The 4% withdraw rule and why you may never need to completely cash out of Steemit
Note: This is not investment advice!
The safe withdraw rate
- Inflation is 3% per year.
- The market (stocks and bonds) typically gain 7% per year.
- This leaves 4% which you can cash out each year indefinitely.
The cryptospace is growing at a brilliant pace and is over 100 billion so far. We could see a space of 1 trillion total market cap by 2020. At the same time some people believe it is a bubble and that the majority of the crypto-assets in this space will crash down in the future. This may be true for cryptospace but the same might also be true for stocks, for bonds, for gold, as there are cycles of bull and bear markets, where sometimes there is recessions or even a depression which lasts for a few years.
Once your basic living expenses are covered by the 4% you cash out each year then you're effectively sustainable indefinitely. Your portfolio will beat inflation if properly diversified and strategically chosen. Your 4% of your portfolio will represent enough money each year to support the cost of living even with inflation of 3% if the market grows at 7%. Cryptospace is growing even faster than 7% so if you're in the right tokens you'll essentially be set for life once you have a large enough portfolio.
How large is a large enough portfolio?
This is up to the individual and how they want to live. For some people $500,000 in crypto is enough. For others $1 million in crypto is enough. For some others maybe it's $5 million. The point is each person has some target number which if reached they'll be able to live indefinitely off 4% cashout. Figure out how much you need to spend a year in order to be comfortable for the rest of your life, and when your portfolio is large enough that 4% of it can support that level of comfort then you've won the financial independence game.
Conclusion
Someday in the future there will be many among us who have Steemit accounts worth over $1 million dollars. What will you do when your account is worth over $1 million and have you done any financial planning for what to do when that occurs? I'd like to hear what people plan to do because many people have mentioned they expect Steemit to reach $10, or even $100. If Steemit reaches these prices then there will be accounts worth millions of dollars. The security on these accounts will have to be improved, but in addition, the best time to discuss withdraw rates is today. Perhaps developers could even implement a 4% automatic withdraw into bank account or similar as an alternative to the in my opinion overly accelerated power down. A power down rate of 4% a year could allow an account to in theory power down indefinitely and the account holder to live off this.
References
Finke, M. S., Pfau, W. D., & Blanchett, D. (2013). The 4 percent rule is not safe in a low-yield world.
Milevsky, M. A., & Robinson, C. (2005). A sustainable spending rate without simulation. Financial Analysts Journal, 89-100.
Stout, R., & Mitchell, J. B. (2006). Dynamic retirement withdrawal planning.
Cooley, P. L., Hubbard, C. M., & Walz, D. T. (1998). Retirement savings: Choosing a withdrawal rate that is sustainable. AAII Journal, 20(2), 16-21.
If you have $1000000 account, you can live just of curation or post rewards. You don't need to withdraw any steem power.
STEEM to $100 @oldtimer
$10 is good enough for me, but It'll go higher than $100 for sure and sooner than we all expect.
And this explains why so many have set the goal to having a $1 million account. It used to be even better with 10% interest on the Steem Dollars.
I will be getting a cabin somewhere north, have a small homestead and still continue blogging on Steemit.
Good plan. You're almost there, haha!
lol. not by a long shot
That's exactly how I live right now. You can do it. Except my cabin is in the south! :)
lovely :)
If your Steemit account is worth enough then yes you can literally retire as a blogger on Steemit and live off it or even increase it depending on how successful you are blogging.
Well, we never know how much is enough
Actually, the blockchain already supports powering down any smaller amount for the 13 week period via the cli_wallet - there isn't an option to do this in the steemit.com front end yet but there may be in the future. You could even set a calendar reminder to restart it every 13 weeks.
Great information and insights. The key is to convince people to start saving/investing early. Many, if not most, find it easy to ignore the future when there are shiny objects in front of them now. I wish this would be taught to kids starting in grade school and reinforced by parents. Our economic future is in our own hands, yet many let it slip through their fingers.
Yes! the 4% rule is a good function to live by. Allowing the steemit seeds to grow will return a bounty for life...
Good article. I am a bit more conservative, so I would put the nest egg at $650k, but good luck, you are going to do great.
The point is you have a number you are fixated on. Once you have a target you can pursue it.
For me. $750k CAD is the magic.
For American users i think there is a substantial risk you may be misunderstanding the IRS's position on Cryptocurrency and STEEM as a subset of that.
I juust got to STEEMIT yesterday, but the first thing I wrote about was what the tax ramifications were. You need to keep in mind the IRS notices strongly support the idea that they will count vested STEEM as income immediately upon your reciept of it.
So, if you have an account with $1000000 in STEEM, and $500,000 of that is value pre-appreciation - then you may owe a substantial amount of tax on the $500,000, even if you don't withdraw those funds.
I am loathe to link to my own post in a comment but it is so on the nose here and I think people are not considering the implications.
https://steemit.com/steem/@dber/let-s-talk-about-taxes-2017613t316666z
Disclaimer - im not an accountant - just a new STEEMIT user coming onto the platform with an interest in potential tax issues - if you have tax questions you should rely on an accountant.)
