Chris Cowles wrote:
- quote -

Chris, as we recently debated (yet again) here, the 4% rule have quite a
few variables, the values of which mostly can't be known, at least not
all at once.
I'd make the same claim for retirement needs. About a year (?) ago, I
posted here that Barron's had an article about people overestimating
their needs, and same week, WSJ showed surveys indicating people
underestimated.
As you suggest, many will enter retirement dropping off the mortgage
payment (maybe 15-20% of gross income?) college savings (5%?) retirement
savings (10%?) and the hit of paying FICA (7%). This totals 37%+ leaving
a 63% replacement need. A single person making $45K will find half his
income replaced by SS benefits, so even if that 63% is way low, the
difference they need to make up is reasonable.
At higher incomes, the SS benefit drops as a replacement percentage, so
the task is tougher.

JOE
www.blog.joetaxpayer.com

<BreadWithSpam[at]fractious.net> wrote in message
news:yobr6hia34c.fsf[at]panix2.panix.com...
- quote -

That's logical, and tax considerations of retirement income make
sense.

My current rate of savings probably will not accrue 25x of my current
expenses, but I fully expect those expenses to go down. I have 2 kids
in school and anticipate paying for college. They both might benefit
from Bright Futures scholarships (in Florida), but that's only as
dependable as their dedication to studying, and the political will of
any given year's batch of legislators.

Once the kids are gone, I'll be out of this house and living a cheaper
lifestyle. Medical expenses will go up of course, but most other
expenses will go down, inflation notwithstanding.

While I disagree with some of the ultraconservative financial
attitudes in this forum, most regular contributors give useful advice
with a pragmatic approach. I appreciate the efforts made on behalf of
myself and other lurkers. Thanks.

(I'm not using the term ultraconservative in a political sense. No
barbs necessary.)

Chris Cowles wrote:
- quote -

As BWS replied, 4% rule = 25X gross withdrawal each year.
If you are earning 60K at pre-retirement, 25X would gross you the same
$60K. But - the net is far higher, no FICA withholding, no need to save
15% off the top, etc. So I rounded down to 20X for that example.

The PIA formula (sic*) from
http://www.socialsecurity.gov/OACT/COLA/piaformula.html
shows, with a bit of arithmetic, that the $60K earner will have 38% of
that income replaced with SS benefits at retirement. So, whatever the
$60K earner lived on, likely $45K or less, the replacement ratio is even
higher, 50% of the $45k net spending.
And in closing, this makes the goal of 25 x $22.5K = $562K savings far
less intimidating, especially when the income will be half an inflation
adjusted annuity in the form of SS, and the other half can be
aggressively invested for the long term.

JOE

(it's an 'equation' not a 'formula'!)

"Chris Cowles" <NoSpam[at]ForMe.Net> writes:
- quote -

Actually, we more commonly talk about 25x expenses.
Gross and Net aren't as important - if you're grossing
say, $100k, netting, say, $75k but only *spending* $50k,
while it would be nice for your savings to throw off
$75k, the fact is that since you're living on a lot
less than that, your savings is throwing off an excess -
which might be nice, but it's not necessary and may
imply that you could have retired sooner or spent more
along the way.

Of course, taxes are quite a trick - if you're actually
spending $50k and plan on continuing to do so, your
collection of investments needs to throw off at least
that much *after taxes*. However the taxes on those
investments may be quite a mixture - money pulled
from a traditional IRA may (mostly) be taxed as income.
Money pulled form sale of long-held appreciated investments
may be (partially - exclude cost basis!) taxed at long-term
cap-gains rates. Money pulled from a Roth will have no
taxes. SS money, if you're counting that as part of
what you'll be living off of - may be partially taxable
as income. Similarly, payouts from annuities may be
partially taxable as income, too. It's *very* messy
and everyone's situation will be different.

If, say, your *entire* savings is in a Roth, it's easy.
You need 25x your spending. If it's entirely in 401k
and/or traditional IRAs (to make this easier, assume
no non-deductible contributions, too) - then the entirety
of it is taxable income and you can guess at an overall
effective rate by plugging that into a tax estimator
(or just guessing that your overall rate in retirement
will be similar to what it is now and just looking at
how much you paid last year).

The bottom line is that these are all *rough* estimates
with about a zillion variables - future tax rates, the
"4% payout" assumption, etc. etc. Besides between
now and your retirement, your spending level may
change, too. You have to approach this kind of
dynamically - both before and after retirement. These
rules of thumb are *not* cold and precise answers.
Well, okay, they are cold and precise answers. They
are just not *solutions*.


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"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:B5adnVqc1eyyhfranZ2dnUVZ_remnZ2d[at]comcast.com...
- quote -

Is the goal 20x gross? or 20x net?

