Define "Expenses"

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EnjoyIt
Posts: 6224
Joined: Sun Dec 29, 2013 8:06 pm

Re: Define "Expenses"

Post by EnjoyIt »

smitcat wrote: Wed Nov 24, 2021 3:55 pm
EnjoyIt wrote: Wed Nov 24, 2021 3:46 pm
smitcat wrote: Wed Nov 24, 2021 3:31 pm
prioritarian wrote: Wed Nov 24, 2021 2:28 pm
smitcat wrote: Wed Nov 24, 2021 9:23 am

"And, at low enough expense level, the person has the choice to generate whatever level of income"
On numerous posts you have indicated what a 60/40 portfolio of 1.5 million would yield - that is income.
Are you now saying you would put those funds into a savings account so as not to grow and not generate future taxes?

"The only exception are mandatory income like pension."
Pensions could be given away - are you saying that is a possible solution to taxes?

"As per social security, we have the choice to defer if it is advantageous to us."
You can defer and get higher SS later which will mean higher taxes later on - you could also not elect to get SS at all - are you saying that you could not elect SS to pay no taxes?

"We do not have the choice to choose our expense."
Of course most of us do - we could cut them to a fraction within a few months.

"But, we have the choice to choose our income during retirement"
You can do these things to choose income during retirement:
- change your AA
- donate funds
- deny a pension
- do not elect SS at all
Which one(s) of these are you proposing you will use to change your income in retirement?
Social security taxes are based on "combined income" which is very different from total social security income.
You also left out roth distributions, low/negative capital gain taxable sales, and cash.

For me the hardest part of managing taxes will be to minimize dividends in taxable so they don't push up my social security combined income. I plan on aggressively donating my most appreciated tax lots and continuing my ongoing shift towards tax efficiency (e.g. during bear markets where I can harvest gains). With a little luck I may end up having a taxable position that is entirely comprised of munis, tax managed indices, and ultra low dividend ETFs (e.g. small value) by the time I retire.
"Social security taxes are based on "combined income" which is very different from total social security income."
Yes - and all taxes are based on combined income from all sources.

"You also left out roth distributions, low/negative capital gain taxable sales, and cash."
Yes- converting AA and account types as well as storing hard metal in your safe can affect the details.

"For me the hardest part of managing taxes will be to minimize dividends in taxable so they don't push up my social security combined income."
Yes - this has an affect on some of us,,..but once again these questions were directed at KlangFool who has a different set of parameters in his account.
FWIW - in our case we will not be able to avoid pushing up our combined SS income.
I think the hardest part of all this is if one does Roth conversions prior to SS, how high up the tax bracket does one go. I have seen conversions to the top of the 24% tax bracket. It is especially complicate before 65 when open market healthcare costs are intimately tied to income. Is it worth paying 12% to do a Roth conversion and then incur increased healthcare costs at an additional 8.5% for a total cost of 20.5%. That is not insignificant, but becomes worthwhile if one will be hitting even the 22% tax bracket once social security kicks in.
FWIW - in our case the Roth conversions are more 'directed' by the Irmma tiers and not the tax bracket itself. The decisions on healthcare costs are also affected by the ages of each spouse, whether you need the ACA or not, and whether you would significantly gain from attempting to receive ACA
subsidies. Since we cannot gain significant ACA subsidies our Roth decisions are driven by our future income models as well as our future models for our kids tax rates. In our case we are reasonably aggressive in our Roth conversions this year and will likely remain that way for a few years unless conditions change.
There is no ACA subsidies cliff currently. It is an effectively an 8.5% tax. Will this law last forever, I don't know and it is not the place of this forum to guess. My other alternative is paying for healthcare through my part time employer at $2k/month with a $3500 deductible and then, doing Roth conversions up to the top of the 24% tax bracket. I don't think that is the most cost effective plan. I say 24% because if I'm willing to Roth convert at 22%, then 24% is probably a good idea as well.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
dbr
Posts: 37901
Joined: Sun Mar 04, 2007 9:50 am

Re: Define "Expenses"

Post by dbr »

K72 wrote: Wed Nov 24, 2021 4:12 pm I think the question posed by the OP is more complex than people suggest. I've struggled with coming up with a sensible estimate for portfolio withdrawal in retirement and it comes down to what number do I apply an inflation factor to. If I use residual expenses (total expenses minus SS, pensions, etc.), I'd be under estimating future withdrawal needs if the pensions and annuities aren't indexed for inflation. To illustrate, if my true expenses were $100k per year and $90k came from non portfolio sources, I'd need $10k from portfolio for the first year, but if inflation were 5% I'd need more like $15k the second year, (1.05*100 - 90) which is a 50% increase in residual expenses. Even more complex is if a pension has COLA but not enough to keep up with inflation.

