Something good from Wade Pfau

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afan
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Something good from Wade Pfau

Post by afan »

https://www.advisorperspectives.com/art ... management

This is apparently a chapter from his new book on retirement planning. Not a word about annuities, other than Social Security.

He works through delaying SS, Roth conversions, IRMAA, and the order of drawing from taxable, deferred and tax free accounts.

The description of the simulation seems a bit too vague to reproduce but one could make some guesses and try.

A worthwhile read and it suggests that the rest of the book could be good as well.
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Soon2BXProgrammer
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Re: Something good from Wade Pfau

Post by Soon2BXProgrammer »

afan wrote: Wed Sep 08, 2021 9:47 am https://www.advisorperspectives.com/art ... management

This is apparently a chapter from his new book on retirement planning. Not a word about annuities, other than Social Security.

He works through delaying SS, Roth conversions, IRMAA, and the order of drawing from taxable, deferred and tax free accounts.

The description of the simulation seems a bit too vague to reproduce but one could make some guesses and try.

A worthwhile read and it suggests that the rest of the book could be good as well.
A note about his previous book: https://www.amazon.com/Safety-First-Ret ... B07X2TW623

while it talks about annuities quite a bit, there is evidence that replacing part of ones bond portfolio with lifetime income, can be a good decision... Its all context.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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Re: Something good from Wade Pfau

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revhappy
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Re: Something good from Wade Pfau

Post by revhappy »

I am bit disappointed that guys like Michael Kitces and Wade Pfau do great research, but all from the US investor perspective. There is much bigger world out there and people out there look upto these people to help them out.
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Re: Something good from Wade Pfau

Post by randomguy »

revhappy wrote: Wed Sep 08, 2021 10:28 am I am bit disappointed that guys like Michael Kitces and Wade Pfau do great research, but all from the US investor perspective. There is much bigger world out there and people out there look upto these people to help them out.
The work generalizes pretty easily. You just have to think about how the specifics of your country (taxation rules are the big one) apply to your situation. For any country with a graduated tax code, this scheme would apply.

That conventional wisdom of taxable, tax deferred is horribley wrong and this shows how bad paying all those extra taxes is. 3 or 4 more years of money by manipulating the tax code is pretty huge in a world we we are struggling to get a couple tenths higher SWR by AA and the like....

What I don't know is how much his assumptions play in. It would be nice if some how when these people published a paper, they also published their tools so that you could play around with them.
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Re: Something good from Wade Pfau

Post by livesoft »

revhappy wrote: Wed Sep 08, 2021 10:28 am I am bit disappointed that guys like Michael Kitces and Wade Pfau do great research, but all from the US investor perspective. There is much bigger world out there and people out there look upto these people to help them out.
OK, so why don't local people in other countries pick up on their work and tailor it to the local crowds? It seems that Kitces and Pfau are not really the best people to translate to non-USA investors, so there is no reason to be disappointed in them nor their work. (Unless I am missing something here.)
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afan
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Re: Something good from Wade Pfau

Post by afan »

revhappy wrote: Wed Sep 08, 2021 10:28 am I am bit disappointed that guys like Michael Kitces and Wade Pfau do great research, but all from the US investor perspective. There is much bigger world out there and people out there look upto these people to help them out.
You can look at the approach but the details are heavily dependent on the laws of your country. Even this analysis rests upon US law for someone in this income range. The calculations would be different for a person with a higher income, where the cost of Medicare can be much higher and income taxes go up with income. If your country has a combination of tax, equivalent to Social Security, pre-tax and after tax retirement funds, opportunity for Roth conversions income tax rates and provisions similar to the US, then it may just be a matter of following his approach and plugging in different numbers. But his results hinge on the rules for people in this country.

It could be very different if, for example, no one pays a separate premium for healthcare coverage in retirement. Or the amounts are not based on income, or they are based on income in some other way.

For US investors, the value is examples from someone who thoroughly understands the rules and how to put them into effect.
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Re: Something good from Wade Pfau

Post by JoeRetire »

revhappy wrote: Wed Sep 08, 2021 10:28 am I am bit disappointed that guys like Michael Kitces and Wade Pfau do great research, but all from the US investor perspective. There is much bigger world out there and people out there look upto these people to help them out.
There is not only a much bigger world, but a huge variety of tax, retirement, and investment laws as well.
Expecting one researcher to handle them all is a bit much, IMHO.
Just remember: it's not a lie if you believe it.
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Re: Something good from Wade Pfau

Post by Luckygirl »

If you go to his website you may find link to a 3 part webinar he is doing based on his new book. He does talk about annuities. Webinar is free. I watched 1st one today. Next one is September 21; third one in October.
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Re: Something good from Wade Pfau

