from personal investments to investing theory.

You are right I honestly have no idea how much I will have at retirement likely between 2 million and 8 million. A pension worth 2k a month and 8k a month. It is impossible to know the future but the point is to understand that "general rules of thumb" are sometimes more harm than good.

I was simply using my personal case as an example. It doesn't HAVE to be accurate it just needs to be reasonable.
The Wizard wrote:
Tue May 22, 2018 3:56 am

So that $300k is your planned AGI in your 60s with significant Roth conversions prior to starting SS and RMDs at 70.5?

So what is your projected AGI after age 70.5 with zero further Roth conversions?
If it's $270k or more, then OK.
Otherwise, you may be paying too much tax upfront with overly large conversions...
That's a very interesting concept. I was mainly seeing how much I could convert prior to drawing social security at 70. Both my wife and I will have earned a pretty decent amount over our lives and had always just planned on taking it at 70. I assumed that considerable bump in yearly income would fill up the entirely of the 22% bracket based on my calcs.

To me it doesn't matter how much we will be spending after 70. Our rmd's will increase every year until I kick off and leave my wife with an extreamly high tax bill like the previous poster (my condolences I hope you guys got to have some fun in retirement). I certainly hope it doesn't happen for 30 years after I start taking rmd's but hope isn't a plan.

Silk McCue
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Silk McCue » Tue May 22, 2018 8:20 am

wrongfunds wrote:
Tue May 22, 2018 7:29 am
Once again, we are talking about multi-generational chickens which are not yet born but we have started counting theirs eggs today!
OP is 32 years old today. All this discussion is completely insane.
It may or may not be insane but you have posted 48 times on this thread. I am up to 10 with this one. At least we are passionate.

Cheers

MnD
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by MnD » Tue May 22, 2018 8:30 am

willthrill81 wrote:
Mon May 21, 2018 10:45 am
I too am planning on retiring at around that age, and I'm planning on either using the SEPP 72(t) rule and/or making withdrawals from my 457 plan, which has no early withdrawal penalty as long as you've separated from service to the employer.
Likewise age 56 we will be using SEPP 72(t) and making 457 plan (TSP) withdrawals. I notice a lot of the "pension" examples trying to make the case for Roth lack any details or actual numbers.

My "decent" 1% times years times high-3 pension isn't a vast sum in a 2-income household and under current tax law will not even come close to filling up the 12% bracket. So as far as tIRA and t457 withdrawals, these will be a blend of 12% and 22% bracket whereas the vast majority of funds went in 100% at the 28% or 31% bracket. My pension income is not inflation-indexed for a significant number of years and then only partially indexed so given tax bracket indexation, the lower rate bracket "room" will likely expand for many years if not forever. % of annual balance (variable) spending from tIRA's and 457 should keep a lid on portfolio balances and RMD's.

If market returns provide a plethora of riches and some fraction of portfolio withdrawals get into the 24% bracket - well that sounds like like a first-world Boglehead "problem" given the level of retirement income that would entail (AGI over $189,000 assuming standard deduction). And some fraction at 24% is still a significant "win" compared to the marginal tax rates when that income was deferred. Our AGI in retirement in today's dollars would have to exceed $339,000 for even $1 to be taxed at a higher rate than the savings from deferred compensation. I think a lot of the Roth camp hasn't actually done the math.
Last edited by MnD on Tue May 22, 2018 10:35 am, edited 1 time in total.

The Wizard
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Location: Reading, MA

Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by The Wizard » Tue May 22, 2018 8:40 am

CnC wrote:
Tue May 22, 2018 8:14 am
The Wizard wrote:
Tue May 22, 2018 3:56 am

So that $300k is your planned AGI in your 60s with significant Roth conversions prior to starting SS and RMDs at 70.5?

So what is your projected AGI after age 70.5 with zero further Roth conversions?
If it's $270k or more, then OK.
Otherwise, you may be paying too much tax upfront with overly large conversions...
That's a very interesting concept. I was mainly seeing how much I could convert prior to drawing social security at 70. Both my wife and I will have earned a pretty decent amount over our lives and had always just planned on taking it at 70. I assumed that considerable bump in yearly income would fill up the entirely of the 22% bracket based on my calcs.

To me it doesn't matter how much we will be spending after 70. Our rmd's will increase every year until I kick off and leave my wife with an extreamly high tax bill like the previous poster (my condolences I hope you guys got to have some fun in retirement). I certainly hope it doesn't happen for 30 years after I start taking rmd's but hope isn't a plan.
You will also have Medicare IRMAA surcharges to deal with if your AGI is higher than some amount, presently $85,000 per person.
Mine is well over $85k and always will be but I still try to avoid having my AGI just over the next higher IRMAA tier threshold.
You can start worrying about this when you're 62, but it makes sense to have relatively level income, not $50k higher AGI this year than next year due to conversions.

And while RMD percentages edge up each year after age 70.5, the resulting dollar amount withdrawn may or may not.
If you're lucky, your RMD dollar amount goes up each year because your tax deferred portfolio did well and there was no 25% stock market crash...
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Admiral
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Admiral » Tue May 22, 2018 9:36 am

The (or one) issue with relying on Roth conversion is that it, in a dual income household, it assumes both spouses retire at the same time (or one has a very low or no earned income). Conversion to Roth is not beneficial if one has already filled up the lower brackets with other income. In that case, you could be paying tax at the same marginal rate on your conversion as you would on your earned income.

Not sure how many people know years in advance the precise date that both employed members of a household will retire. It can certainly be planned for, I suppose, but I know that in my household my spouse plans to work longer than I do, at least currently. At her income, even if I was earning nothing, we could not convert favorably, tax wise, for more than perhaps a couple of years, unless she changes her mind.

That said, we have both Roth and Traditional accounts, mostly due to our desires for our heirs.

KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Tue May 22, 2018 1:55 pm

CnC wrote:
Tue May 22, 2018 8:14 am
wrongfunds wrote:
Tue May 22, 2018 7:29 am
Once again, we are talking about multi-generational chickens which are not yet born but we have started counting theirs eggs today!
OP is 32 years old today. All this discussion is completely insane.
That's why the mods shifted this from personal investments to investing theory.

You are right I honestly have no idea how much I will have at retirement likely between 2 million and 8 million. A pension worth 2k a month and 8k a month. It is impossible to know the future but the point is to understand that "general rules of thumb" are sometimes more harm than good.

I was simply using my personal case as an example. It doesn't HAVE to be accurate it just needs to be reasonable.
The Wizard wrote:
Tue May 22, 2018 3:56 am

So that $300k is your planned AGI in your 60s with significant Roth conversions prior to starting SS and RMDs at 70.5?

So what is your projected AGI after age 70.5 with zero further Roth conversions?
If it's $270k or more, then OK.
Otherwise, you may be paying too much tax upfront with overly large conversions...
That's a very interesting concept. I was mainly seeing how much I could convert prior to drawing social security at 70. Both my wife and I will have earned a pretty decent amount over our lives and had always just planned on taking it at 70. I assumed that considerable bump in yearly income would fill up the entirely of the 22% bracket based on my calcs.

To me it doesn't matter how much we will be spending after 70. Our rmd's will increase every year until I kick off and leave my wife with an extreamly high tax bill like the previous poster (my condolences I hope you guys got to have some fun in retirement). I certainly hope it doesn't happen for 30 years after I start taking rmd's but hope isn't a plan.
If you believe 4 million in tax-defered is tooo much, stop at a smaller number like 3 million and switch to Roth.

KlangFool

CnC
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Tue May 22, 2018 4:25 pm

KlangFool wrote:
Tue May 22, 2018 1:55 pm


If you believe 4 million in tax-defered is tooo much, stop at a smaller number like 3 million and switch to Roth.

KlangFool
Honestly that seems to be really good advise. That 24% tax bracket will stretch a long dollar amount so switching to Roth later on won't hurt anymore than doing it now, but making sure we hit that 3mil floor or whatever floor we want before we start planning for lifestyles of the rich and famous that may never happen is a very logical idea.

Because as many have said paying a bunch of tax now based on grand plans that may never happen is a gamble.

sc9182
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by sc9182 » Tue May 22, 2018 5:43 pm

CnC wrote:
Tue May 22, 2018 4:25 pm
KlangFool wrote:
Tue May 22, 2018 1:55 pm


If you believe 4 million in tax-defered is tooo much, stop at a smaller number like 3 million and switch to Roth.

KlangFool
Honestly that seems to be really good advise. That 24% tax bracket will stretch a long dollar amount so switching to Roth later on won't hurt anymore than doing it now, but making sure we hit that 3mil floor or whatever floor we want before we start planning for lifestyles of the rich and famous that may never happen is a very logical idea.

Because as many have said paying a bunch of tax now based on grand plans that may never happen is a gamble.
LOL, if that plan sounds good to you, be happy. But like many who chimed in earlier, including MadFientist article, for just about many Tax Deferred savings make more /financial/ sense.

We sure wouldn't count our eggs until as we approach financial milestones. If you are crossing 2 million mark, you could fine tune your plan as you are crusing towards 3 million mark.

Definitely try to max out suitable tax efficient vehicles.

wrongfunds
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by wrongfunds » Wed May 23, 2018 9:08 am

Thinking this over, I am wondering if it would be much better if all the calculations were done on real rather than nominal numbers. I don't know if I am using the correct terminology but the intent is to NOT take inflation or COLA in to account for the calculations and ASSUME that value of dollar remains constant for next 50 years and then do apple to apple comparison. I think to be able to decide which option is better or worse, I think this idea will work. If nothing else, at least the numbers would be simpler to comprehend.

As a conservative estimate, let us start with 4% real total growth per year. Because we are not taking inflation in to account, that number is reasonable and NOT too low. Start with 30 year old couple with good income and in a position to max their 401K. Let us assume 20K per person for simplicity sake. We will keep that same for 20 years (age 30-50). Then for next 10 years(50-60), we will add catch up 6K+ per person. We will use 28.5x at age 60 (3.5% draw) and use 40x at age 50 (2.5% draw). I am using calculator from smartasset.com

$40K every year for 20 years at 4% growth gives 1278K Can support 2.5% (aka 40x) withdrawal 32K at age 51
$40K every year for 30 years at 4% growth gives 2373K Can support 3.5% (aka 28.5x) withdrawal 82K at age 61
If we add catch-up of 12K from 51-60 that will add 161K total (2372+161) = 2534K @3.5 gives 88K at age 61

Unless I am doing something wrong, the catch-up does not seemed to be making too much difference. That is really surprising. Would somebody cross check my calculations?

Since we are not taking any inflation in to account, for SS benefits, assuming the couple has been able to get max benefits at today's rate, that would be $67K if taken at FRA and worked till at least 60. I do not think if the couple stops working at 50, they will be able to max their SS benefits even with 20 years of maxing out SS contributions. I am not able to guesstimate that number but just thinking it would be about $35K for couple.

Since we are assuming maxing out 401K every year, realistically speaking, the couple's total W2 income today is north of at least $150K. I do not think their retirement expenses (aka current standard of living) would be covered at 51 (available 32+35 = 67K) but we do see that they would be able to retire *extremely well* at 61 (available 88+67=155K).

I suppose there is some sweet spot between 51 and 60 when they can pull the plug and keep the standard of living almost the same. Not only the portfolio grows, it also needs to support fewer retirement years and thus allow to increase the draw rate.

The reason I am posting this is to help younger people grasp real numbers rather getting overly excited with inflation adjusted numbers or getting very disappointed by looking at the huge numbers needed at the end of 30-35 years.