I think the right answer is that we need to account for all expenses and somehow factor in income sources that have partial or no inflation indexing.
That is exactly right. That is why any answer short of a full model of all the factors is too simple to be an adequate answer. I like to use FireCalc as an example of a model that at least includes all the pieces in one place, whatever approximations and estimations might be involved. The issues you mention are automatically considered in that kind of model. Other models may offer even more flexibility. One example where FireCalc does not offer the flexibility one wants is that the asset allocation cannot be changed over time. Other models might allow that.
KlangFool
Posts: 22757
Joined: Sat Oct 11, 2008 12:35 pm

Re: Define "Expenses"

Post by KlangFool »

smitcat wrote: Wed Nov 24, 2021 4:11 pm
If you put in the other details above you will know/learn that your taxes in the future will be significant when compared to your $45K per year draw. You can delay them for quite some time but at some age someone in your family will pay larger taxes without a plan.
Unless your plan is to give portions of your funds away to a charity.
smitcat,

1) What is significant to you may not be significant to me. It is subjective.

2) In summary, it is insignificant to me. And, that is all that matters.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
KlangFool
Posts: 22757
Joined: Sat Oct 11, 2008 12:35 pm

Re: Define "Expenses"

Post by KlangFool »

EnjoyIt wrote: Wed Nov 24, 2021 4:14 pm
There is no ACA subsidies cliff currently. It is an effectively an 8.5% tax. Will this law last forever, I don't know and it is not the place of this forum to guess. My other alternative is paying for healthcare through my part time employer at $2k/month with a $3500 deductible and then, doing Roth conversions up to the top of the 24% tax bracket. I don't think that is the most cost effective plan. I say 24% because if I'm willing to Roth convert at 22%, then 24% is probably a good idea as well.
EnjoyIt,

And, if you go with the ACA and pay 8.5% taxes and collect 10K of subsidy in the process, are you

A) Paying 8.5% taxes?

B) Saving 10K of insurance premium

C) Net gain of X as a sum of (A) and (B)? Then, are you paying 8.5% taxes?

Taxes are not expense. It is a a different kind of stuff. You pay whatever amount based on how you play the tax management game.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
smitcat
Posts: 8471
Joined: Mon Nov 07, 2016 10:51 am

Re: Define "Expenses"

Post by smitcat »

KlangFool wrote: Wed Nov 24, 2021 4:29 pm
smitcat wrote: Wed Nov 24, 2021 4:11 pm
If you put in the other details above you will know/learn that your taxes in the future will be significant when compared to your $45K per year draw. You can delay them for quite some time but at some age someone in your family will pay larger taxes without a plan.
Unless your plan is to give portions of your funds away to a charity.
smitcat,

1) What is significant to you may not be significant to me. It is subjective.

2) In summary, it is insignificant to me. And, that is all that matters.

KlangFool
You always want to work out the details with other folks posts when they do not make complete sense.
Whay is it that in this post you do not want to work thru the details in the same way?
Why would you not want to do yourself what you always ask of others?
Please read what I posted and not change the words...

"1) What is significant to you may not be significant to me. It is subjective."
I did not say it was significant to you or to me - I said it would be significant compared to your claimed retirement expenses of $45K per year
If you work another year or two based on your modeling (not mine) your 401K will grow above 1.0 million and your after-tax account will be near that large as well.
Your $45K draw each year will not make a dent on the growth of the portfolio and the incoming SS.
When you combine the aftertax accounts annual divs and gains with the SS @70 along with the RMD's due at 70 you will have significant number compared to the $45K in expenses.
While you can delay some of the effects of the RMD's they will increase each year until/unless you make more significant withdrawals.
smitcat
Posts: 8471
Joined: Mon Nov 07, 2016 10:51 am

Re: Define "Expenses"

Post by smitcat »

EnjoyIt wrote: Wed Nov 24, 2021 4:14 pm
smitcat wrote: Wed Nov 24, 2021 3:55 pm
EnjoyIt wrote: Wed Nov 24, 2021 3:46 pm
smitcat wrote: Wed Nov 24, 2021 3:31 pm
prioritarian wrote: Wed Nov 24, 2021 2:28 pm

Social security taxes are based on "combined income" which is very different from total social security income.
You also left out roth distributions, low/negative capital gain taxable sales, and cash.

