Cash before Taxes and Insurance

Bob continues, “The first line of this section, labeled ‘Cash Before Tax&Ins,’ is pretty simple. It represents the total amount of cash that would be available for spending if there were no income taxes or insurance premiums.” (See Figure 6.2.)

“This is computed by adding the entry for that year in ‘Taxable Income,’ ‘Nontaxable Income,’ ‘Qual Divs,’ and ‘Social Security,’ then adding that sum to the amount taken from the various accounts: ‘Cash,’ ‘TRA Assets,’ ‘Roth Assets,’ and ‘Taxable Assets.’ So, for your case, in 2017 that can be calculated as $46,175 (Taxable Income) + $4,389 (the sum taken from cash) + $4,389 (the sum taken from your traditional retirement account) - $920 (the amount put into your Roth account), which comes out to … (enters numbers into calculator) $54,033, which is the entry in the 'Cash Before Tax&Ins’ for 2017.”

"Does either of you have any questions about this entry?"

Jane and June both shake their heads no.

Estimated Federal Income Tax

Bob continues, “OK, let’s take a look at the next row, ‘Est. Fed. Income Tax.’” (See Figure 6.3.)

Bob continues, addressing Jane, “As I hope the name makes clear, this is the estimated federal income tax that you and Jim would pay under this scenario for the next nine years. Do you have any questions about this?”

Jane replies, “Yes, I do have a couple of questions about the federal tax row. First, I assume this means that the program doesn’t estimate any state taxes. Is that right?”

Bob replies, “Yes, that’s right. Of course, it would be possible to estimate those, too, but since every state that has an income tax has different rules for how to compute that tax, that would increase the complexity substantially. So, it is the one significant area that is omitted in the software. Fortunately, since we live in a state with no income taxes, we don’t have to worry about that complication at this point. What’s your other question?”

Jane says, “What happens to the taxes after 2025?”

Bob replies, “As I think I’ve shown you before, information for other years is visible if you slide the slider above the withdrawal source section of the spreadsheet, so here’s the estimation for years 2025 to 2033. Does this answer your question?” (See Figure 6.4.)

Jane answers, “Wow, that is interesting. No income taxes after 2025? I see that our income keeps going up with inflation, so why don’t we have to pay income taxes?”

Bob replies, “That is largely the result of the favorable tax treatment of Social Security, which makes up your entire income at that point in time. Of course, tax laws can and do change, but that particular benefit of Social Security payments has been around for a long time.”

Jane says, “Sounds good to me. What’s next?”

Insurance Premiums

Bob replies, “The next row is ‘Insurance Premiums,’ which shows how much total premium you and Jim would pay for life insurance every year until one of you dies. Let’s move the slider back to the present so we can see the next few years.” (See Figure 6.5.)

Jane asks, “Why just until one of us dies? Does a surviving spouse have to stop paying his or her life insurance premium?”

Bob replies, “The program assumes that the life insurance has served its purpose after the first spouse dies. Of course, you could keep paying the premium until the end of the term,17 but it isn’t needed any more to protect the income of the surviving spouse, which is the reason that the program suggested the insurance in the first place. Thus, it no longer shows that premium in its projections after the death of the first spouse, as you can see happens in this scenario in 2032. Does that make sense?” (See Figure 6.6.)

Jane says, “But if this projection shows Jim dying in 2032, why isn’t there an insurance payout? Shouldn’t there be one?”

Bob says, “The program is designed to be as conservative as possible, so if a spouse dies during the last year of an insurance term, it assumes that he or she dies after the policy has expired, which of course means that there wouldn’t be a payout.”

Jane says, “OK, I get it. It says premiums. Is there anything else that can go on that row other than the term life insurance that the program recommends?”

Bob says, “Yes, there is. First, if you already have some life insurance, the premiums for that policy (or those policies) will be included on that line until the projected date of death as well as premiums for the suggested new policies. Second, the program also can suggest the purchase of a single-premium annuity, in which case the premium for that annuity will be shown on that row in the first year. That applies mostly to people who have quite a bit in assets, but I can show you what (if anything) it would do for you after we get through the long-awaited explanation of how the program works, if you’re interested.”

Jane says, “Actually, my mother has been hinting at giving us some cash while she’s still alive rather than making us wait for an inheritance. So maybe it would be a good idea to see how that might affect our sustainable spending in our retirement.”

Bob replies, “Yes, buying an annuity can make a sizable difference in sustainable spending, depending on your age, assets, and the assumptions we make about how much the market will return. Before we discuss that, I’ll need to do some research on annuity prices so I’ll have something to show you.”

Jane answers, “Sure, then let’s finish the spreadsheet explanation and get through how the program works, if you are okay with that.”

Bob replies, “I am fine with that.”

Cash after Taxes and Insurance

“The last row on the spreadsheet is ‘Cash After Tax & Ins.’ That is really the bottom line, both physically and logically. It tells you how much you can spend every year, in inflated dollars according to our inflation estimate. Let’s move the year slider back to the present so we can see the first few years.” (See Figure 6.7.)

Jane says, “I see most of the entries in that row go up a bit every year from the previous year, but the entries for 2018 and 2020 are considerably higher than the numbers on either side. Is that because of the ‘Expected Additional Expenses’?”

Bob replies, “Yes, that’s why. Here’s the ‘Expected Additional Expenses’ tab that shows those numbers, and you can see that they occur in 2018 and 2020.” (See Figure 6.8.)

Bob continues, “Any other questions for today, or should we just call it a day and get back together tomorrow at 1 PM to discuss how the program actually does its job?”

Both sisters agree to continue the next day, so Bob shuts down the program and closes his laptop.