I am sure there are lot better spreadsheets available to do this back of napkin analysis but this is something that I can understand little bit easier.

smitcat
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by smitcat » Wed May 23, 2018 9:33 am

CnC wrote:
Tue May 22, 2018 4:25 pm
KlangFool wrote:
Tue May 22, 2018 1:55 pm


If you believe 4 million in tax-defered is tooo much, stop at a smaller number like 3 million and switch to Roth.

KlangFool
Honestly that seems to be really good advise. That 24% tax bracket will stretch a long dollar amount so switching to Roth later on won't hurt anymore than doing it now, but making sure we hit that 3mil floor or whatever floor we want before we start planning for lifestyles of the rich and famous that may never happen is a very logical idea.

Because as many have said paying a bunch of tax now based on grand plans that may never happen is a gamble.
I did not realize you were so young and projecting the amounts in the future. You have modeled the savings and are concerned with the tax situation many years down the road what have you done to adjust the tax brackets you are worried about in the future?
For a different view if I take our current retirement accounts use the tax tables from 25 years back I would be in trouble myself.
Have you utilized the OPR or RPM calculators which will adjust the taxes per your loaded inflation rate and then grid out the estimated taxes owned by each bracket?

22twain
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by 22twain » Wed May 23, 2018 10:17 am

It just occurred to me:

Anyone planning decades into the future, who assumes that Social Security benefits will be cut around 2034, as must happen according to current law, should also assume that the current individual tax rates and brackets will expire in 2024 (IIRC) and return to last year’s setup, as must happen according to current law. :twisted:
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Wed May 23, 2018 1:31 pm

smitcat wrote:
Wed May 23, 2018 9:33 am


I did not realize you were so young and projecting the amounts in the future. You have modeled the savings and are concerned with the tax situation many years down the road what have you done to adjust the tax brackets you are worried about in the future?
For a different view if I take our current retirement accounts use the tax tables from 25 years back I would be in trouble myself.
Have you utilized the OPR or RPM calculators which will adjust the taxes per your loaded inflation rate and then grid out the estimated taxes owned by each bracket?
OPR or RPM calculators? I am not familiar with them. Please explain.

Everything I have ran is via Excel sheets. I have indexed everything for inflation. I have estimated new tax brackets based on inflation.

This thread was not meant as a humble brag or just a contrarian topic it is relevant to what I do in the future.

Honestly, I'm just kind of at a loss of what I should and shouldn't do. Right now our tax rate will be 24% I'm 20 years from even an early retirement.

We save a ton of money relative to what we make simply because we have always had reasonable lifestyles and our income has quadrupled from when we got married bought our first house and moved out 10 years ago. But our expenses have not changed much more than inflation since then.

Just last year I got serious about saving and investing and while this is putting the cart before the horse, if things do continue to go well for the cnc family I want to make sure we are following the smartest path. Not the the path the "average" person should.

Perhaps the smartest thing is hedge my bets with pretax because who knows what our jobs will do in the future, but that's what I am trying to figure out.

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FiveK
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by FiveK » Wed May 23, 2018 2:00 pm

CnC wrote:
Wed May 23, 2018 1:31 pm
OPR or RPM calculators? I am not familiar with them. Please explain.
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and
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KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by KlangFool » Wed May 23, 2018 2:01 pm

CnC wrote:
Wed May 23, 2018 1:31 pm
smitcat wrote:
Wed May 23, 2018 9:33 am


I did not realize you were so young and projecting the amounts in the future. You have modeled the savings and are concerned with the tax situation many years down the road what have you done to adjust the tax brackets you are worried about in the future?
For a different view if I take our current retirement accounts use the tax tables from 25 years back I would be in trouble myself.
Have you utilized the OPR or RPM calculators which will adjust the taxes per your loaded inflation rate and then grid out the estimated taxes owned by each bracket?
OPR or RPM calculators? I am not familiar with them. Please explain.

Everything I have ran is via Excel sheets. I have indexed everything for inflation. I have estimated new tax brackets based on inflation.

This thread was not meant as a humble brag or just a contrarian topic it is relevant to what I do in the future.

Honestly, I'm just kind of at a loss of what I should and shouldn't do. Right now our tax rate will be 24% I'm 20 years from even an early retirement.

We save a ton of money relative to what we make simply because we have always had reasonable lifestyles and our income has quadrupled from when we got married bought our first house and moved out 10 years ago. But our expenses have not changed much more than inflation since then.

Just last year I got serious about saving and investing and while this is putting the cart before the horse, if things do continue to go well for the cnc family I want to make sure we are following the smartest path. Not the the path the "average" person should.

Perhaps the smartest thing is hedge my bets with pretax because who knows what our jobs will do in the future, but that's what I am trying to figure out.
If and when your tax-defered account reach 1 million, then, you run the calculation. Until then, it is too early to worry about this.

KlangFool

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by Grt2bOutdoors » Wed May 23, 2018 2:17 pm

LaurieAnnaT wrote:
Mon May 21, 2018 7:59 pm


The problem I ran into is that my husband handled anything related to the house and yard and vehicles. Within three weeks of his passing, I needed to figure out about mowing the lawn, for example. I've mowed before, with our old mower. But that was only when my husband was out of town. He cleaned the underside of the mower when he got home. He also told me which gas can contained fuel for the mower before he left. Right now I have no idea which gas can has which gas/oil combination - we own a lawn mower, a single stage snowblower, a two stage snowblower, leaf blowers and grass trimmers. Plus, I have no idea how to clean a lawn mower. My solution: a lawn service.

Next problem: How to change the furnace filter. All I know is that it's a hammock filter and I have to cut the filter material to fit. I'm hoping YouTube will show me the steps.