Post by Mr.BB »

I would love to see Michael Kitces do some updated articles on some of his Roth conversions and social security articles that he did 5-6 years ago.
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Re: Something good from Wade Pfau

Post by khunron »

revhappy wrote: Wed Sep 08, 2021 10:28 am I am bit disappointed that guys like Michael Kitces and Wade Pfau do great research, but all from the US investor perspective. There is much bigger world out there and people out there look upto these people to help them out.
Feel free to publish your research from a non-US investor perspective.
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Re: Something good from Wade Pfau

Post by Exchme »

It was good to see a concrete example of some concepts, but hard to know what message the reading public comes away with. Bogleheads would know the approaches that he debunked are flawed and why, but I felt that the way the they were put forward was less about education so people could DIY and more about persuasion that the concepts were tricky and hard to grasp (with the unspoken point that you need an advisor).

A teacher would have put the optimal themes first (equalize tax rates, minimize taxes on SS, etc.) and then showed how some common withdrawal ideas don't match the themes so don't give the best results. But the persuader tests each seemingly smart withdrawal strategy and then the next even smarter strategy pops up. By the time we are on the last one, our jaws have dropped in awe of the big smarts of the advisor.

But maybe I'm too cynical and too primed to look for a sales pitch.
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Re: Something good from Wade Pfau

Post by wrongfunds »

28.99 years? That is short of the proverbial thirty years by a hair but that will be considered as failure in the infamous 4% “rule”. I was expecting that with assumed 2% interest income it should have crossed the thirty year barrier.
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Re: Something good from Wade Pfau

Post by wade »

Exchme wrote: Thu Sep 09, 2021 8:04 am It was good to see a concrete example of some concepts, but hard to know what message the reading public comes away with. Bogleheads would know the approaches that he debunked are flawed and why, but I felt that the way the they were put forward was less about education so people could DIY and more about persuasion that the concepts were tricky and hard to grasp (with the unspoken point that you need an advisor).

A teacher would have put the optimal themes first (equalize tax rates, minimize taxes on SS, etc.) and then showed how some common withdrawal ideas don't match the themes so don't give the best results. But the persuader tests each seemingly smart withdrawal strategy and then the next even smarter strategy pops up. By the time we are on the last one, our jaws have dropped in awe of the big smarts of the advisor.

But maybe I'm too cynical and too primed to look for a sales pitch.
This comment is really frustrating and really encapsulates why I've lost interest in participating at Bogleheads over the years. People just like to express opinions about things they haven't read. It happens over and over to me. This book excerpt is at the end of the tax planning chapter. It began 56 pages in. It follows careful explanations about the different tax concepts at work, and it simply provides an example at the end to show how those pieces all fit together. The chapter does what you've asked of it.

I worked very hard to make this book serve as a standalone tool for self-directed people. There is a brief discussion of working with financial advisors on pages 440 to 444, but even there it is clear that not all individuals perceive advisors as providing value beyond their fees. Being self-directed is a fine option to choose. This book is NOT a sales pitch for working with a financial advisor. And I know it doesn't matter how hard I work to make this clear, because there are always going to be the cynics at Bogleheads.
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Re: Something good from Wade Pfau

Post by wade »

wrongfunds wrote: Thu Sep 09, 2021 8:14 am 28.99 years? That is short of the proverbial thirty years by a hair but that will be considered as failure in the infamous 4% “rule”. I was expecting that with assumed 2% interest income it should have crossed the thirty year barrier.
You are right about the idea that 2% is a high enough return for the 4% rule. A 1.33% real return makes it work. But this example wasn't about the 4% rule. The 4% rule doesn't consider taxes. And the initial spending goal in this example was already higher than 4%, with taxes then also added on top of that.
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Re: Something good from Wade Pfau

Post by bobcat2 »

In reading the acknowledgements section of the book at Amazon I was saddened to learn that Dick Purcell, who used to post regularly at Bogleheads, recently passed away.

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Re: Something good from Wade Pfau

Post by Exchme »

wade wrote: Thu Sep 09, 2021 9:22 am
Exchme wrote: Thu Sep 09, 2021 8:04 am It was good to see a concrete example of some concepts, but hard to know what message the reading public comes away with. Bogleheads would know the approaches that he debunked are flawed and why, but I felt that the way the they were put forward was less about education so people could DIY and more about persuasion that the concepts were tricky and hard to grasp (with the unspoken point that you need an advisor).

A teacher would have put the optimal themes first (equalize tax rates, minimize taxes on SS, etc.) and then showed how some common withdrawal ideas don't match the themes so don't give the best results. But the persuader tests each seemingly smart withdrawal strategy and then the next even smarter strategy pops up. By the time we are on the last one, our jaws have dropped in awe of the big smarts of the advisor.