For me the hardest part of managing taxes will be to minimize dividends in taxable so they don't push up my social security combined income. I plan on aggressively donating my most appreciated tax lots and continuing my ongoing shift towards tax efficiency (e.g. during bear markets where I can harvest gains). With a little luck I may end up having a taxable position that is entirely comprised of munis, tax managed indices, and ultra low dividend ETFs (e.g. small value) by the time I retire.
"Social security taxes are based on "combined income" which is very different from total social security income."
Yes - and all taxes are based on combined income from all sources.

"You also left out roth distributions, low/negative capital gain taxable sales, and cash."
Yes- converting AA and account types as well as storing hard metal in your safe can affect the details.

"For me the hardest part of managing taxes will be to minimize dividends in taxable so they don't push up my social security combined income."
Yes - this has an affect on some of us,,..but once again these questions were directed at KlangFool who has a different set of parameters in his account.
FWIW - in our case we will not be able to avoid pushing up our combined SS income.
I think the hardest part of all this is if one does Roth conversions prior to SS, how high up the tax bracket does one go. I have seen conversions to the top of the 24% tax bracket. It is especially complicate before 65 when open market healthcare costs are intimately tied to income. Is it worth paying 12% to do a Roth conversion and then incur increased healthcare costs at an additional 8.5% for a total cost of 20.5%. That is not insignificant, but becomes worthwhile if one will be hitting even the 22% tax bracket once social security kicks in.
FWIW - in our case the Roth conversions are more 'directed' by the Irmma tiers and not the tax bracket itself. The decisions on healthcare costs are also affected by the ages of each spouse, whether you need the ACA or not, and whether you would significantly gain from attempting to receive ACA
subsidies. Since we cannot gain significant ACA subsidies our Roth decisions are driven by our future income models as well as our future models for our kids tax rates. In our case we are reasonably aggressive in our Roth conversions this year and will likely remain that way for a few years unless conditions change.
There is no ACA subsidies cliff currently. It is an effectively an 8.5% tax. Will this law last forever, I don't know and it is not the place of this forum to guess. My other alternative is paying for healthcare through my part time employer at $2k/month with a $3500 deductible and then, doing Roth conversions up to the top of the 24% tax bracket. I don't think that is the most cost effective plan. I say 24% because if I'm willing to Roth convert at 22%, then 24% is probably a good idea as well.
I do not know what might be the best path for you but the goal is to have the best plan that eventually reduces all pretax plans to zero. Your best Roth conversion plans will vary dependent upon your exact numbers and goals for those funds as well as your modeled future portfolio performance.
When all else seems unclear it is often best to attempt to have a plan that keeps tax rates as even as possible over longer time periods.
EnjoyIt
Posts: 6224
Joined: Sun Dec 29, 2013 8:06 pm

Re: Define "Expenses"

Post by EnjoyIt »

KlangFool wrote: Wed Nov 24, 2021 4:34 pm
EnjoyIt wrote: Wed Nov 24, 2021 4:14 pm
There is no ACA subsidies cliff currently. It is an effectively an 8.5% tax. Will this law last forever, I don't know and it is not the place of this forum to guess. My other alternative is paying for healthcare through my part time employer at $2k/month with a $3500 deductible and then, doing Roth conversions up to the top of the 24% tax bracket. I don't think that is the most cost effective plan. I say 24% because if I'm willing to Roth convert at 22%, then 24% is probably a good idea as well.
EnjoyIt,

And, if you go with the ACA and pay 8.5% taxes and collect 10K of subsidy in the process, are you

A) Paying 8.5% taxes?

B) Saving 10K of insurance premium

C) Net gain of X as a sum of (A) and (B)? Then, are you paying 8.5% taxes?

Taxes are not expense. It is a a different kind of stuff. You pay whatever amount based on how you play the tax management game.

KlangFool
Klangfool,
I know you well enough that you are a man of your convictions and those convictions are rigid. I see no point in arguing semantics.

"A penny saved is a penny earned"
-Ben Franklin
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
EnjoyIt
Posts: 6224
Joined: Sun Dec 29, 2013 8:06 pm

Re: Define "Expenses"

Post by EnjoyIt »

smitcat wrote: Wed Nov 24, 2021 4:57 pm
EnjoyIt wrote: Wed Nov 24, 2021 4:14 pm
smitcat wrote: Wed Nov 24, 2021 3:55 pm
EnjoyIt wrote: Wed Nov 24, 2021 3:46 pm
smitcat wrote: Wed Nov 24, 2021 3:31 pm

"Social security taxes are based on "combined income" which is very different from total social security income."
Yes - and all taxes are based on combined income from all sources.