I hate that I have to figure these things out. I know my husband would have shown me what to do, or documented the steps, if he had any idea that he would die so young. Oh well... I will figure things out.
Sorry for your loss. Gas/oil mix will have a cloudy appearance and nasty smell. Straight gasoline is clear to light brown. Open the top of container, stick in a rolled up piece of paper towel, oil/gas mix will have a oily film on it (when I used oil/gas the oil would make mixture a deep gray color besides the smell).

Lawn mower should use straight gas with either some Stabil in it or I use "Ethanol Free" mixture from Home Depot to remove the water, prevent ethanol issue with motor and stablize gas. Single stage likely uses the gas/oil. Two stage use gas, has own compartment for oil. Gas trimmer uses gas/oil mix.
Lawn service works. :wink:
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bradpevans
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by bradpevans » Wed May 23, 2018 3:03 pm

wrongfunds wrote:
Wed May 23, 2018 9:08 am
Thinking this over, I am wondering if it would be much better if all the calculations were done on real rather than nominal numbers. I don't know if I am using the correct terminology but the intent is to NOT take inflation or COLA in to account for the calculations and ASSUME that value of dollar remains constant for next 50 years and then do apple to apple comparison. I think to be able to decide which option is better or worse, I think this idea will work. If nothing else, at least the numbers would be simpler to comprehend.

As a conservative estimate, let us start with 4% real total growth per year. Because we are not taking inflation in to account, that number is reasonable and NOT too low. Start with 30 year old couple with good income and in a position to max their 401K. Let us assume 20K per person for simplicity sake. We will keep that same for 20 years (age 30-50). Then for next 10 years(50-60), we will add catch up 6K+ per person. We will use 28.5x at age 60 (3.5% draw) and use 40x at age 50 (2.5% draw). I am using calculator from smartasset.com

$40K every year for 20 years at 4% growth gives 1278K Can support 2.5% (aka 40x) withdrawal 32K at age 51
$40K every year for 30 years at 4% growth gives 2373K Can support 3.5% (aka 28.5x) withdrawal 82K at age 61
If we add catch-up of 12K from 51-60 that will add 161K total (2372+161) = 2534K @3.5 gives 88K at age 61

Unless I am doing something wrong, the catch-up does not seemed to be making too much difference.
That is really surprising. Would somebody cross check my calculations?
<snip>
(emphasis added). The catch up is $120,000, invested (on average) just 5.5 years, so besides being smaller amount in than 40x20 or 30x20, it has had much less time to grow.

At some point, the growth on current assets is much greater than new money in.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by smitcat » Wed May 23, 2018 5:38 pm

CnC wrote:
Wed May 23, 2018 1:31 pm
smitcat wrote:
Wed May 23, 2018 9:33 am


I did not realize you were so young and projecting the amounts in the future. You have modeled the savings and are concerned with the tax situation many years down the road what have you done to adjust the tax brackets you are worried about in the future?
For a different view if I take our current retirement accounts use the tax tables from 25 years back I would be in trouble myself.
Have you utilized the OPR or RPM calculators which will adjust the taxes per your loaded inflation rate and then grid out the estimated taxes owned by each bracket?
OPR or RPM calculators? I am not familiar with them. Please explain.

Everything I have ran is via Excel sheets. I have indexed everything for inflation. I have estimated new tax brackets based on inflation.

This thread was not meant as a humble brag or just a contrarian topic it is relevant to what I do in the future.

Honestly, I'm just kind of at a loss of what I should and shouldn't do. Right now our tax rate will be 24% I'm 20 years from even an early retirement.

We save a ton of money relative to what we make simply because we have always had reasonable lifestyles and our income has quadrupled from when we got married bought our first house and moved out 10 years ago. But our expenses have not changed much more than inflation since then.

Just last year I got serious about saving and investing and while this is putting the cart before the horse, if things do continue to go well for the cnc family I want to make sure we are following the smartest path. Not the the path the "average" person should.

Perhaps the smartest thing is hedge my bets with pretax because who knows what our jobs will do in the future, but that's what I am trying to figure out.
I see some others posted the links to IORP and RPM - great.
A couple of more thoughts for your research….
"Everything I have ran is via Excel sheets. I have indexed everything for inflation. I have estimated new tax brackets based on inflation."
If we go back 25 years to 1993 you will find that the MFJ bracket for 28% (closest avail to 24%) was at $36,900.
In 2018 the 24% bracket will be at $165,000 or about 4.4175 times the 1993 bracket.
Does your 24% braket 25 years in teh future start at $737,804? Does that provide enough room each year to do Roth conversions?

Additionally - for those of us who had sizable accounts (because we are older) in 2008 to 2010 and saw them demsinish we know that the market travels in each direction. Test the math on your accounts when the market drops 50% in 2 years then it goes back up 50% over 2-3 years. Starting with $100 it looks like this.... 100 X .5 = 50 .... and then 50 X 1.5 = 75.

When you have lived through mutiple drops you become aware that accounts dont follow spreadsheets and tax brackets grow substantilly with inflation in both break points and breadth of category. Perhaps these will help resolve your view of being in a higher tax bracket way out in the future.

IORP and RPM adjust the brackets dependent upon your selected inlfation rate and yuo can view them much easier and debate and/or solve for mutiple issues at once not one at a time.

CnC
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by CnC » Wed May 23, 2018 10:40 pm

smitcat wrote:
Wed May 23, 2018 5:38 pm
CnC wrote:
Wed May 23, 2018 1:31 pm
smitcat wrote:
Wed May 23, 2018 9:33 am


I did not realize you were so young and projecting the amounts in the future. You have modeled the savings and are concerned with the tax situation many years down the road what have you done to adjust the tax brackets you are worried about in the future?
For a different view if I take our current retirement accounts use the tax tables from 25 years back I would be in trouble myself.
Have you utilized the OPR or RPM calculators which will adjust the taxes per your loaded inflation rate and then grid out the estimated taxes owned by each bracket?
OPR or RPM calculators? I am not familiar with them. Please explain.

