We often hear what "our number" is - usually a multiple (~25x income needed for a 4% withdrawal rate for example). How exactly do you account for this when you have a mix of traditional 401k and roth IRA accounts). Since you obviously don't have to pay taxes on the roth contributions, that money "goes further".
Do you calculate essentially what it takes to meet your after tax goals?
if you need 100k, 25 x 100k - 2.5 million, but if you take 4% out of traditional you have less money, thus need to take more? (if this makes any sense, I worked graveyard shift last night and my brain is tired
how to calculate your number-mix of roth and regular accounts
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Re: how to calculate your number-mix of roth and regular accounts
Taxes are ignored for this simplistic way of looking at things. 25x whether a retirement account or not.
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Re: how to calculate your number-mix of roth and regular accounts
I have always assumed that the X includes taxes.
The closer you get to retirement and the higher the X, the more important the type of account will matter. There are many retired people who pay no or very low taxes so that the source of income makes little enough difference that it is drowned out by the overall fuzziness of the 25X anyway.
The closer you get to retirement and the higher the X, the more important the type of account will matter. There are many retired people who pay no or very low taxes so that the source of income makes little enough difference that it is drowned out by the overall fuzziness of the 25X anyway.
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Re: how to calculate your number-mix of roth and regular accounts
It is a little more complex than a number times what you need in year one. I have a simple spreadsheet that accounts for inflation, investment returns, and changes in how much I will need when I get SS. Putting these variables in gives a much more accurate picture. My spreadsheet shows a gross amount I will need before taxes are taken out.
Re: how to calculate your number-mix of roth and regular accounts
Tax is an expense.
If you know your net expenses and a percentage of where your income will come from, e.g. half income is taxed and half income not taxed, you can a decent idea of your gross income needed to calculate 25 x.
If one spends 80k annually of net take home funds, with half their portfolio in Roth and half traditional they know they'll have 40k not taxed. So, what, that's ballpark 90k total expenses including 10k tax on the 40k.
Obviously the ratios for half taxed and half not aren't exactly correct there, nor marginal tax rate, but you get the idea, hopefully.
If you know your net expenses and a percentage of where your income will come from, e.g. half income is taxed and half income not taxed, you can a decent idea of your gross income needed to calculate 25 x.
If one spends 80k annually of net take home funds, with half their portfolio in Roth and half traditional they know they'll have 40k not taxed. So, what, that's ballpark 90k total expenses including 10k tax on the 40k.
Obviously the ratios for half taxed and half not aren't exactly correct there, nor marginal tax rate, but you get the idea, hopefully.
Last edited by gr7070 on Mon May 10, 2021 5:55 pm, edited 2 times in total.
Re: how to calculate your number-mix of roth and regular accounts
The original studies showed that based on historical returns, a portfolio was likely to avoid total depletion in 30 years if all expenses, including taxes, came to 4% of the portfolio. Your withdrawals would be increased by the rate of inflation, but were otherwise steady. It was an important finding in that many finance folks had been telling people they could take more, but the fact that you still have to live and make withdrawals during bad times meant that hurt the portfolio more than was obvious.
Many people here would argue the need to be more conservative due to low bond yields today, but no way to know if that will be true. Also, you may live much longer than 30 years if you are young and need extra funds for that.
Many people here would argue the need to be more conservative due to low bond yields today, but no way to know if that will be true. Also, you may live much longer than 30 years if you are young and need extra funds for that.