For the 4% rule in retirement planning, how much extra should I add to my expenses to cover taxes?

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  • #95881 Reply

      I’m sure I’ve missed this somehow, but when your determining your targeted expenses for retirement to use for the 4% rule, how much are you supposed to add to that amount for taxes?

      #95882 Reply

        That includes taxes.

        #95883 Reply

          Taxes are part of the 4%. It’s an expense.

          #95884 Reply

            Taxes in retirement are not as complex and much much lower. 1099/W2 taxable income has the brackets. In retirement you might have rental income with countless deductions making it seem you profited very little.

            Selling off long-term assets such as VTSAX or funds that you hold at least (1yr+1day) is 0% taxes per person up to 44k… 15% taxes up to half a million.

            Useful: How can I navigate financial planning for family planning, retirement, and taxes as a latecomer to financial literacy?

            #95885 Reply

              Agree with others. Yes you should already include it as part of your expenses from which you determine the amount of asset you needs. Also, it can very a lot form your taxes due now so take some time to map out taxes in retirement instead of using your taxes today.

              Here is a rough example of how a married couple could create $120k of “income” (more if you consider the amount drawn to create the capital gain was likely much higher amount) and yet pay about $1,500 in taxes.

              Just one of many examples of how income tax in retirement can be less than you expect.

              #95886 Reply

                You will have to project what you feel your taxes will be as you draw down. And you include taxes in the 4 percent. We can’t tell you how much to project for taxes because it depends on your tax situation and draw down strategy. And of course, it could be different if the tax climate is different by then.

                #95887 Reply

                  The 4% rule dictates the maximum safe annual withdrawal from your nestegg. It says that your nestegg will last 30-yrs if it is FULLY invested and you only remove 4%/yr to pay ALL expenses including taxes. It has a 4% failure rate…so if you accidentally retire just a year or two before a big down draft in the mkt, you may be one of the 4% of people who need to drop back to 3.5% or 3% for a few years until your nestegg recovers.

                  The 4% rule is inflation indexed. If you start withdrawing $10k/yr and the next yr inflation is 3%, then the following yr you can safely withdraw $300 more, for a total of $10,300.

                  #95888 Reply
                  Ed Hoch

                    The 4% rule did not consider taxes or fees paid. It’s just a total percentage of investable assets that are safe to withdraw each year and (allegedly) not run out of money.

                    So, if you’re paying an AUM manager 1%, and they have all your investments under their control you really have a 3% safe withdrawal rate.

                    Tax rates are variable from person to person ( and vary year to year), so it’s hard to put a # on that.

                    Roth conversion taxes add another layer of complexity, but that’s a whole other discussion.

                    #95889 Reply

                      You need to determine what tax bracket you will be in to determine what the $ amount of taxes you will include in your Procter expenses. No one can answer this for you. You’ll need to look at what your sources of income will be in retirement and how much of those will be subject to tax. Everyone is different.

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