Everything I have ran is via Excel sheets. I have indexed everything for inflation. I have estimated new tax brackets based on inflation.

This thread was not meant as a humble brag or just a contrarian topic it is relevant to what I do in the future.

Honestly, I'm just kind of at a loss of what I should and shouldn't do. Right now our tax rate will be 24% I'm 20 years from even an early retirement.

We save a ton of money relative to what we make simply because we have always had reasonable lifestyles and our income has quadrupled from when we got married bought our first house and moved out 10 years ago. But our expenses have not changed much more than inflation since then.

Just last year I got serious about saving and investing and while this is putting the cart before the horse, if things do continue to go well for the cnc family I want to make sure we are following the smartest path. Not the the path the "average" person should.

Perhaps the smartest thing is hedge my bets with pretax because who knows what our jobs will do in the future, but that's what I am trying to figure out.
I see some others posted the links to IORP and RPM - great.
A couple of more thoughts for your research….
"Everything I have ran is via Excel sheets. I have indexed everything for inflation. I have estimated new tax brackets based on inflation."
If we go back 25 years to 1993 you will find that the MFJ bracket for 28% (closest avail to 24%) was at $36,900.
In 2018 the 24% bracket will be at $165,000 or about 4.4175 times the 1993 bracket.
Does your 24% braket 25 years in teh future start at $737,804? Does that provide enough room each year to do Roth conversions?

Additionally - for those of us who had sizable accounts (because we are older) in 2008 to 2010 and saw them demsinish we know that the market travels in each direction. Test the math on your accounts when the market drops 50% in 2 years then it goes back up 50% over 2-3 years. Starting with $100 it looks like this.... 100 X .5 = 50 .... and then 50 X 1.5 = 75.

When you have lived through mutiple drops you become aware that accounts dont follow spreadsheets and tax brackets grow substantilly with inflation in both break points and breadth of category. Perhaps these will help resolve your view of being in a higher tax bracket way out in the future.

IORP and RPM adjust the brackets dependent upon your selected inlfation rate and yuo can view them much easier and debate and/or solve for mutiple issues at once not one at a time.
Wow tax brackets have not followed inflation at all. Since I wasn't paying taxes 25 years ago I wouldn't remember. But wow I knew that brackets dropped a bit due to Trump's new tax plan in rates but I would have never guessed that the 28% bracket would have moved that many times inflation. A dollar wouldn't have even doubled in that time yet tax rates gave 4x as much room.

smitcat
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by smitcat » Thu May 24, 2018 7:42 am

CnC wrote:
Wed May 23, 2018 10:40 pm
smitcat wrote:
Wed May 23, 2018 5:38 pm
CnC wrote:
Wed May 23, 2018 1:31 pm
smitcat wrote:
Wed May 23, 2018 9:33 am


I did not realize you were so young and projecting the amounts in the future. You have modeled the savings and are concerned with the tax situation many years down the road what have you done to adjust the tax brackets you are worried about in the future?
For a different view if I take our current retirement accounts use the tax tables from 25 years back I would be in trouble myself.
Have you utilized the OPR or RPM calculators which will adjust the taxes per your loaded inflation rate and then grid out the estimated taxes owned by each bracket?
OPR or RPM calculators? I am not familiar with them. Please explain.

Everything I have ran is via Excel sheets. I have indexed everything for inflation. I have estimated new tax brackets based on inflation.

This thread was not meant as a humble brag or just a contrarian topic it is relevant to what I do in the future.

Honestly, I'm just kind of at a loss of what I should and shouldn't do. Right now our tax rate will be 24% I'm 20 years from even an early retirement.

We save a ton of money relative to what we make simply because we have always had reasonable lifestyles and our income has quadrupled from when we got married bought our first house and moved out 10 years ago. But our expenses have not changed much more than inflation since then.

Just last year I got serious about saving and investing and while this is putting the cart before the horse, if things do continue to go well for the cnc family I want to make sure we are following the smartest path. Not the the path the "average" person should.

Perhaps the smartest thing is hedge my bets with pretax because who knows what our jobs will do in the future, but that's what I am trying to figure out.
I see some others posted the links to IORP and RPM - great.
A couple of more thoughts for your research….
"Everything I have ran is via Excel sheets. I have indexed everything for inflation. I have estimated new tax brackets based on inflation."
If we go back 25 years to 1993 you will find that the MFJ bracket for 28% (closest avail to 24%) was at $36,900.
In 2018 the 24% bracket will be at $165,000 or about 4.4175 times the 1993 bracket.
Does your 24% braket 25 years in teh future start at $737,804? Does that provide enough room each year to do Roth conversions?

Additionally - for those of us who had sizable accounts (because we are older) in 2008 to 2010 and saw them demsinish we know that the market travels in each direction. Test the math on your accounts when the market drops 50% in 2 years then it goes back up 50% over 2-3 years. Starting with $100 it looks like this.... 100 X .5 = 50 .... and then 50 X 1.5 = 75.

When you have lived through mutiple drops you become aware that accounts dont follow spreadsheets and tax brackets grow substantilly with inflation in both break points and breadth of category. Perhaps these will help resolve your view of being in a higher tax bracket way out in the future.

IORP and RPM adjust the brackets dependent upon your selected inlfation rate and yuo can view them much easier and debate and/or solve for mutiple issues at once not one at a time.
Wow tax brackets have not followed inflation at all. Since I wasn't paying taxes 25 years ago I wouldn't remember. But wow I knew that brackets dropped a bit due to Trump's new tax plan in rates but I would have never guessed that the 28% bracket would have moved that many times inflation. A dollar wouldn't have even doubled in that time yet tax rates gave 4x as much room.
For those of us that have experienced a longer time frame and have also projected out in the future on our own we have seen how far off the projections can and will be.