But maybe I'm too cynical and too primed to look for a sales pitch.
This comment is really frustrating and really encapsulates why I've lost interest in participating at Bogleheads over the years. People just like to express opinions about things they haven't read. It happens over and over to me. This book excerpt is at the end of the tax planning chapter. It began 56 pages in. It follows careful explanations about the different tax concepts at work, and it simply provides an example at the end to show how those pieces all fit together. The chapter does what you've asked of it.

I worked very hard to make this book serve as a standalone tool for self-directed people. There is a brief discussion of working with financial advisors on pages 440 to 444, but even there it is clear that not all individuals perceive advisors as providing value beyond their fees. Being self-directed is a fine option to choose. This book is NOT a sales pitch for working with a financial advisor. And I know it doesn't matter how hard I work to make this clear, because there are always going to be the cynics at Bogleheads.
My apologies. I did read the bit at the link, I didn't realize there was more somewhere else that took a teaching approach.
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Re: Something good from Wade Pfau

Post by wade »

bobcat2 wrote: Thu Sep 09, 2021 9:27 am In reading the acknowledgements section of the book at Amazon I was saddened to learn that Dick Purcell, who used to post regularly at Bogleheads, recently passed away.

BobK
Yes, this is sad news. Dick passed away in January 2020. I don't really have any more details about it beyond the date.
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Re: Something good from Wade Pfau

Post by wade »

Exchme wrote: Thu Sep 09, 2021 9:34 am My apologies. I did read the bit at the link, I didn't realize there was more somewhere else that took a teaching approach.
Thank you.
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Re: Something good from Wade Pfau

Post by randomguy »

wade wrote: Thu Sep 09, 2021 9:25 am
wrongfunds wrote: Thu Sep 09, 2021 8:14 am 28.99 years? That is short of the proverbial thirty years by a hair but that will be considered as failure in the infamous 4% “rule”. I was expecting that with assumed 2% interest income it should have crossed the thirty year barrier.
You are right about the idea that 2% is a high enough return for the 4% rule. A 1.33% real return makes it work. But this example wasn't about the 4% rule. The 4% rule doesn't consider taxes. And the initial spending goal in this example was already higher than 4%, with taxes then also added on top of that.

This is a more complex (and realistic) case than the 4% rule. Our retiree has 2 million in assets and 20-37k in SS starting in 2-10 years. They will need ~105-120k of income (they going to be paying 10-20k in taxes). A SWR number doesn't really exist for this type of portfolio but if you assume they pay for the 2 first years out of savings and then do SS at 62, you are going to be looking at approximately 1.8 million in savings, 30k of SS, 85k/year from the portfolio and a 17k tax bill. Or a ~5% SWR after SS kicks in if you take it early. A quick calculation shows you should expect your money to last 26 years in that case. Delaying SS and manipulating the tax code generates/saves a bit of money which is enough to push out the date those couple of years.
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Re: Something good from Wade Pfau

Post by wrongfunds »

wade wrote: Thu Sep 09, 2021 9:25 am
wrongfunds wrote: Thu Sep 09, 2021 8:14 am 28.99 years? That is short of the proverbial thirty years by a hair but that will be considered as failure in the infamous 4% “rule”. I was expecting that with assumed 2% interest income it should have crossed the thirty year barrier.
You are right about the idea that 2% is a high enough return for the 4% rule. A 1.33% real return makes it work. But this example wasn't about the 4% rule. The 4% rule doesn't consider taxes. And the initial spending goal in this example was already higher than 4%, with taxes then also added on top of that.
Of course, a typical BH will *kill* to get guaranteed 2% interest rate in today's environment (only kidding! I am sure if you are willing to purchase hypothetical (not-available) 30-year CD with huge penalty, you will get that interest rate)

Also you are right that the available spending shown is quite higher than the proverbial 4%, so my comment was totally misplaced.
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Re: Something good from Wade Pfau

Post by frugalecon »

wade wrote: Thu Sep 09, 2021 9:22 am
Exchme wrote: Thu Sep 09, 2021 8:04 am It was good to see a concrete example of some concepts, but hard to know what message the reading public comes away with. Bogleheads would know the approaches that he debunked are flawed and why, but I felt that the way the they were put forward was less about education so people could DIY and more about persuasion that the concepts were tricky and hard to grasp (with the unspoken point that you need an advisor).

A teacher would have put the optimal themes first (equalize tax rates, minimize taxes on SS, etc.) and then showed how some common withdrawal ideas don't match the themes so don't give the best results. But the persuader tests each seemingly smart withdrawal strategy and then the next even smarter strategy pops up. By the time we are on the last one, our jaws have dropped in awe of the big smarts of the advisor.