- quote -

I think this will be one of the first tax to be changed when the cost
crunch arrives. Basically I expect 100% of SS to be included in
taxable AGI. If you are couple receiving the average pension and
nothing else, there will be no tax. But for someone decently off,
all of your SS pension will be in your marginal bracket. Sounds fair
to me.

Will Trice wrote:


- quote -

The SS tax bubble occurs when income + 1/2 of SS benefits exceed
$32,000. For those who need to save well beyond that, there's little
chance to avoid it unless they are starting now and have access to the
Roth 401(k). Any of us who have worked 20 years or more and maxed the
regular 401(k) are likely beyond that point.

A person just starting, with the Roth and/or Roth 401(k) availability,
needs to be aware of the 0 (standard ded, exemption) bracket and cutoffs
for 10% and 15%.

In the end, you are right, as was Dave's remarks, but the path isn't
clear cut. Just as we agree the input variables needed for the
retirement withdrawal decisions are known only as variables, not fixed
numbers ("I will die at 97, inflation will be 3.2%, etc.), if one
considers this each year, there's still some fuzzy math involved. It
gets pretty clear close to retirement, the bubble is easy to calculate,
one can defer SS benefits, and convert to Roth each year to deplete pre
tax savings and fill their current tax bracket. 30 years out, crapshoot,
diversify.
JOE
www.blog.joetaxpayer.com

joetaxpayer wrote:
- quote -

You may be right in most instances. But if we use the example you gave,
I think our saver will end up in the same tax bracket (if by some crazy
chance the tax brackets remain the same in current dollars). For a 120k
groos, take home could be around 80k as you suggest. If all of our
saver's money is in pre-tax accounts, then it would take ~91.3k to keep
that equivalent 80k take home, leaving our saver in the 25% bracket. So
our saver will be better off in a Roth if that bracket's rate moves up
(which it looks like will happen in 2010 - but out farther than that,
who knows?). Of course, every dollar that comes out of a Roth (or maybe
even a taxable) vehicle gets our saver closer to the next bracket down.
So it seems that tax diversification would be wise. Maybe?

-Will

william dot trice at ngc dot com

Dave Dodson wrote:
- quote -

Well, there's irony for you. I wrote about this,
http://www.joetaxpayer.com/ss.html and then for this thread, ignored my
own wisdom. The third page of my article shows the impact of income for
a couple receiving $25K in SS benefits. If my math is right,
http://www.socialsecurity.gov/OACT/COLA/piaformula.html tells me that
$12.5K is the benefit someone with an ending pay of $23,600 would have
earned. So if the couple had similar incomes, they made $47,200, and
will receive the $25K SS. They need to make up $20K or less, and from my
chart, they only get nailed after $29.5K of pre-tax money withdrawn.
One would need nearly $738K to suggest a withdrawal of that $29.5K.

So, drop back 20 years, this couple had little to worry about from
saving too much or from the SS tax bubble. Of course, if they saved the
20X final pay we discuss, they'd have $944K and hit that bubble dead on.
In the end, you are right, it was foolish of me to dismiss my own
observations. Some more time in excel and TurboTax will help me narrow
down advice to better define the range of people this would impact. For
a single retiree, that bubble isn't just 27.75%, it's 46.25%. Good to
stay out of that trap.

JOE

On Dec 17, 12:50 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

It is not a good idea to ignore Social Security benefits. Don't forget
that, for some income ranges, an additional $1 of income causes not
only that $1 to be taxed, but also $0.50 or $0.85 of Social Security
benefits to be taxed. So someone whose income level would put them
into the 15% bracket can find themselves with a marginal tax rate of
22.5% or 27.75%. And this occurs at a lot lower income than where the
25% bracket kicks in. If you are in the 15% tax bracket before
retiring, and think you will fall in the income range where Social
Security taxation creates these higher rates, then you should
seriously consider contributions to a Roth, or even IRA to Roth IRA
conversions to "top up" your 15% bracket.

Dave

BreadWithSpam[at]fractious.net wrote:

- quote -

In general I agree with you here, but as I run the numbers I wonder how
high the risk is, of saving your way into a higher bracket at retirement.

Consider, for a couple, the Exemptions ($3400 each) and Standard
Deduction ($10,700) combine with the top of the 15% bracket ($63,700) to
total $81,200 one can withdraw at retirement and still be in the 15%
bracket. Given our rule of 25, this is the sum withdrawn from a pre-tax
savings of $2.03M.
But let's circle back. $81K is what someone earning well over $100,000
would target as an annual withdrawal, right? Even ignoring SS, once you
account for taxes and the savings, 80 is take home for 120K gross give
or take. I'd be curious to hear others' views on this, but I'm thinking
it would take either a super saver, working well beyond their 'need' for
money, or someone fortunate enough to have superior investment returns
to land in a higher bracket. My analysis shows it more likely to be two
brackets lower in retirement, and it would take quite a change in tax
structure to trip that up.
JOE

"Andrew Koenig" <ark[at]acm.org> writes:
- quote -

There's also a notion of "tax diversification" - you don't
know whether your marginal rate will be higher or lower
when you retire, so to reduce risk, having some money
in a Roth (already taxed at today's rate) and some in
a traditional (all of which will be taxed at a future
rate), you split that exposure.