Taking that same 25 year historical tax move and projection it out 25 years puts the 24% bracket at $737,804 - $1,403,536 so you would be in a lower tax bracket (and the historical is based upon 28% to boot).

Bit that is not really the message or the thought - if you want utilize IORP or RPM you may be able to get a reasonable projection on these issues but the real message is that projecting that far out is problematic and can be very misleading. So from one who has been through a bunch of this and is about to retire I will say that your taxes will most likely be lower in retirement than when working. I believe the exceptions will mostly reside with those that have larger pensions or two pensions while also having larger tax deferred accounts.

If you so load and play with either of those calculators please try and vary the inflation rate and account earnings rate in a large way to get a feel for what they represent and could represent in the future.

leftcoaster
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by leftcoaster » Thu May 24, 2018 7:54 am

With housing and kids education paid off, you will need less income. You may not need to pull as much from deferred accounts.

Early retirement may be a factor as well.

And- moving to a lower tax state would definitely make tax deferral pay off.

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ruralavalon
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by ruralavalon » Thu May 24, 2018 8:43 am

leftcoaster wrote:
Thu May 24, 2018 7:54 am
With housing and kids education paid off, you will need less income. You may not need to pull as much from deferred accounts.

Early retirement may be a factor as well.

And- moving to a lower tax state would definitely make tax deferral pay off.
Expenses in retirement are often lower.

For us there were significant differences between expenses while working and expenses when retired. The most significant reductions are:
1) no more self-employment tax;
2) greatly reduced medical costs (I had paid for our health insurance when working, $23k/year);
3) no more contributions to retirement savings;
4) no more mortgage payments; and
5) no more college expenses for children.
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mptfan
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by mptfan » Thu May 24, 2018 11:27 am

6) No more income tax paid on earned income
7) No more social security tax
8) No more medicare tax

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by TravelforFun » Thu May 24, 2018 11:51 am

Nowizard wrote:
Mon May 21, 2018 4:23 pm
We are definitely not among the super wealthy posting here, neither of us ever making more than six figures annually during our working lives. However, we have saved well, invested well and have SS and a small pension (One of us). Most of our assets are in retirement accounts, and we are in a higher tax bracket in retirement than while working, that in spite of making ROTH contributions during the last decade of our working lives.

Tim
It's more common among the bogleheads than people realize.

TravelforFun

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by roflwaffle » Thu May 24, 2018 11:58 am

My feeling is that not being in a lower tax bracket when you retire is a nice problem to have. :sharebeer

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by willthrill81 » Thu May 24, 2018 12:11 pm

roflwaffle wrote:
Thu May 24, 2018 11:58 am
My feeling is that not being in a lower tax bracket when you retire is a nice problem to have. :sharebeer
That's my perception of the situation as well. Given that the overwhelming majority of retirees are in a lower bracket (often several lower), unless one has a compelling reason to believe that their bracket will be the same or higher, it seems prudent to favor tax-deferred accounts. But this should be reevaluated on an ongoing basis to see if/when it makes sense to switch to Roth accounts, to the extent that that is possible.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by MnD » Thu May 24, 2018 1:18 pm

roflwaffle wrote:
Thu May 24, 2018 11:58 am
My feeling is that not being in a lower tax bracket when you retire is a nice problem to have. :sharebeer
Unless it resulted from working for far more years than was necessary to retire.
Having a taxable income in retirement high enough to be in a higher tax bracket than when working would result in our financial standard of living in retirement being 133% higher than when working, given that maintaining a pre-retirement standard of living in retirement requires far less income for many Bogleheads. And that income level would likely require working 10-15 years past when we planned and wanted to retire. Yuck!
Last edited by MnD on Thu May 24, 2018 1:21 pm, edited 1 time in total.

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by ruralavalon » Thu May 24, 2018 1:19 pm

TravelforFun wrote:
Thu May 24, 2018 11:51 am
Nowizard wrote:
Mon May 21, 2018 4:23 pm
We are definitely not among the super wealthy posting here, neither of us ever making more than six figures annually during our working lives. However, we have saved well, invested well and have SS and a small pension (One of us). Most of our assets are in retirement accounts, and we are in a higher tax bracket in retirement than while working, that in spite of making ROTH contributions during the last decade of our working lives.

Tim
It's more common among the bogleheads than people realize.

TravelforFun
Roth contributions were not available during most of the working life of people who are now retired.

After college I worked from 1971 through 2011.

The Roth IRA was not invented until 1997, and Roth 401k contributions were first allowed in 2006.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

1CEBITN
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by 1CEBITN » Thu May 24, 2018 3:04 pm

I chose Roth 401k/IRA as soon as it was available to me more for safety and control of my estate and as a hedge against higher taxes since that isn't something anyone can predict unless you are retiring in the next couple years. Just because you can live off of less money in retirement doesn't mean your tax bill will be lower, especially the farther away you are from retirement. How does anyone know how many brackets there will be 20 years from now or what the rates and income levels that define those will be? It's a gamble to do pre-tax imho. For young people I would do no more than 50% in traditional to get some tax benefits today and allow you to be prepared for either higher/lower tax scenarios while providing flexibility at withdrawal time. If you are just starting to build your career and are in a lower bracket now I'd actually do 100% Roth and change that over time to 50/50 as you go up in income and tax bracket. Remember too that the traditional carries RMDs with it that you can't avoid so, if you have a large tax-deferred 401k that could make for a very large tax bill ($5M trad. 401k = $225k-ish of required distributions every year which you have to pay taxes on). Roth does not have any such stipulations.

