@shawbridge, I agree strongly – instead of capital gains, the gains should be inflation adjusted and then taxed as ordinary income. If my $100 of stock goes to $102 in a year of 2% inflation, I haven’t made a penny.
The problem is that most of the firms are only beginning to do “specific lot” identification on sales, which is necessary for the calculation.
@Iglooo, even with the lower 401k amounts (many can’t access the higher limit for technical reasons), it is possible. Not genius – compounding, Einstein’s 8th wonder of the universe.
Even with compounding, I don’t know if you get that often. For simplicity let’s assume max contribution of $60,000 for 30 years. These days you get about $600,000, 30 year mortgage for $60,000 annual payment. Assuming that $600K doubles every ten years, you will have $4.8 million. It’s more than $3.4 million but not by that much considering we are assuming pretty optimal investing environments, low interest and decent returns.
Maybe that’s why LTCG taxes are low. It’s simpler than trying to adjust for inflation. IMO it is a reasonable trade-off that shouldn’t be demonized by politicians as exploitation by the wealthy. Short term gains are taxed at ordinary rate.
If you make 3% per year on your money, starting with $3.4mil and taking $210K/year, the money will last 22 years. On average that would be sufficient.
Using the 4% rule, the money would last 46 years.
I have been thinking about it and if you get rid of preferential treatment of capital gains, short term gains are not treated as long term gains, and work isn’t treated as capital gains (carried interest). I won’t hate inflation adjusted basis. 
No more stepped up basis to market value at death either. and Cap gains taxes will be paid at death (after both the husband and wife dies).
No more $500,000 cap gsin exclusion for homes.
To make things simpler, you have to hold an investment for an entire calendar year to receive stepped up basis.
So, if I buy a stock in Jun 1999, and sell in Mar 2001, i can adjust my basis by some agreed upon inflation index for the year 2000 because I held that investment for the whiole 2000 calendar year. Otherwise, what a pain to keep track.
What happens when you use leverage? Do you inflation adjust your capital invested or the market value of the investment?
Maybe banks can provide inflation adjusted cost basis every year. You don’t have to pay gains tax if you didn’t do well enough to cover inflation. I think I will come out ahead. I always felt short changed holding stocks much longer than 1 year and cost basis staying the same.
How does this work for small bussiness owners and family farmers? How do they calculated cost basis if they improved their business over many years?
@notrichenough, the SWR calculations assume that you will inflation adjust each year’s withdrawal. If I could make 3% real gains every year, I’d be happy, but with a conservative asset allocation, I’m not sure that is something to depend on. Additionally, there’s the “sequence of returns” issue, where a really bad year early in retirement hurts you considerably more than one later in your retirement.
I’m admittedly conservative and would rather err on the side of having my money outlive me than the other way around. http://www.mymoneydesign.com/personal-finance-2/retirement/is-2-percent-the-new-safe-retirement-withdrawal-rate/
Bob, 4% withdrawal gives you about 120K. That alone puts you in the 80%. It’s not unreasonable to assume tax assited programs like roth should not be expected to help people in the top 10-20%. Just my opinion of course.
@Iglooo, by no means am I suggesting that tax-advantaged resources should help me “get by” on $120k. I’m a bit like a teenager in that I get incensed at unfairness – it is unfair to make a tax-advantaged option available to me and then change the rules halfway through the game. We will be fine in any case; we have worked hard and lived below our means, but mostly we have been LUCKY.
I won’t say any more, because it will become political
^ Plus, if you’ve piled up that much in your IRA you are most likely in the top 20%, meaning you are going to get $30K+ from SS, maybe x2 if both spouses worked.
@IxnayBob, I get the complexity in figuring this out, but it has to be reduced to a one sentence summary. That $210K number probably came from using the average life expectancy at age 65, with some small return like 3%, ignoring inflation, using a $3.4mil pot of money. Or maybe they just called an insurance company and asked, and parroted back the number they got.
I am a little puzzled at where and how they came up with the $3.4 million number. I haven’t seen an explanation.
$3.4M limit applies to one ira. For a couple, the limit would be more likely $6.8M. 4% withdrawal of that puts the household income to $280K. That’s in the top 2%. Even without SS.
The thing is the option became available only after the rule change half way through for most of us here.