There is no proof that the IRS has treated anything like that in the past. For example if it's an unrealized gain, as in you've not realized it, then is it income before you can spend it? This really depends and could end up in court but if the IRS says even virtual tokens can be seen as legit income, then this would apply to literally any other thing which can be used to barter with, including tokens in online games which have nothing to do with cryptocurrency such as World of Warcraft, Diablo, or even Second Life.
I've seen no evidence that the IRS has cracked down on gamers who in theory could trade their game items for other items. As far as I know this only applies to the trading of the game item for fiat or real money. This of course could be wrong but then millions of gamers and people working with virtual tokens would also be wrong as digital currencies have been used for quite a while.
Will the IRS seee cryptocurrency as money? So far it is property. So if you sell your property for fiat then it's money? If you get paid in monopoly money, or in WoW gold, how is it treated? We know with mining it's treated as income the moment it comes into existence, but are all digital tokens treated as mining? Is there any reason to believe Steem more resembles mining than WoW considering the income on Steemit is earned by blogging while mining is automatic? And you can't really buy much anything with Steem Dollars except to trade it for Bitcoin and into fiat, but it can be used for barter and has monetary value, but so does anything.
References
Nor have I - and perhaos they won't. But the current notice seems to say they feel they could. I think the take away is, the larger your STEEM pile, the more likely you should probably at least get an evaluation by a CPA before making assumptions about potentially massive amounts of money and planning around that.
Can you show me the current notice? I haven't seen the IRS make any recent announcement on this matter.
But I have seen debates about this going as far back as 2007 when the idea of "virtual taxes" were being discussed. There is no evidence that I can find which shows the IRS cracked down on Second Life or WoW players for in game activities. If evidence could be found indicating that then we would have precedent and my opinion would change.
So far even the most draconian interpretations I've seen haven't gone as far as to say gamers owe taxes on virtual activities. This however could change in the future and I'm not a lawyer or tax expert. The fact is the IRS is deliberately leaving things confused.
References
The IRS's current rules for cryptocurrency are defined in two posts: IR-2014-36 and the accompanying notice 2014-21
Find them here: www.irs.gov/uac/newsroom/irs-virtual-currency-guidance
I really want to make clear, I agree with the fact that this is all totally new and fairly up in the air. The current paradigm doesnt make sense entirely but seems to be trying to tax new "value" upon its coming into existence.
Everyone has their own personal risk assessment to do, especially in legal frontiers like this. Mine tends to be very conservative.
the take away though is that just to say "I see no risk", period, is a very bold statement when dealing with the amounts of USD equivalent value STEEM is now producing in conjunction with the IRS's desire to tax that burgeoning value
Right but it might be technically impossible to track value to that extent with current tools. We simply have no way to determine what the value of Steem is prior to at least a bank connecting and willing to accept Steem for fiat. I mean does any bank accept Steem in exchange for fiat so we can have an idea of what Steem is worth?
Otherwise it's just a bunch of barter to barter until it gets to Bitcoin. Bitcoin actually does connect to the banking system and actually has a fiat price, because it tries to be a currency. Steem Dollars don't match up to $1 so we don't know for sure what that is really worth, and while you can trade it for Bitcoin which really does have a price, then it's Bitcoin where things are slightly more clear but not significantly better.
So basically what you are saying is that there is a potentially impossible and confusing tax burden on bloggers who use Steemit. The only solutions will be to press the IRS to clarify their position, and to change the laws to relax the tax burden so that it becomes something reasonable. As you describe it, not only would it be non-practical for Steemit users, but also for the IRS to try to enforce it. All sides would lose as the IRS would seem to have to spend more money than they could gain trying to enforce those policies, and then the individual users cannot track all that unless they are an accountant and even then it would be difficult.
If you go to a CPA it is not a guarantee that this will protect you. You are right there is risk involved (regulatory risk), but I see no way to reduce it. The situation seems to be to pay the taxes you think you owe the IRS and wait or the IRS to correct you in the future.
That's what my post was about - it really does sum up my whole position
https://steemit.com/steem/@dber/let-s-talk-about-taxes-2017613t316666z
The ultra conservative approach - meaning total protection - is to do what i plan on doing - which invovles a ledger,and always cashing out enoguh to maintain the worst case scenario tax burden for that year.
I don't see any risk. When you take 4% out and put it into your bank account it becomes "income" and you pay the same income tax you would otherwise pay. I don't see why the IRS would care where it came from. So assume you have an account worth 1 million, and you take out $40,000? You would pay whatever taxes on that income just as you would if you received a dividend or anything else worth $40,000.
Can you tell me what misunderstanding there can be?
It's possible of course that they change this rule in the future - even now it's just an advisory notice,I think. But without any other stuff to guide me I consider that IRS policy - and it has some serious implications for STEEM the moment it can be claimed in your account.
That notice is from 2014 and speaks nothing of Steemit in particular. Does it even apply to Steemit? If it applies to Steemit why wouldn't it apply to World of Warcraft, Diablo 2, and every online activity?
