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I've thinking about the cash ladder issue myself lately. Here are a couple of things I have come up with, partly thanks to the comments of others on the board and partly just from analyzing things to death.

- Is your $30K example pre-tax income or post-tax? It seems to me that when you put your intital ladder in place, you can consider those dollars to be post-tax dollars, since you will not pay any significant tax when you convert them from a rung on the ladder to spending money. (You will, of course, be paying tax on any interest on the bond/CD that's embedded in the amount, but I would think that you would have already paid taxes on the principal before you bought the bond or CD.) So your annual ladder requirement (each "rung") may actually be less than you think. When it comes time to convert equity assets to a rung on the ladder, you will have to withdraw enough so that you can pay the taxes on what you withdraw, leaving you with the amount you need to live on for a year as the replacement rung on the ladder. (This is what intercst refers to as "grossing up" the amount.)
- Are your non-ladder equity assets in stocks that throw off dividends or in mutual funds that throw off dividends/cap gains distributions? If so and if you can estimate approximately how much they will be each year, you can potentially reduce the amount of cash required for each rung on the ladder by a corresponding amount (less taxes). Look at it this way -- those dividends and CG distributions will be taxable events anyway, so you might as well use them for living expenses in the year in which they are distributed rather than having them automatically reinvested. So if you need $30K per year post-tax and you can count on $5K post tax from your distributions, you can reduce the need for the cash ladder to $25K. (Of course, you may want a little wiggle room in there because the amount of dividends and CG distribtions is not guaranteed.)

As I have slogged through some of this, I've concluded that I may have put more than is actually necessary in each year of my ladder. I'm now trying to figure out how I can convert this fact to an earlier retirement. <grin>


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