But maybe I'm too cynical and too primed to look for a sales pitch.
This comment is really frustrating and really encapsulates why I've lost interest in participating at Bogleheads over the years. People just like to express opinions about things they haven't read. It happens over and over to me. This book excerpt is at the end of the tax planning chapter. It began 56 pages in. It follows careful explanations about the different tax concepts at work, and it simply provides an example at the end to show how those pieces all fit together. The chapter does what you've asked of it.

I worked very hard to make this book serve as a standalone tool for self-directed people. There is a brief discussion of working with financial advisors on pages 440 to 444, but even there it is clear that not all individuals perceive advisors as providing value beyond their fees. Being self-directed is a fine option to choose. This book is NOT a sales pitch for working with a financial advisor. And I know it doesn't matter how hard I work to make this clear, because there are always going to be the cynics at Bogleheads.
Wade,
Thank you for providing this context on the book. It sounds like a really valuable piece of work. I may be retiring as soon as next year, so this is arriving at an excellent time for me personally. I look forward to delving into it more deeply, particularly on the tax issues. For those of us who have been boring W-2 wage earners, tax planning appears to be a key way that our personal finances become much more complicated after retirement. And, as you point out, the costs of choosing a suboptimal strategy can be very costly.
Best,
FE
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Re: Something good from Wade Pfau

Post by wrongfunds »

After reading this completely I have few comments on it.

- The simplified assumptions are too simple but I understand the need for it to have reasonable model to explain the principle behind the tax bracket usage. Certainly nobody can (or should) use this scenario as it is without understanding that real life is not so simple.
- All the analysis is done in today's dollars; which is good and easy to grasp
- Some of the taxes paid were astronomically high during some of the years! Effective rate of 20% federal income tax that I just can NOT fathom at $100K of income. On over $350K of AGI income, we are paying at ~18% effective rate! Is this the difference between single vs joint?
- Let us put some perspective to the numbers provided. The $400K taxable has cost basis of $400K making this pot in the "already paid taxes on it" bucket. $300K is in Roth IRA aka "already paid taxes on it". So we are talking about $1.3M of "Never paid taxes on it" money here. If I want to spread it over 25-30 years, let us see how much taxes I would incur on it. $1.3M/25 = $52K per year. What is the effective tax liability on that income? Surely, it NOT be 20% ! OK; I am ignoring the 2% interest but I just don't see it making a huge difference.
- What am I missing here?
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Re: Something good from Wade Pfau

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wrongfunds wrote: Thu Sep 09, 2021 11:38 am After reading this completely I have few comments on it.

- The simplified assumptions are too simple but I understand the need for it to have reasonable model to explain the principle behind the tax bracket usage. Certainly nobody can (or should) use this scenario as it is without understanding that real life is not so simple.
- All the analysis is done in today's dollars; which is good and easy to grasp
- Some of the taxes paid were astronomically high during some of the years! Effective rate of 20% federal income tax that I just can NOT fathom at $100K of income. On over $350K of AGI income, we are paying at ~18% effective rate! Is this the difference between single vs joint?
- Let us put some perspective to the numbers provided. The $400K taxable has cost basis of $400K making this pot in the "already paid taxes on it" bucket. $300K is in Roth IRA aka "already paid taxes on it". So we are talking about $1.3M of "Never paid taxes on it" money here. If I want to spread it over 25-30 years, let us see how much taxes I would incur on it. $1.3M/25 = $52K per year. What is the effective tax liability on that income? Surely, it NOT be 20% ! OK; I am ignoring the 2% interest but I just don't see it making a huge difference.
- What am I missing here?
The 20% effective tax rate you are mentioning does happen after 2026, which means going back to 2017 tax brackets. I used those for 2026 and later, but adjusted for inflation through 2021. You can see on page 14 of this document:

https://www.irs.gov/pub/irs-prior/i1040tt--2017.pdf

That having federal income taxes of over $20,000 on $100,000 of taxable income for a single filer is something that does happen. Also on your next to last point, there is a Social Security benefit getting taxed as well.
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Re: Something good from Wade Pfau

Post by wrongfunds »

Are there other analysis where tax smoothing is done where both spendable money and effective tax rate stay relatively constant throughout the entire retirement (once again with all the necessary simplifying assumption)? Your analysis has many over 20% effective tax years and then miniscule tax rate in later years.

I mean if $52K were to be taken out every year for 25 years (or $43.3K if for 30 years) and then adding social security on top of it, I still do not see how the effective tax rate would be over 20%. We should be only considering the income taxes on the $1.3M and should use the other $.7M for consumption smoothing.