As far as I know, that seems to apply to miners in particular. Miners are creating money or something intended to be money. Steemit bloggers are earning virtual tokens which can be traded for some unknown amount of money which fluctuates wildly. You can't use Steem Dollars to buy coffee or for anything really so it's not like Bitcoin but seems more like Linden Dollars or WoW gold which is used on this platform but isn't like real money.
Of course I could be wrong, but unless the IRS clarifies and states that this notice applies to all digital currencies, and all platforms, including games, then I don't see that it clearly applies to Steem even if some people might want it to.
So it looks like you would have to declare using a 1099 for Steemit income and that much is clear. What isn't clear is the theory that you have to declare before it touches your bank account and becomes real money. There is no evidence or at least not consistent evidence that the IRS enforces that or that it is the intended policy. If it is then the implications would go far beyond Bitcoin mining and would touch all activities which involve any kind of game item, token, etc, and so if someone gives you a sword worth money in World of Warcraft, do you now have to immediately declare it on your income tax even if you never sell the sword for real money?
It sounds a bit ridiculous if that is the case because how would people play the game of World of Warcraft if their activities in the game are all taxable? It would make all online gaming taxed by the IRS to the point where every player would owe some sort of tax.
To me it's a radical view, and theoretical because the IRS hasn't released any additional notice since 2014. This leaves everyone in the dark or in the confused position where no one can say for sure what the IRS intends to do except for the IRS itself and what happens if you believe every virtual activity is taxed so you pay too much in tax? Do you get the money back if you over paid?
Read my post - the most recent IRS notice counts bought, pre existing crypto currency as investment subject to capital gains. But they count newly mined crypto currency as an immediate income at the value at which it was mined
https://steemit.com/steem/@dber/let-s-talk-about-taxes-2017613t316666z
Right but Steemit isn't minting new cryptocurrency. Bitcoin is minting cryptocurrency. Steem Dollars might be created but those Steem Dollars aren't being minted by the player/participant/bloggers. The bloggers earn the Steem Dollars so it's earned income not minted or mined.
Tell me where I'm wrong? If you blogged on your own website and someone donated Bitcoin to you, how would you pay tax on this? Suppose the Bitcoin was received at $2500 but by the time you got it to your bank account it was $500? Are you saying you owe taxes on imaginary money? Is that the intended policy of the IRS?
Couldn't this be exploited? Someone could deliberately send you a token which seems to be worth $1 million dollars and then minutes a day later it's worth $0 and you owe taxes anyway? What if it's a baseball card which is worth a lot when you received it, but worthless a few days later?
Again, based on a plain reading of the notics i sent you, i would understand the bitcoin to be compensation for my nlogging and the IRS to tax that bitcoin at the current value the moment i receive it.
Now, if it loses value after i get it perhaps i can, bizarrely, also deduct those loses as it is simultaneously being treated as currency and investment property.
But really, who knows?! no one. Im just saying at least have a back up plan in case the IRS DECIDEDS TO GET AS GREEDY AS IT APPEARS THEY MAY TRY TO GET
So if you receive it, you can claim capital loss? But only to some arbitrary limit. So what happens if your losses far surpass what you owe, but you cannot claim that?
The IRS hasn't shown that they are going to pick on cryptocurrency to that extent but of course they could. The IRS also could decide to investigate all who are of a certain political view such as libertarians and anarchists. This however sort of defeats the purpose and makes the IRS into a sort of activist outlet, as the purpose is to collect the maximum amount of taxes rather than to bankrupt the tax payers correct?
So by simply accepting the income taxes from 1099 they can get tax payments for 30 years or however long indefinitely. Why would they reject that in favor of bankrupting Steemit millionaires? I don't see how it would get them more money and in fact probably will just encourage people to try to avoid paying any taxes.
It is - to put it frankly -a shitshow. Nothing is certain and that's the concern. Yes, there would be a profit motive on the IRSs part i think to maintain value in these currencies and therefore not take on the most onorous interpretations of income here.
But at the same time the IRS has been for a long time an agent of societal norms and taxation as a form of behavioral penalty is always a real possibility.
But how this plays out is unknowable I'm just glad to have engaged with you on the topic and am trying to encourage people to at least consider and prepare for all eventualities. just because the worst case outcome does not seem sensible does not mean it should not be prepared for.
You have a point, and if my account on Steemit becomes worth beyond a certain threshold then I too will hire a CPA. Right now I don't have an account worth $1 million but I do think it is possible by the end of the year it's possible.
Even with a CPA, some transactions I don't know how to capture or how to classify, but if I think I will be a millionaire in the future it would make sense to follow a path of least resistance in order to keep whatever I do earn on Steemit.
From what I heard even from various CPAs there is mixed opinions and strategies. Some suggesting immediate cash out into fiat as a means of risk reduction. Others seem to think if it doesn't touch a bank account it's not taxed. I'm not sure which faction is right.
Thats why I'm going to move to Australia of that ever happens.
This is exactly what I was doing for some time :-)!
Something to look forward to