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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”?<