Obviously, the onus of proof would be on me to provide the calculations for what my intuition tells me; albeit I am hoping that somebody more knowledgeable in this area would pick up the mantle and do my job :-)
Last edited by wrongfunds on Thu Sep 09, 2021 1:08 pm, edited 1 time in total.
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Re: Something good from Wade Pfau

Post by Soon2BXProgrammer »

wade wrote: Thu Sep 09, 2021 9:22 am because there are always going to be the cynics at Bogleheads.
As a Boglehead who has turned into one of your students at The American College, I appreciate the contribution's to the discipline of financial planning you have made. (I haven't read the book yet, as it just got published, but it is on my todo)
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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Re: Something good from Wade Pfau

Post by wade »

wrongfunds wrote: Thu Sep 09, 2021 1:00 pm Are there other analysis where tax smoothing is done where both spendable money and effective tax rate stay relatively constant throughout the entire retirement (once again with all the necessary simplifying assumption)? Your analysis has many over 20% effective tax years and then miniscule tax rate in later years.
The excerpted part of the article includes the worst-performing and best-performing strategies. A couple of others are also shown in the book. One was trying to smooth AGI at $60,000 throughout retirement. Maybe that would be one that interests you? It ultimately didn't work as well as the second example from the book excerpt, in terms of sustaining assets for as long as possible.
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Re: Something good from Wade Pfau

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Soon2BXProgrammer wrote: Thu Sep 09, 2021 1:01 pm
wade wrote: Thu Sep 09, 2021 9:22 am because there are always going to be the cynics at Bogleheads.
As a Boglehead who has turned into one of your students at The American College, I appreciate the contribution's to the discipline of financial planning you have made. (I haven't read the book yet, as it just got published, but it is on my todo)
Thank you!
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Re: Something good from Wade Pfau

Post by wade »

wade wrote: Thu Sep 09, 2021 1:05 pm
wrongfunds wrote: Thu Sep 09, 2021 1:00 pm Are there other analysis where tax smoothing is done where both spendable money and effective tax rate stay relatively constant throughout the entire retirement (once again with all the necessary simplifying assumption)? Your analysis has many over 20% effective tax years and then miniscule tax rate in later years.
The excerpted part of the article includes the worst-performing and best-performing strategies. A couple of others are also shown in the book. One was trying to smooth AGI at $60,000 throughout retirement. Maybe that would be one that interests you? It ultimately didn't work as well as the second example from the book excerpt, in terms of sustaining assets for as long as possible.
And just to be clear, the reason that front-loading the taxes worked so well is because it dramatically reduced the portion of Social Security benefits subject to taxes.
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Re: Something good from Wade Pfau

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You said your analysis does NOT need the 2% and even 1.33% would show the similar results. What about 0% return? I am thinking if it is possible to come up with both spendable_money+tax smoothing for the whole of assumed period.

I would prefer (for example) ~7% effective tax rate for all 30 years rather than ~25% for the 1st half and then nothing for the rest of the years. I am just not too fond of prepaying taxes. May be I will be able to crunch the sample numbers with 0% assumption. Would the result be still valid if 0% were to creep upward? Yes it will be a *good problem* to have :-)
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Re: Something good from Wade Pfau

Post by Soon2BXProgrammer »

wrongfunds wrote: Thu Sep 09, 2021 1:15 pm I would prefer (for example) ~7% effective tax rate for all 30 years rather than ~25% for the 1st half and then nothing for the rest of the years. I am just not too fond of prepaying taxes.
If you model this when people are subject to the social security hump (or torpedo) https://www.bogleheads.org/wiki/Social_ ... calculator
then people will pay net more in taxes, then if they shift their income around to make their social security not taxable at some point.

This is one of the powers of deferring social security, it makes SS bigger AND it makes people not subject to this taxation rule for a few years.. If people capitalize on that, and if they take advantage of it, then they can reduce their future tax liability.
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Re: Something good from Wade Pfau

Post by wrongfunds »

Soon2BXProgrammer wrote: Thu Sep 09, 2021 1:18 pm
wrongfunds wrote: Thu Sep 09, 2021 1:15 pm I would prefer (for example) ~7% effective tax rate for all 30 years rather than ~25% for the 1st half and then nothing for the rest of the years. I am just not too fond of prepaying taxes.
If you model this when people are subject to the social security hump (or torpedo) https://www.bogleheads.org/wiki/Social_ ... calculator
then people will pay net more in taxes, then if they shift their income around to make their social security not taxable at some point.
I understand that part. I believe that hump does NOT affect the effective tax rate (please correct me if you think I am wrong). Unfortunately, those hump make all of this discussion NOT scalable e.g. instead of the $2M kitty, make that $4M with the same proportion and results may not be valid! Or make that $1M and the basic principle highlighted in this book may NOT apply!

