My analysis revealed some interesting things. In order to create the tables I needed specific RMD data
The graphs look like this
20 years of actual side by side yearly data for the 2 conditions looks like this
The side by side of the taxes was 338K vs 94K, so I paid myself about 225K across 20 years to optimize.
Here is a kicker
This is the above RMD schedule for the 2 versions according to WR. Notice how the WR increases every year forcing more to be extracted and greater taxes to be paid. You essentially loose control of the WR. The smaller account does the same thing but it’s a smaller % of the total monthly WR allowing you to actually control the WR for longer. If you planned around a 4% WR by year 5 you’re already at 4.1%. That’s how the extra taxes are generated. If you planned a 3% WR you already start at 3.5%.
You can see even to year 20 the 6% chart just starts to loose steam. You still have more money than when you started and you lived a good life off the proceeds. In the lower yield smaller IRA case you consumed 37% of the asset but still have 2/3 left. Volatility for the small TIRA is lower. All of this analysis therefore may be moot for you. If you have 1.5M to start you may just decide to let it RMD and pay the taxes. You die well off with more money than when you started at the mercy of the government RMD and progressive tax structure. What comes out will pay for you and partially for someone else, a kind of forced charitable giving. You will experience greater volatility in case #1 than case #2, but either way there is money to pass along. In case 2 the excess 1M stays in your control to be spent when and where and in an amount you like.
For many the hassle may outweigh the benefit. For me I’m getting paid to enjoy the hassle, paid by tax savings and freedom to control my income. I guess you could call this my side “frugality” gig. By setting up and following through the side gig pays me back year over year with no added work. By parsing out the future you gain a lot of insight into how to get there. You gain insight into the security you really possess because the plan is tailored to your resources. You can let go of the past and the W2 income and move into the future of passive income with confidence.
5 Replies to “Parsing Cash Flow Part 4”
I am planning on doing the graph on the right with our tax deferred accounts. I think anything left would mostly be taken by taxes in our country.
I love your site for the options to see your calculations. It is very informative indeed!
Hope you are getting some good rest.
High MB It was a long wordy tomb but very revealing. In my analysis I came to realize if you just RMD you will have no control over WR. Your WR becomes functionally dependent on the progressive RMD schedule which then feeds a progressive tax bite a double whammy. Better to keep control if possible,
Recovery has been a bitch. I managed to get sucked into a vortex of catabolic stress and mild adrenal insufficiency and I’m loosing weight and muscle mass beyond what I expected. Scary shit. Plus I was over medicated driving my BP too low. I now weigh what I weighed when I started Med school. Rest diet warmth and moderate exercise have been the key.
I’ve enjoyed your parsing series and appreciate the details of your process. I noticed you treat each category separately, TIRA, Roth, taxable. I understand your reasoning for 17:83 stock:bond in your TIRA to be most efficient, but did you give any thought to 100% bond there and slightly bumping the stock % in the Roth to match your desired overall AA? I know I’m slightly mixing the two separate buckets, but I figure the simplicity in the TIRA is one less thing to monitor. If you don’t really want the TIRA to grow, have access to taxable for $$ beyond SS & TIRA, and hope to leave the Roth alone forever unless there’s a life emergency, I can just buy BND take my yearly RMD and be done with it. Just a thought and I am very impressed by your productivity during your recovery.
the tangent portfolio is the most efficient portfolio. The tangent portfolio is mostly bonds and a little stocks. We have grown very used to running portfolios HIGH in risk chasing after return which is OK until it hits the fan. Let’s say you run an 80/20 mix It means if the market drops in half 40% of your money goes away. That’s OK if your living on a W2 not so cool if your living off the portfolio. This is the actual expression of sequence of return risk. You hope to God the market comes back. So far in this country it’s always come back but in Japan in the 90’s it never came back. In the 20/80 case if the market drops in half you loose 10% 90% remains. You can in fact re-balance the now 10/80 back to 20/80 by buying a little more stock cheap. If the market comes back you once again re-balance, so your growth is optimized. The thing about a TIRA is RMD is the required minimum. There is nothing stopping you from taking more so if one year you decide there is too much in there take a 1 time distribution pay the taxes enjoy the windfall and return to the plan elsewise just stick with the plan