"You also left out roth distributions, low/negative capital gain taxable sales, and cash."
Yes- converting AA and account types as well as storing hard metal in your safe can affect the details.

"For me the hardest part of managing taxes will be to minimize dividends in taxable so they don't push up my social security combined income."
Yes - this has an affect on some of us,,..but once again these questions were directed at KlangFool who has a different set of parameters in his account.
FWIW - in our case we will not be able to avoid pushing up our combined SS income.
I think the hardest part of all this is if one does Roth conversions prior to SS, how high up the tax bracket does one go. I have seen conversions to the top of the 24% tax bracket. It is especially complicate before 65 when open market healthcare costs are intimately tied to income. Is it worth paying 12% to do a Roth conversion and then incur increased healthcare costs at an additional 8.5% for a total cost of 20.5%. That is not insignificant, but becomes worthwhile if one will be hitting even the 22% tax bracket once social security kicks in.
FWIW - in our case the Roth conversions are more 'directed' by the Irmma tiers and not the tax bracket itself. The decisions on healthcare costs are also affected by the ages of each spouse, whether you need the ACA or not, and whether you would significantly gain from attempting to receive ACA
subsidies. Since we cannot gain significant ACA subsidies our Roth decisions are driven by our future income models as well as our future models for our kids tax rates. In our case we are reasonably aggressive in our Roth conversions this year and will likely remain that way for a few years unless conditions change.
There is no ACA subsidies cliff currently. It is an effectively an 8.5% tax. Will this law last forever, I don't know and it is not the place of this forum to guess. My other alternative is paying for healthcare through my part time employer at $2k/month with a $3500 deductible and then, doing Roth conversions up to the top of the 24% tax bracket. I don't think that is the most cost effective plan. I say 24% because if I'm willing to Roth convert at 22%, then 24% is probably a good idea as well.
I do not know what might be the best path for you but the goal is to have the best plan that eventually reduces all pretax plans to zero. Your best Roth conversion plans will vary dependent upon your exact numbers and goals for those funds as well as your modeled future portfolio performance.
When all else seems unclear it is often best to attempt to have a plan that keeps tax rates as even as possible over longer time periods.
Thats kind of how I see it. Best course of action is to try an equalize taxes. What complicated step to all this, and I think you and I have discussed it before is how much longer I plan to work. If I continue for 20 more years, well then that 401k will grow so much that RMDs alone will be putting me deep in the 24% tax bracket. If I continue for 5 more years, that number will be much lower. I currently have no plans of fully retiring today, but I always like the option of being able to do so at any time.

These next few years are going to be very complicated years. Do I do Roth 401k contributions and live off the rest plus dividends from my taxable account? Do I do half Roth half traditional? It is way too hard to know the right answer with all the current variables. I'm thinking maybe doing all Roth while Trumps Tax Cuts and Jobs act is still in effect and just buy health insurance on the open market. The 20% business deduction is clinching the deal....for now.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
smitcat
Posts: 8471
Joined: Mon Nov 07, 2016 10:51 am

Re: Define "Expenses"

Post by smitcat »

EnjoyIt wrote: Wed Nov 24, 2021 5:33 pm
smitcat wrote: Wed Nov 24, 2021 4:57 pm
EnjoyIt wrote: Wed Nov 24, 2021 4:14 pm
smitcat wrote: Wed Nov 24, 2021 3:55 pm
EnjoyIt wrote: Wed Nov 24, 2021 3:46 pm