Since there are so many moving parts and so many unrealistic and simplifying assumptions, I think in real life an approach which intuitively makes sense is the more valuable one rather than the one which is mathematically found to be superior.

Your mileage may vary!
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Re: Something good from Wade Pfau

Post by Soon2BXProgrammer »

wrongfunds wrote: Thu Sep 09, 2021 1:25 pm
I understand that part. Unfortunately, those hump make all of this discussion NOT scalable e.g. instead of the $2M kitty, make that $4M with the same proportion and results may not be valid! Or make that $1M and the basic principle highlighted in this book may NOT apply!

Since there are so many moving parts and so many unrealistic and simplifying assumptions, I think in real life an approach which intuitively makes more sense is the more valuable one rather than the one which is mathematically found to be superior.
As i haven't read the book yet, i can't comment in detail about what the book outlines. But retirement income optimization is very complicated, so a standard approach in research is to simplify/hold constant the rest of the analysis, and test one thing at a time. It is up to the practitioner (either DIY or professional), building a retirement income plan, to figure out which knobs make sense for their situation. Of course it is YMMV.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
AlwaysLearningMore
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Re: Something good from Wade Pfau

Post by AlwaysLearningMore »

revhappy wrote: Wed Sep 08, 2021 10:28 am I am bit disappointed that guys like Michael Kitces and Wade Pfau do great research, but all from the US investor perspective. There is much bigger world out there and people out there look upto these people to help them out.
Conversely, does one frequently see investment books aimed at the individual US investor penned by financial writers from Azerbaijan, Yemen or Croatia?
Retirement is best when you have a lot to live on, and a lot to live for.
wrongfunds
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Re: Something good from Wade Pfau

Post by wrongfunds »

Soon2BXProgrammer wrote: Thu Sep 09, 2021 1:29 pm
wrongfunds wrote: Thu Sep 09, 2021 1:25 pm
I understand that part. Unfortunately, those hump make all of this discussion NOT scalable e.g. instead of the $2M kitty, make that $4M with the same proportion and results may not be valid! Or make that $1M and the basic principle highlighted in this book may NOT apply!

Since there are so many moving parts and so many unrealistic and simplifying assumptions, I think in real life an approach which intuitively makes more sense is the more valuable one rather than the one which is mathematically found to be superior.
As i haven't read the book yet, i can't comment in detail about what the book outlines. But retirement income optimization is very complicated, so a standard approach in research is to simplify/hold constant the rest of the analysis, and test one thing at a time. It is up to the practitioner (either DIY or professional), building a retirement income plan, to figure out which knobs make sense for their situation. Of course it is YMMV.
Of course because nothing is fixed and everything is changing. Very rarely the assumptions made in the past will hold true for the present or future. But some people love doing the what-if analysis and trying to extract the last cent from Uncle Sam. For me, the most important thing is to avoid gross and careless mistakes. That will give me "good enough" results.
Soon2BXProgrammer
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Re: Something good from Wade Pfau

Post by Soon2BXProgrammer »

wrongfunds wrote: Thu Sep 09, 2021 1:40 pm For me, the most important thing is to avoid gross and careless mistakes. That will give me "good enough" results.
One thing that I try to make sure are identified and mitigated are scenarios that would cause significantly bad outcomes. A simple example would be an early death of one spouse and the other spouse having a very long life. So I like to look at things that help this type of bad scenario, that are roughly neutral on the typical scenario.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
aghusker
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Re: Something good from Wade Pfau

Post by aghusker »

wrongfunds wrote: Thu Sep 09, 2021 1:25 pm
Soon2BXProgrammer wrote: Thu Sep 09, 2021 1:18 pm
wrongfunds wrote: Thu Sep 09, 2021 1:15 pm I would prefer (for example) ~7% effective tax rate for all 30 years rather than ~25% for the 1st half and then nothing for the rest of the years. I am just not too fond of prepaying taxes.
If you model this when people are subject to the social security hump (or torpedo) https://www.bogleheads.org/wiki/Social_ ... calculator
then people will pay net more in taxes, then if they shift their income around to make their social security not taxable at some point.
I understand that part. I believe that hump does NOT affect the effective tax rate (please correct me if you think I am wrong). Unfortunately, those hump make all of this discussion NOT scalable e.g. instead of the $2M kitty, make that $4M with the same proportion and results may not be valid! Or make that $1M and the basic principle highlighted in this book may NOT apply!