Overall though, my reasoning for Roth has very little to do with gains and spreadsheets. Simply put, I don't want to rely on the government to dictate what I can do post-retirement with RMDs and changing tax brackets deciding how I live my life. Just today I was reading about the Dems new platform with a whole lot of "free stuff" in there. Free college, free healthcare (medicare for all, yay), guaranteed federal jobs for everyone at a significant minimum wage, federal owned banks to save the post office, blah blah blah - they want to turn us into China apparently. That means higher taxes, a lot higher, should they get elected in a couple years (or inflation from all the money they will have to print). I'll just pay mine now when taxes are lower than they've been in a long time, thank you.

Most people don't invest the difference saved in taxes between Roth and traditional contributions anyway, just like most people don't max out their 401k in general, and that is the only way you come out ahead. Otherwise that 401k max is the same for both Roth and traditional so your net account value at retirement will be the same. Living on $6k less per year to avoid taxes for life after retirement is a small price to pay imho (I'm talking about for the majority of people who wouldn't actually take that $6k and invest it before anyone mentions compounding returns).

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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by willthrill81 » Thu May 24, 2018 3:08 pm

1CEBITN wrote:
Thu May 24, 2018 3:04 pm
I chose Roth 401k/IRA as soon as it was available to me more for safety and control of my estate and as a hedge against higher taxes since that isn't something anyone can predict unless you are retiring in the next couple years.
Why are you hedging against higher taxes? People have been using that argument for years, yet tax rates recently went down, which is disadvantageous to prior Roth contributions.

If you want to hedge against tax rate changes without regard to your tax rates at contribution and withdrawal (which are far more important IMHO), then split between tax-deferred and Roth contributions.
Last edited by willthrill81 on Thu May 24, 2018 10:53 pm, edited 1 time in total.
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LaurieAnnaT
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by LaurieAnnaT » Thu May 24, 2018 10:49 pm

ruralavalon wrote:
Thu May 24, 2018 8:43 am
Expenses in retirement are often lower.
For a time. Maybe a decade or more, depending on your health. But there will come a time when you have to hire someone to do things you are no longer capable of doing. You may have to move into assisted living, or a nursing home. You may have health costs not covered by insurance - dentures, hearing aids, a nice walker. Your later years can be incredibly expensive.

randomguy
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by randomguy » Thu May 24, 2018 11:59 pm

LaurieAnnaT wrote:
Thu May 24, 2018 10:49 pm
ruralavalon wrote:
Thu May 24, 2018 8:43 am
Expenses in retirement are often lower.
For a time. Maybe a decade or more, depending on your health. But there will come a time when you have to hire someone to do things you are no longer capable of doing. You may have to move into assisted living, or a nursing home. You may have health costs not covered by insurance - dentures, hearing aids, a nice walker. Your later years can be incredibly expensive.
Nah they are dirt cheap. A good nursing home is only 80-100. That is like half of what I am spending in retirement😁 Not to mention the 20 years I am spending brainwashing my kids to give Dad free room and board😂

The last year's can be pricey but for most people that is about 2 years of high expenses. How much you want to guard against the chance of being in the group with a decade+ of cost is up to you. A lot will come down to your guess about how much that type of stuff will exceed your budget. A 10k trip pays for a lot of dentures and hearing aids. Uber might be cheaper than your current car cost. Downsizing to something mangeable really cuts housing costs and so on. You make your guesses and hope it all works out.

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ruralavalon
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by ruralavalon » Fri May 25, 2018 6:44 am

LaurieAnnaT wrote:
Thu May 24, 2018 10:49 pm
ruralavalon wrote:
Thu May 24, 2018 8:43 am
Expenses in retirement are often lower.
For a time. Maybe a decade or more, depending on your health. But there will come a time when you have to hire someone to do things you are no longer capable of doing. You may have to move into assisted living, or a nursing home. You may have health costs not covered by insurance - dentures, hearing aids, a nice walker. Your later years can be incredibly expensive.
Serious expensive health issues for both of us already arrived many years ago. But Medicare Part B and Part D and Supplemental premiums are so far below what we had to pay for health insurance while working that all-in medical/dental/vision costs in retirement are still much less than the previous total.

I acknowledge that the figures will be different for anyone whose health insurance was paid for by their employer.

When we downsized and bought a smaller home I gave away all my power tools, no longer do any home maintenance or repairs or yard work, and the $70/month HOA fee pays for lawn mowing and snow removal.

I don't know what the final months or years of life will bring, but so far health associated costs are very small compared to costs while I was still. working.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

bloom2708
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by bloom2708 » Fri May 25, 2018 1:48 pm

Would someone inclined to take a mortgage into retirement be similarly inclined to not do Roth conversions above 12% (22%, 24%)?

I still have a hard time accepting that people are willing pay 22% or 24% now with a great unknown out there 10-15 years out.

A very nuanced discussion with many edges. Reading many of the responses, I am no longer even able to tell if someone is for or against Roth conversions in certain cases. With the unknown-ness I like paying down debt with a guaranteed return, but on the flip side I don't like paying 22% or 24% taxes. Just can't put my finger on this topic.
Last edited by bloom2708 on Fri May 25, 2018 3:40 pm, edited 1 time in total.
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smitcat
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by smitcat » Fri May 25, 2018 2:18 pm

bloom2708 wrote:
Fri May 25, 2018 1:48 pm
Would someone inclined to take a mortgage into retirement be similarly inclined to not do Roth conversions above 12% (22%, 24%)?

I still have a hard time accepting that people will willing pay 22% or 24% now with a great unknown out there 10-15 years out.

