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The occasional heated posts directed at a certain esteemed, HumbleDollar contributor, regarding his disdain for spreadsheets, always amuse me. While I find them entertaining, they sometimes become a bit uncivilized. I actually sympathize with his views, and my own use of spreadsheets is quite sparing. I believe that common sense, rule-of-thumb heuristics, and an individual’s intimate knowledge of their own circumstances are more than sufficient for everyday budgeting. However, I do construct the odd spreadsheet, very occasionally.
My latest foray into spreadsheet creation came from a rambling discourse with myself when a particular thought piqued my interest. Suzie and I have set up fixed annuities to the limit of our 0% income tax bracket. What if we took the rest of our income needs from after-tax accounts for the next 10 years, paying absolutely no personal taxes? This seemed like a splendid idea! “Good old brain,” I thought, “you’ve done me proud!” The more I considered it, the more I liked it. I reasoned that the money saved from not paying taxes would compound over the timeframe, resulting in an excellent outcome. And paying no tax for ten years? Who wouldn’t love that? I felt very pleased with myself for coming up with this strategy.
Over the next few days, I decided to script a spreadsheet to get a feeling for our potential savings. After much brain activity, I completed the spreadsheet and input all the required information. To my dismay, the computer said no. This was devastating to my dreams of a tax-free decade and my desire to snub the tax authorities. It turns out we would be approximately 10% worse off over a 30-year timeframe if we optimized for ten years of zero tax.
So I guess it shows that even my most splendid ideas need a bit of a kicking by the dreaded spreadsheet of doom.
I guess that I am wondering what kinds of things you can invest in within your after tax account? And, what kind of return you might expect from these investment choices?
In the US, if you had a substantial after tax account with a large percentage of unrealized capital gains you might easily live off of your taxable account for 10 years and pay no tax. However, this might not produce better overall tax results when you ultimately begin taking withdrawals from your tax deferred account (your pension).
That was the conclusion made by the spreadsheet I talked about in the article.
On the rare occasion that creating a spreadsheet of any kind ever crosses my mind, I hasten to my favorite spreadsheet — the DirecTV scheduling guide — to see what games are on. It never fails me.
The only spreadsheet I routinely consult is the one I set up to keep track of my credit card perks as I play the points and miles game. I’m not leaving money on the table!
Mark, hyperbole aside, did you learn anything from the project? What were the reasons your plan didn’t work? How did you define “worse off”?
I ask because, in my experience, one of the most challenging parts of financial planning and analyzing various strategies, especially in retirement, is defining the goal, and define what success is. This is very personal, and drives a lot of the planning. Was your goal 10 years of tax free income, or minimizing lifetime taxes? From your post, it sounds like you could accomplish the first, but not the latter.
Hi Rick
The goal was a straightforward 30-year comparison of portfolio balances, evaluating two withdrawal strategies:T
Initial 10-year tax-free withdrawals followed by a combined approach until the tax-free account was depleted, with the taxable account covering the remaining burden.
Combined withdrawals from both taxable and tax-free accounts, prioritizing staying within the UK’s lowest tax bracket.
Total tax optimization was not a consideration. The primary reason for the first option’s underperformance was the swift depletion of after-tax funds, forcing the taxable element to bear the load and pushing the portfolio into a higher tax bracket.
Mark, That makes sense. It’s nice to have a lot of tax diversification in retirement, but in the US the tax break you get with qualified plans, especially at your peak earnings years, is hard to turn down. We’ve also seen some pretty dramatic tax law changes in the US in the past decade, so it is doubly hard to plan.
I can’t agree more over the complexity of your retirement landscape. This conversation has put a idea for a short post into my mind.
I look forward to it
I am in the same camp as the esteemed HD contributor. I have never used a spreadsheet myself for our finances, but started keeping track of our net worth quarterly about 10 years ago. I had my own guardrails. Spouse was never involved, didn’t want to be, until they retired. They like spreadsheets, and it helps them know more about our finances, so I am ok with it. I was always worried about what would happen if I passed first. Chris
Same here, Chris. I check our accounts and net worth regularly but don’t use spreadsheets for our finances. Part of that, to be honest, is that I don’t really know how to operate them (setting up equations and math and such), but I could learn if I wanted to. I just don’t feel the need. If our bills are paid, we’re saving money, and we’re making charitable donations, I figure we’re in a good place. And online bank accounts, credit card statements, and a quick way to check our overall retirement account balances do that work for me.
Just change a few assumptions and the spreadsheet will support your cause. 😎😃 They can be very accommodating if you are nice to them.
I like your thinking 🤔 but my account balance might not 😂
You bring up an important point here, which is that being deliberate is far more likely to lead you to a path where you get the results you want!
A lot of things sound good in our heads, it’s the spreadsheet where the rubber meets the road.
We’re fortunate to have such powerful analytical tools at our disposal, but my imagination disagrees lol
I absolutely recognise this specific issue. Following “traditional” wisdom my initial plan had been much like your own , pay the minimum of tax in the early years – save for deflating my GIA in preference to ISA(Roth) on the basis that was always going to be taxable growth.
But I have come to realise and model that the most important thing (especially now inheritance tax exemption on SIPP will end) is getting the maximum cash out under the basic rate tax band because fiscal drag will eventually mean higher rate tax needs to be paid.
The thing I haven’t quite modelled yet (and this is very UK specific) is whether the starting rate for savings modifies the strategy i.e. is having more interest tax free now worth the HRT bite on SIPP later.
I have literally no idea how anyone would get their head round these things without doing some modelling. Hang around and hope someone researchs and writes something to your exact fact pattern? Or just pay someone for the answer which might cost more than the arbitrage you end up with/
I think it’s not only UK specific but individually specific and the modeling would be beyond my ability.
Yep it’s certainly very niche and you have to start off with a variety of sources to drawdown from to even bring it into play.
More generally what are you planning to do with pension tax free lump sum? Take it early or leave it for cashflow needs later (at the risk of change in law that might reduce it)?
I certainly won’t be using it in the next ten years.
That would be my preference but as it is effectively an ISA I wonder whether I’m being too precious about it. Plus I’m not sure it is inheritable (in its tax free wrapper) so there is that too.