Since there are so many moving parts and so many unrealistic and simplifying assumptions, I think in real life an approach which intuitively makes sense is the more valuable one rather than the one which is mathematically found to be superior.

Your mileage may vary!
What??? Your argument is that a gut approach beats a mathematical approach, just because the future is uncertain. Sorry, you are 100% wrong on that one.
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Re: Something good from Wade Pfau

Post by LadyGeek »

FYI - Forum member wade is Wade Pfau.
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Wannaretireearly
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Re: Something good from Wade Pfau

Post by Wannaretireearly »

Glad I found this thread. Just bought the book & looking forward to the read!
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deserat
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Re: Something good from Wade Pfau

Post by deserat »

wade wrote: Thu Sep 09, 2021 1:07 pm
wade wrote: Thu Sep 09, 2021 1:05 pm
wrongfunds wrote: Thu Sep 09, 2021 1:00 pm Are there other analysis where tax smoothing is done where both spendable money and effective tax rate stay relatively constant throughout the entire retirement (once again with all the necessary simplifying assumption)? Your analysis has many over 20% effective tax years and then miniscule tax rate in later years.
The excerpted part of the article includes the worst-performing and best-performing strategies. A couple of others are also shown in the book. One was trying to smooth AGI at $60,000 throughout retirement. Maybe that would be one that interests you? It ultimately didn't work as well as the second example from the book excerpt, in terms of sustaining assets for as long as possible.
And just to be clear, the reason that front-loading the taxes worked so well is because it dramatically reduced the portion of Social Security benefits subject to taxes.
Mr Pfau,

I pains me to see you defend yourself on a 'virtual quasi social media' platform or what we used to call a bulletin board. It is important to be able to receive feedback on one's work, however, I hope that you don't stop contributing because I am sure there is a silent majority of readers who don't necessarily post or engage but benefit mightily from all that you are doing both here and in your remunerated efforts. Two sayings: the world goes to the doers, of which you are one; and, illegitimi non carborundum.

To the subject above, while I have not yet read the excerpt or the book, I can attest to your statement above; I am single, so yes, the tax rates are brutal compared to the MFJ (alluding to the comment by another reader with regard to surprise at tax rates on levels of income as well as the on-running thread on what happens to taxes (or not) when one becomes a widow(er). I was looking at how to manage my Roth conversions over time. I could be classed as a quasi early retiree (late 50s), so I have available a possible decade to do the conversion. However, when I simply modeled the conversion using the existing brackets and constraints of IRMAA and other future pension income, the difference in the tax hits for the different brackets was significant. In my case, I saved 10% by accelerating to the 32% bracket over the 24% bracket and even would save doing those conversions in the 32% bracket over ripping the band-aid right off up to the 35% bracket. I was quite surprised. Lesson: model your own situation and run the numbers; this can make a large difference if filing single as the income levels for the different tax brackets is essentially half of those filing married.
Derpalator
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Re: Something good from Wade Pfau

Post by Derpalator »

Wannaretireearly wrote: Sat Sep 11, 2021 1:12 am Glad I found this thread. Just bought the book & looking forward to the read!
Me too. Just bought it. Bought based upon finding it on this boglehead thread. Wade, your work is very appreciated.
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Re: Something good from Wade Pfau

Post by retire2022 »

wade wrote: Thu Sep 09, 2021 9:22 am
I worked very hard to make this book serve as a standalone tool for self-directed people. There is a brief discussion of working with financial advisors on pages 440 to 444, but even there it is clear that not all individuals perceive advisors as providing value beyond their fees. Being self-directed is a fine option to choose. This book is NOT a sales pitch for working with a financial advisor. And I know it doesn't matter how hard I work to make this clear, because there are always going to be the cynics at Bogleheads.
Wade,

I want to publicly thank you, your example investor almost fits my situation will minor differences, ie I have pension 70K and a portfolio of 2.6 million and recently retired in August 2021.

Everything has been DIY since 1993 and your article is helpful.

best retire2022
BluesH
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Re: Something good from Wade Pfau

Post by BluesH »

Just a quick question on format. I see the Kindle version is $8 cheaper than paperback. And in general, I prefer reading books (novels) on a Kindle. But I've found that books with lots of charts, graphs, maps, etc, don't do well on Kindle. That frequently applies to financial books. I have a Kindle Paperwhite, which is B&W and not scalable.

So the quick question is - would I do better to buy the paperback?
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afan
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Re: Something good from Wade Pfau

Post by afan »

Of course the optimum approach will depend on the level of income. No, you could not double the income and assets and expect to use the same strategy. The point of the exercise was to analyze the tax situation of an illustrative case.