A very nuanced discussion with many edges. Reading many of the responses, I am no longer even able to tell if someone is for or against Roth conversions in certain cases. With the unknown-ness I like paying down debt with a guaranteed return, but on the flip side I don't like paying 22% or 24% taxes. Just can't put my finger on this topic.
Our solution is to run the potential Roth conversions thru the RPM calculator/spreadsheet and see what the affect has in store for your case.
You can then vary the future possibilities and see would happen.
Unfortunately - there is no calculator which will foretell what are earnings, taxes, or drawdown needs will be in the future so we must supply our best guess on our own.
FWIW - in our case we are definetaly for Roth conversions. Differing inputs will yield differing results.

marcopolo
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by marcopolo » Fri May 25, 2018 2:58 pm

smitcat wrote:
Fri May 25, 2018 2:18 pm

Our solution is to run the potential Roth conversions thru the RPM calculator/spreadsheet and see what the affect has in store for your case.
You can then vary the future possibilities and see would happen.
Unfortunately - there is no calculator which will foretell what are earnings, taxes, or drawdown needs will be in the future so we must supply our best guess on our own.
FWIW - in our case we are definetaly for Roth conversions. Differing inputs will yield differing results.
I have to admit, I am still trying to figure out all the nuance of the RPM spreadsheet.
Just out of curiosity, how big do you go with your Roth conversions? It seems doing so to the top of the 12% bracket makes a lot of sense. But, as someone a few posts up mentioned, voluntarily paying 22% now just seems like too big a pill to swallow given the uncertainties of future events.
Once in a while you get shown the light, in the strangest of places if you look at it right.

bloom2708
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by bloom2708 » Fri May 25, 2018 3:08 pm

marcopolo wrote:
Fri May 25, 2018 2:58 pm
smitcat wrote:
Fri May 25, 2018 2:18 pm

Our solution is to run the potential Roth conversions thru the RPM calculator/spreadsheet and see what the affect has in store for your case.
You can then vary the future possibilities and see would happen.
Unfortunately - there is no calculator which will foretell what are earnings, taxes, or drawdown needs will be in the future so we must supply our best guess on our own.
FWIW - in our case we are definetaly for Roth conversions. Differing inputs will yield differing results.
I have to admit, I am still trying to figure out all the nuance of the RPM spreadsheet.
Just out of curiosity, how big do you go with your Roth conversions? It seems doing so to the top of the 12% bracket makes a lot of sense. But, as someone a few posts up mentioned, voluntarily paying 22% now just seems like too big a pill to swallow given the uncertainties of future events.
+1

For 22 or 24% I would let it grow for another 10 years.

Revisit at 78. If I lost and pay 28, that seems fine.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

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FiveK
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by FiveK » Fri May 25, 2018 3:25 pm

marcopolo wrote:
Fri May 25, 2018 2:58 pm
Just out of curiosity, how big do you go with your Roth conversions?
Up to and including what we expect to pay come SS and RMD time, provided doing so doesn't decrease those expected rates.

marcopolo
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by marcopolo » Fri May 25, 2018 5:19 pm

FiveK wrote:
Fri May 25, 2018 3:25 pm
marcopolo wrote:
Fri May 25, 2018 2:58 pm
Just out of curiosity, how big do you go with your Roth conversions?
Up to and including what we expect to pay come SS and RMD time, provided doing so doesn't decrease those expected rates.


That makes sense in theory. Do you assume full Soc Sec or with the statutory reduction if no changes are made?

That point in time is 18 years away for me. The ability to predict what the tax rates will be, how Soc Sec might be altered, tax treatment of Roth etc. has a pretty significant expected variance over that time frame. While getting money into a Roth has other advantages as well, if we assume static conditions, paying 22% now to be in similar (22% or 24%) bracket in 18 years does not seem like a big gain.

I also need to consider the impact doing large conversions would have on any possible ACA subsidies. That mutes any advantage of converting at higher rates even more.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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FiveK
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by FiveK » Fri May 25, 2018 5:28 pm

marcopolo wrote:
Fri May 25, 2018 5:19 pm
FiveK wrote:
Fri May 25, 2018 3:25 pm
marcopolo wrote:
Fri May 25, 2018 2:58 pm
Just out of curiosity, how big do you go with your Roth conversions?
Up to and including what we expect to pay come SS and RMD time, provided doing so doesn't decrease those expected rates.
That makes sense in theory. Do you assume full Soc Sec or with the statutory reduction if no changes are made?
Full. Yes, it's an assumption. I also assume 2018 tax rates - another debatable assumption, but if one wants to attempt something other than coin flipping one has to assume something. Of course, the coin flipper may come out better.... ;)
That point in time is 18 years away for me. The ability to predict what the tax rates will be, how Soc Sec might be altered, tax treatment of Roth etc. has a pretty significant expected variance over that time frame. While getting money into a Roth has other advantages as well, if we assume static conditions, paying 22% now to be in similar (22% or 24%) bracket in 18 years does not seem like a big gain.
It's not a big gain, but the cost of typing one number instead of another into web site box for "amount to convert" is also rather low.
I also need to consider the impact doing large conversions would have on any possible ACA subsidies. That mutes any advantage of converting at higher rates even more.
Tools such as the personal finance toolbox spreadsheet may be helpful for things like that, or one can roll one's own.

marcopolo
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"

Post by marcopolo » Fri May 25, 2018 5:38 pm

FiveK wrote:
Fri May 25, 2018 5:28 pm
marcopolo wrote:
Fri May 25, 2018 5:19 pm
While getting money into a Roth has other advantages as well, if we assume static conditions, paying 22% now to be in similar (22% or 24%) bracket in 18 years does not seem like a big gain.
It's not a big gain, but the cost of typing one number instead of another into web site box for "amount to convert" is also rather low.
Point taken :happy .

But, the cost i am concerned about is not that associated with the act of entering the conversion amount, but rather the cost of guessing wrong on the assumptions and ending up paying more in taxes now than would be owed if I had converted less. e.g. Soc Sec takes a bigger haircut (means test), tax rates are lowered again, they figure out some way to tax Roth accounts.... Given those risks, is the small gain achieved assuming static conditions worth it? Converting at 12%, I feel pretty confident i will come out ahead even if some of those risks materialize. At 22% or 24%, it seems like the risk/reward is not so simple.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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