25 times expenses for retirement fund

[megdesilva]

Can someone help me with this? Is the amount of money you need in retirement 25 times your expenses after taxes? Most of our retirement funds are in 401k and will be taxed at 28-33%. Do I need to take this into account? Or does the 25 or 30 times expenses calculation factor taxes in?

[Capsu78]

I try to factor in taxes because you can't spend what Uncle Sugar takes (assuming you live in the us :-) )
You may find that the tax bite is not as high as you are thinking, unless you are taking large distributions.  Here is a scenario for "income" of $92,000-

 If you are married and your taxable income is $92,000, here is how the tax is calculated:   
   
The first $18,450 is taxed at 10%, so you pay $1,845 on that amount   
The next $56,450 is taxed at 15% so you pay $8,467 on that portion   
That leaves $17,100 of taxable income, which will be taxed at 25% so you pay $4,275 on that portion.   
Total taxes owed would be $14,587.   

If you are factoring in SS, I am thinking that only gets taxed up to 85%, so your effective tax rate should be lower than 28-33%, unless and until the government decides to change the tax code- which no one can truly predict.

[megdesilva]

Yes, I was thinking Mr Money meant after taxes. Thank you for your reply.

[teen persuasion]

I try to factor in taxes because you can't spend what Uncle Sugar takes (assuming you live in the us :-) )
You may find that the tax bite is not as high as you are thinking, unless you are taking large distributions.  Here is a scenario for "income" of $92,000-

 If you are married and your taxable income is $92,000, here is how the tax is calculated:   
   
The first $18,450 is taxed at 10%, so you pay $1,845 on that amount   
The next $56,450 is taxed at 15% so you pay $8,467 on that portion   
That leaves $17,100 of taxable income, which will be taxed at 25% so you pay $4,275 on that portion.   
Total taxes owed would be $14,587.   

If you are factoring in SS, I am thinking that only gets taxed up to 85%, so your effective tax rate should be lower than 28-33%, unless and until the government decides to change the tax code- which no one can truly predict.

If your income is $92k, your taxable income is less due to personal exemptions and either the standard deduction or itemized deductions.  So for MFJ, your taxable income would be under $72k, and your taxes under $10k.

But, yes, OP, I treat taxes as an expense, just like rent or food.  I try to find ways to reduce that expense, of course, but the future tax code isn't written in stone so I have to guess.

[Gone Fishing]

If your 401(k) is going to be taxed at 28-33% you should have more than enough to retire MMM style.  How about a doing a case study, you might be able to retire tomorrow!

[MDM]

Is the amount of money you need in retirement 25 times your expenses after taxes? Most of our retirement funds are in 401k and will be taxed at 28-33%. Do I need to take this into account? Or does the 25 or 30 times expenses calculation factor taxes in?

The "4% SWR rule," as defined in the original Trinity Study, assumes several things
 1.  No fees on your investments
 2.  No taxes
 3.  Portfolio rebalancing

To address those assumptions:
 - You can approximate #1 by investing in low fee funds (e.g. Vanguard, Fidelity Spartan, etc.).  Higher fees means a lower SWR.
 - Assumption #2 means you have to include your taxes as an expense.
 - Assumption #3 means you should do your own rebalancing, or invest in a fund that does it for you.