People whose income will always be high enough that 85% of SS will be taxed have this one feature off the table. They may have to worry about IRMAA. You could not take their optimal approach, cut the figures in half and expect the best result to be the same.

Someone who will work past RMD age and will never have low income years will need a different analysis.

There is not a single approach that is right for all circumstances.

I do not believe this was an advertising pitch. I have been one of those who criticized Pfau for some analyses that had a thumb on the scale for insurance products. This is not such a contribution.

I called attention to the post and the book because I thought they were useful.

I have not read the book but I am buying it today.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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cockersx3
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Re: Something good from Wade Pfau

Post by cockersx3 »

Curious if the book contains anything of value to early retirees (is 50-55)? I assume that the book is geared towards "normal" retirement, but would be happy to hear any feedback on that point specifically. If so I would consider buying it.
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Peter Foley
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Re: Something good from Wade Pfau

Post by Peter Foley »

To Wade,

I've read a number of your articles and the application of some of your studies are central to my plan. It is a plan that has worked very well over the past dozen years.

Thank you.
Whitecap
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Re: Something good from Wade Pfau

Post by Whitecap »

Wade,
Your work has been instrumental in helping me gain financial literacy, helping me gain the confidence to plan out my financial future, and helping my wince and I sleep soundly at night. As a newer Boglehead, I wanted you to know how comforted I am that you are here, popping in from time to time.

Thank you for your contributions here at bogleheads. Thank you for the positive contributions that you have added to my family’s financial education and ultimately, our financial freedom.

I’ll be buying your book soon.

Warm regards,
Whitecap
evofxdwg
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Re: Something good from Wade Pfau

Post by evofxdwg »

Im on the fence about buying the book.

Wife and I are retired (me 4 yrs now; her, longer). We have taken SS (at age 66). We always file jointly. And I have a spreadsheet plan (now 3 years in going on 4) that manages brackets and stays below the first IRMMA MAGI step limit to Roth convert the federal taxable headspace. I have been doing Roth conversions for 3 years now. State taxes are almost nil due to SS not being taxed at all and large exclusions on retiree income.

I plan to continue the above until RMD's kick in at 72 (Secure Act), and I guess I will continue conversions, but with smaller amounts since a lot of the headspace will be reduced by RMD withdrawals.

Rough projections show Im not going to get a large percentage of the big IRA converted before RMD's kick in at 72 (Secure Act).

These Roth conversions will likely benefit our children more than they will benefit us. One question I do have is how to manage this plan and/or estate differently if required to minimize (or possibly pay zero) inheritance tax. (We are spending some on travel and fun, just bought a new RV)

So a lot of our major decisions are cast in stone at this point. And our major concern is passing some to our heirs tax efficiently.

Will the book provide some worthwhile pointers for me?
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Re: Something good from Wade Pfau

Post by valleyrock »

afan wrote: Wed Sep 08, 2021 2:35 pm
revhappy wrote: Wed Sep 08, 2021 10:28 am I am bit disappointed that guys like Michael Kitces and Wade Pfau do great research, but all from the US investor perspective. There is much bigger world out there and people out there look upto these people to help them out.
You can look at the approach but the details are heavily dependent on the laws of your country. Even this analysis rests upon US law for someone in this income range. The calculations would be different for a person with a higher income, where the cost of Medicare can be much higher and income taxes go up with income. If your country has a combination of tax, equivalent to Social Security, pre-tax and after tax retirement funds, opportunity for Roth conversions income tax rates and provisions similar to the US, then it may just be a matter of following his approach and plugging in different numbers. But his results hinge on the rules for people in this country.

It could be very different if, for example, no one pays a separate premium for healthcare coverage in retirement. Or the amounts are not based on income, or they are based on income in some other way.

For US investors, the value is examples from someone who thoroughly understands the rules and how to put them into effect.
Soon2BXProgrammer
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Re: Something good from Wade Pfau

Post by Soon2BXProgrammer »

evofxdwg wrote: Sun Sep 12, 2021 12:17 am These Roth conversions will likely benefit our children more than they will benefit us. One question I do have is how to manage this plan and/or estate differently if required to minimize (or possibly pay zero) inheritance tax. (We are spending some on travel and fun, just bought a new RV)
If you really think you will pay inheritance/estate taxes, by ramping up the Roth conversions, you effectively shrink your estate/inheritances by the amount of the income tax paid, and with the 10 year window for beneficiaries, there is a good chance your heirs could pay a similar income tax rate.

Furthermore, if you know you have too much money, you could be using the annual exclusions to start gifting to your children now. Also, there are some exceptions for tuition/medical, https://www.law.cornell.edu/cfr/text/26/25.2503-6 which if you really want to start transferring you could try to utilize.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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