When is it time to stop maximizing retirement savings and conclude enough is enough? This article from WSJ was insightful (and incite-ful judging from the comment section):
http://www.wsj.com/articles/how-to-tell-if-your-retirement-nest-egg-is-big-enough-1421726456
I’m 63, and IRAs were there relatively early in my career. 401k a bit later. Early on, even putting $2,000 in my IRA was felt by me.
Am slogging through all of the posts on this thread. We are in, what I hope is a temporary retirement. H is between jobs at this time. Not an expected development, as we do not have all of our retirement ducks in a row as of yet. At any rate, this has been a wake up call and suddenly this topic has become VERY interesting to me. Not yet 60, and not 59 and 1/2 either, and still have one kid to get through college. Thanks for all of the great information.
Does anyone have any knowledge of inherited IRA’s? I have an inherited IRA, due to my dad passing away in 2012, and have taken the required minimum distributions required for the past three years. It’s not a lot, not enough to live on, but does help pay for Christmas presents, and a few extras or unplanned bills. Problem is, the custodian, Prudential, has to be reminded every year to pay this. For some reason, my sister doesn’t have this issue. They send her a check every year with no prompting. Maybe she got someone more on the ball on the phone when she set hers up?
At any rate, after three years of this annoying run around, I am thinking of switching this money to another institution. Most of the money is in something called PruSecure (GIA), which is what my dad had all of his pension in before he passed. I switched 20% to Prudential Stock Index Fund A, which I was told was okay to do by the person on the phone. Now because the Stock Index Fund has done well, it is more than 25% of the total, and I am paying a fee of $500 per year for this success because it is more than 25% of the total. I guess the 25% triggered the fee. The PruSecure GIA is a group annuity product issued by the Prudential Insurance Company and earning 1.75 %. That is all I know about it. It has been going down steadily every year for the past few years. When my dad was alive it was up there around 3 or 4 % for a long time, which is why I can see why he left it like that. But at 1.75% (and declining), it seems to me that I could do better elsewhere? Plus, maybe get more on the ball custodians that don’t have to be pushed and prodded (has meant several phone calls each year so far) into making the required distribution each year.
Are there any penalties or implications that I need to be aware of for switching custodians, and changing the way this money is invested? Based on what I’ve read here, it seems that Vanguard index funds might be a better way to invest this money if I am able to? Right now, I’ve had it with Prudential.
When you switch, you have to take your Required Minumim Distribution for the current year before you’re allowed to move the funds. I’d move all the funds to Vanguard,Schwab or Fidelity and buy no load, low cost index funds. You can choose total market fund and 1/2 bond fund, or whatever.
Sorry, it sounds like you’re currently being charged a fee for assets under management. I’d move money out of that.
[quote]
I’m 63, and IRAs were there relatively early in my career. 401k a bit later. Early on, even putting $2,000 in my IRA was felt by me.[/quote}
Isn’t 3.4M limit for roth? Does it apply to tira, too? We couldn’t contribute to roth until 2010.
Thank you – I didn’t know I had to take the distribution before switching. That is very helpful info. I have some experience with Fidelity and Schwab, and like them both, for different reasons. OTOH, because of this thread, I am becoming won over by the Bogleheads philosophy-- haha. However, I haven’t any experience with Vanguard. Any reason to choose them over Fidelity? Or Schwab? Or are they all similar?
@Iglooo, if it’s only Roth, then we are a million miles from $3.4M. They’re not waiting for my vote and it probably won’t happen anyway, so I’m going the “ignorance is bliss” route and smiling my “fool on the hill” smile.
@mstee, I’m sorry to hear if the employment problem – I hope it’s short-lived.
I’ve had funds at Vanguard, Schwab, and Fidelity. I’m not a fan of Fido, but some people like them. They seem unable to stop marketing, even after I told them I’m not interested. I prefer Vanguard over Schwab because of the low-fee low-pressure environment, plus I like that their only shareholders are the fund owners (ie, me and the millions who have money there).
For details on how to get your Prudential money’s moved with the least friction, I would put the question to Bogleheads. There are some nerdy types over there with very sharp pencils who really enjoy helping people.
They like to get into debates about how many dollars can dance on the head of a pin, but listen to their macro view and let them haggle over the micro
Once you have a strategy in mind, I would have the receiving organization manage the transfer – save The thing is the option became available only after the rule change half way through for most of us here.yourself the retention sales pitch.