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oprah.chopra[at]gmail.com writes:

- quote -

No

- quote -

The 8606 tracks the amount of your contributions to a traditional
IRA which were non-deductible. The fund company does not know
if/whether you deducted the contributions or not - your ability
to deduct them depend on your income level, whether you have
a 401k at work, etc - things outside the fund company's knowledge
and control.

The 8606 and "basis" tracking for your non-deductible
traditional IRA contributions is your responsibility.

Roths don't have the same complexities.

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"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:g_-dnQlAU5Z4LfvanZ2dnUVZ_hKdnZ2d[at]comcast.com...

- quote -

Um, yeah. I do think it's remarkable, though, how many people don't get
this point.

- quote -

Agreed. Again, this is a point that many people seem to miss: Putting money
into a Roth is *not* equivalent to putting the same amount into a
traditional IRA.

Andrew Koenig wrote:

- quote -

It's called the Commutative property of multiplication:
P*G*T = P*T*G
P=principal, G= growth, T= taxrate
So I agree with you.

The point others bring up is more toward 'density'. You can only put
$4000 into the IRA, so if it's tax deductible, where does the $1000
refund go (assuming 25% bracket)? Into a taxable account, I'd assume.
By putting the $4000 into the Roth, you avoid that.
JOE

"rick++" <rick303[at]hotmail.com> wrote in message
news:5b110d44-637c-4084-8433-b2a3790b1ae0[at]r29g2000hsg.googlegroups.com...

- quote -

I don't understand why this is relevant, as the initial principal has
already been reduced by the tax paid on it when you deposited it.

Consider two scenarios:

A) You deposit money in a traditional IRA, wait some period of time, and
then withdraw the money, paying taxes on it at that time.

B) You pay taxes on money, deposit what's left in a Roth IRA, wait some
period of time, and then withdraw the money, paying no further taxes.

I claim that if the tax rates are the same, and the accounts' earnings are
the same over the same period of time, then what you have after the
withdrawal and paying any taxes dur on the withdrawal will be the same in
both scenarios.

If you think I am missing something, please tell me what it is.

On Dec 17, 9:39 am, "rick++" <rick...[at]hotmail.com> wrote:
- quote -

Add a third one, which can be of huge importance for retired folks:
Roth IRA distributions do not contribute to the taxability of Social
Security benefits.

Dave

I think there is two main advantages:
1) No forced withdrawal of money at any age because the
government has all the taxes it will collect already.
2) "Interest on interest" is never taxed as in most other
deferred income accounts. This effect become significant
after 20 years or so.

On Dec 17, 6:20 am, oprah.cho...[at]gmail.com wrote:
- quote -

Correct.

- quote -

No.

- quote -

Because you can move IRA funds arounda, an IRA custodian may not know
whether money you are sending in is a new contribution or an old IRA
being transferred, and if it is an old ira being transferred, what its
basis is. So the IRS has you keep track by filing Form 8606 any year
when you make a non-deductible contribution or take a distribution.

- quote -

If you do your own taxes, it is up to you to know how to file them
correctly. The IRS provides all kinds of instructions to assist people
in doing this. Your IRA custodian sent you forms shortly after the end
of the year that probably also had instructions on them. The interview
mode of the tax software I am familiar with (Turbotax) asks you about
IRA contributions; if you made any, it asks whether they were
deductible or not, and includes Form 8606 in your return when
appropriate. And finally, if you hired someone, they should know.

- quote -

Do you mean a topic something like: "Taxpayers are not paying
attention to the instructions and are filing incorrect tax returns"? A
scandal like that would certainly earn the network the highest
ratings. :-)

Dave

oprah.chopra[at]gmail.com wrote:

- quote -

8606 only references non-deductible IRAs, to keep those deposits
identified. Since Roth money goes into a Roth account, no distinction is
needed, you track Roth via worksheets (which I see within the tax
software, these are not numbered forms, and do not get filed).

Tax professionals are all (I hope) aware of these reporting
requirements, as is the (pretty inexpensive) Tax Software.

As far as the funds tracking for you, of course you mean the bank or
broker, they cannot do this as they are unaware of your other accounts.
One can keep IRA deposits at multiple banks/brokers. You are responsible
for your own tracking.

I'll only add: If you think the deposit tracking/reporting is difficult,
you should see the rules for withdrawal, quite a complex maze, which is
non-intuitive for the living and worse so for any IRA beneficiary.

8606 is a simple form, pull a copy, and learn to use it. Keep in mind,
even using a pro, you need to bring them the forms from the prior year,
otherwise how do they know where to start?

JOE