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Do a google search on SWR (safe withdrawal rates). This will help you with the academic theories on how to determine how much you can spend from the 4 million.
The original research says you can withdraw 4% of the 4 million the first year and then keep withdrawing this amount, increased for inflation, for the next 30 years. The 4% is before tax so calculate your tax with this money included. Yes you can use capital gains rate for the sale of assets, but not the income from the assets.
By the way you could get 100 posts on why 4% is wrong or I do not know enough about your situation. That is why I said do some research.
4% is still reasonable... we are fairly flexible in our life style and can scale down when needed, as to not eat into our principle too much. I guess having a buffer and/or just living on 2% would be wise.
We will spend some time running the various scenarios.
Quote:
Originally Posted by mathjak107
just picture having 10k invested and it goes up 100% year one , so now you have 20k.
next year it falls 50% so you are back to your 10k again with zero gain over the two years .
your average return though is 100% less 50% so you show a 50% gain in two years . that is a 25% average return when in reality you got zero return .
sequence risk is very important especially when spending down . averages mean nothing when spending down. you had a 25% average return in the above example yet you were up zero %
Thanks MJ, that simple example spells it out nicely.
Yes you can use capital gains rate for the sale of assets, but not the income from the assets.
So as long as we're not receiving any income from our hypothetical mutual fund, and we just sell off some stocks every few years (to live off), we're only going to have to pay LTCG's?
So as long as we're not receiving any income from our hypothetical mutual fund, and we just sell off some stocks every few years (to live off), we're only going to have to pay LTCG's?
"Hypothetical" is the key here. Very few, if any, equity mutual funds will have no dividends. The average dividend across all US equities is currently about 1.7%. You will pay tax on those whether they are reinvested or are spent as income. Tax rate on qualified dividends is the same as LTCG. Tax rate on ordinary dividends is whatever your tax bracket is.
So, to answer your question you need to get specific and pick the mutual funds you will invest in.
Lots of people miss this! I suspect that the OP will too...
Quote:
Originally Posted by TwoByFour
"Hypothetical" is the key here. Very few, if any, equity mutual funds will have no dividends. The average dividend across all US equities is currently about 1.7%. You will pay tax on those whether they are reinvested or are spent as income. Tax rate on qualified dividends is the same as LTCG. Tax rate on ordinary dividends is whatever your tax bracket is.
So, to answer your question you need to get specific and pick the mutual funds you will invest in.
I have personally MANY otherwise savvy people end up with HUGE tax liabilities from misunderstanding how the "dividend distibutions" work on their portfolio of investments. There are some funds that are managed for tax efficiency that have occiasional "rebalancing" events that still result in TERRIBLE tax bills.
The OP is asking the right question, about net returns after taxes, but the asnswer is NOT easy nor is it cast in stone -- every year all kind of decisions can change the tax picture. Some firms that previously did not pay out much dividends might have an accounting event or even merger that results in huge increase in their dividend. That might translate into a mutual fund that holds shares in that firm scrambling to rebalance their holding for tax efficiency. The various changes that the Congress works out for the IRS can mean that once low tax investments now have different implications...
If the OP is really worrried about trying to live off $4M in invested funds while the ride around in an RV that is a silly question, because unless they are spending tens of thousands per week they won't outlive their money. OTOH if they really do want to set aside an appropriate sum on a regular basis for annual income taxes they will soon learn that relying on an investments to be taxed the same way year in and year out is impossible. The smartest advisors that I have worked with try to get their clients to understand that variablity above a baseline is a prudent way to plan for expenditures and investment draw down. That means that whatever accounts you use to pay bills (including tax liability...) will have a range that includes a baseline and then some ammount that will vary. If your total expenditures are not met by the baseline you need to dial back your lifestyle and/or shift your spending so only the amount above the baseline is your "splurge", otherwise when annual payments are actually due you will dip into principal and THAT starts a spiral of asset depletion that often does result in folks ending up destitute. For older retirees the splurge is often something like treating the extended family to a shared vacation of some other frivolous thing. Funny thing too is more of the families that I know that have been "treated" to such a thing often complain that it was more of a hassle to get kids out of school or miss scheduled sports events. Being a millionaire is truly a burden even for extended family of such a generous person...
How much can one expect to make per million on the stock market (low risk mutual funds/retirement investment), after tax?
Such funds usually return 6.8% adjusted for inflation, but what about the tax?
Can you take advantage of long term capital gains tax rate of 23.8%, while "living" off mutual funds (only source of income)? A quick bit of time searching show it's not a simple answer, but what's a good ball park figure?
I assume moving to a tax free state means no local/state taxes on investments?
FWIW, we are in our 40's so I guess we don't qualify for any retirement tax concessions.
Is this a hypothetical $1 million? If it isn't hypothetical - then you should have some idea what investments you're comfortable with - and what you've been earning on them. Both before and after tax. Robyn
So as long as we're not receiving any income from our hypothetical mutual fund, and we just sell off some stocks every few years (to live off), we're only going to have to pay LTCG's?
Yes in theory but mutual funds do not work that way. Each year mutual funds will pass on income and capital gains to you even if you do not sell any shares. The mutual fund does not pay any Federal taxes but passes the liability on to you each year.
Your example would work if your owned individual stock such as GE, ATT etc.
4% is still reasonable... we are fairly flexible in our life style and can scale down when needed, as to not eat into our principle too much. I guess having a buffer and/or just living on 2% would be wise.
We will spend some time running the various scenarios.
Thanks MJ, that simple example spells it out nicely.
If you dig into the theory you will see that the higher the stock market is at the time of retirement the more likely you are to have a downturn in your investments. This would mean 4% is a little high so if you retired in good time you might use a rate a little lower than 4%.
Another problem is we have had very very low interest rates for a number of years. The 4% is assuming rate that were a lot higher. Thus more pressure for a rate under 4%.
Lets say 3% so your 2% should be ok. In fact you should be able to generate dividend income over 2% so you should be in good shape.
The 4% assumes you will spend all of your investment and income over 30 years. The idea is how much money can you spend each year if you have the worst investment experience. Following the 4% rule you could die with more money than you started with.
actually the higher the valuations the more likely you will experience below average returns over the next 8-15 years . the years nearer term can be all over the map both having great years and poor years but when all is said and done by 8 years out or so returns will average out to below average and may hold that way up to as long as 15 years .
this has never not held true to date .
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Lots of people miss this! I suspect that the OP will too...