I think the hardest part of all this is if one does Roth conversions prior to SS, how high up the tax bracket does one go. I have seen conversions to the top of the 24% tax bracket. It is especially complicate before 65 when open market healthcare costs are intimately tied to income. Is it worth paying 12% to do a Roth conversion and then incur increased healthcare costs at an additional 8.5% for a total cost of 20.5%. That is not insignificant, but becomes worthwhile if one will be hitting even the 22% tax bracket once social security kicks in.
FWIW - in our case the Roth conversions are more 'directed' by the Irmma tiers and not the tax bracket itself. The decisions on healthcare costs are also affected by the ages of each spouse, whether you need the ACA or not, and whether you would significantly gain from attempting to receive ACA
subsidies. Since we cannot gain significant ACA subsidies our Roth decisions are driven by our future income models as well as our future models for our kids tax rates. In our case we are reasonably aggressive in our Roth conversions this year and will likely remain that way for a few years unless conditions change.
There is no ACA subsidies cliff currently. It is an effectively an 8.5% tax. Will this law last forever, I don't know and it is not the place of this forum to guess. My other alternative is paying for healthcare through my part time employer at $2k/month with a $3500 deductible and then, doing Roth conversions up to the top of the 24% tax bracket. I don't think that is the most cost effective plan. I say 24% because if I'm willing to Roth convert at 22%, then 24% is probably a good idea as well.
I do not know what might be the best path for you but the goal is to have the best plan that eventually reduces all pretax plans to zero. Your best Roth conversion plans will vary dependent upon your exact numbers and goals for those funds as well as your modeled future portfolio performance.
When all else seems unclear it is often best to attempt to have a plan that keeps tax rates as even as possible over longer time periods.
Thats kind of how I see it. Best course of action is to try an equalize taxes. What complicated step to all this, and I think you and I have discussed it before is how much longer I plan to work. If I continue for 20 more years, well then that 401k will grow so much that RMDs alone will be putting me deep in the 24% tax bracket. If I continue for 5 more years, that number will be much lower. I currently have no plans of fully retiring today, but I always like the option of being able to do so at any time.

These next few years are going to be very complicated years. Do I do Roth 401k contributions and live off the rest plus dividends from my taxable account? Do I do half Roth half traditional? It is way too hard to know the right answer with all the current variables. I'm thinking maybe doing all Roth while Trumps Tax Cuts and Jobs act is still in effect and just buy health insurance on the open market. The 20% business deduction is clinching the deal....for now.
"If I continue for 20 more years, well then that 401k will grow so much that RMDs alone will be putting me deep in the 24% tax bracket."
This is why we backed off of maximum 401K contributions near the end of our working career.

"These next few years are going to be very complicated years."
Agreed - and any year(s) that you consider Roth conversions will likely be different from today and just as confusing.
There are no exact answers and you will need to be content with the best plan at the time based on your best guess at the future.
But.... really all of this retirement planning is somewhat similar in that respect.
delamer
Posts: 12724
Joined: Tue Feb 08, 2011 6:13 pm

Re: Define "Expenses"

Post by delamer »

K72 wrote: Wed Nov 24, 2021 4:12 pm I think the question posed by the OP is more complex than people suggest. I've struggled with coming up with a sensible estimate for portfolio withdrawal in retirement and it comes down to what number do I apply an inflation factor to. If I use residual expenses (total expenses minus SS, pensions, etc.), I'd be under estimating future withdrawal needs if the pensions and annuities aren't indexed for inflation. To illustrate, if my true expenses were $100k per year and $90k came from non portfolio sources, I'd need $10k from portfolio for the first year, but if inflation were 5% I'd need more like $15k the second year, (1.05*100 - 90) which is a 50% increase in residual expenses. Even more complex is if a pension has COLA but not enough to keep up with inflation.

I think the right answer is that we need to account for all expenses and somehow factor in income sources that have partial or no inflation indexing.
Here are some ideas from Scott Burns (who introduced me via his columns to index investing) on dealing with a non-inflation adjusted pension: https://assetbuilder.com/knowledge-cent ... -inflation

Presumably the Inflation Protection Fund that he proposes would be separate from the rest of your portfolio.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
dbr
Posts: 37901
Joined: Sun Mar 04, 2007 9:50 am

Re: Define "Expenses"

Post by dbr »

delamer wrote: Wed Nov 24, 2021 7:06 pm
Here are some ideas from Scott Burns (who introduced me via his columns to index investing) on dealing with a non-inflation adjusted pension: https://assetbuilder.com/knowledge-cent ... -inflation

Presumably the Inflation Protection Fund that he proposes would be separate from the rest of your portfolio.
The idea is correct. But I bonds now have 0% real return and TIPS -1% to -2% real return, so it doesn't work at the moment.
delamer
Posts: 12724
Joined: Tue Feb 08, 2011 6:13 pm

Re: Define "Expenses"

Post by delamer »

dbr wrote: Thu Nov 25, 2021 12:58 am
delamer wrote: Wed Nov 24, 2021 7:06 pm
Here are some ideas from Scott Burns (who introduced me via his columns to index investing) on dealing with a non-inflation adjusted pension: https://assetbuilder.com/knowledge-cent ... -inflation

Presumably the Inflation Protection Fund that he proposes would be separate from the rest of your portfolio.
The idea is correct. But I bonds now have 0% real return and TIPS -1% to -2% real return, so it doesn't work at the moment.
As he notes, you can be more aggressive with the investment choices for the fund as need be. The core idea and the math still work.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
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