Everyone says to include taxes in one's spending number for purposes of the 4% rule, and that is true. But if one is spending modestly, it isn't that hard to pay zero(*) in both federal and state income taxes. And of course if one isn't working one is not paying SS or Medicare taxes.
Reducing tax to 0% can require significant restrictions on spending even with a tax optimized drawdown, and it can be pretty much impossible in many cases. I responded to a couple similar posts in another thread, which are appropriate in response here. This is a copy/paste from that thread:
Regarding taxes: I thought the idea would be that your taxes should be minimal if you’ve set everything up well?
Are you forgetting state taxes? These differ from state to state. Curry Cracker may live in a state with very different taxation or without a state income tax, could be married, or minimizing his spending to require less income. I already know I could do those things. But, everyone's situation is different.
Minimizing taxes and "no" taxes are not the same thing. A single person can't shield as much federal income from taxes as easily as a couple or family, and remember, the chart includes "fat" singles with $50K/yr spending. If you're relying more on pre-tax 401Ks etc., pension, and/or SS, you'll have more taxable income. Many members will be in that situation, even if not initially. And many states allow very little shielding of income from taxation with very small deductions while taxing long term gains/dividends as ordinary income, so you need to factor that in also in many states. Then there's taxable pension and SS benefits that many people receive. That's very different than the still-young MMM "family" spending only "half" that "fat 50K" amount of a single person. I don't know if he includes taxes, but that is irrelevant what one individual (err family) might do due to his (their) particular circumstances and taxation. The common advice on this forum is to include taxes as part of your FIRE spending because it's another expense to pay from your drawdown, even more likely if you're a on a fat budget that requires more income or if receiving taxable pension/SS. I agree with that, and it shouldn't be ignored.
I've been setting up my planned drawdown to optimize for lower taxes for years as mentioned in previous posts on this forum but will still generate about $24/yr in income as a single person while projecting fat expenses up to $50K/yr. So for the first 15 years of FIRE, I'll be paying paying about
1.6% of my drawdown in taxes - all state income tax, about $66/mo if they don't raise it again.
No federal tax - 0%. In 15 years, I'll have even more taxable income with taxable SS/pension income, so then my total
state and federal tax combined will be 4.6% of my drawdown and SS benefits combined. More SS benefits are taxable every year because the thresholds that are used for triggering the taxable amounts are not indexed to inflation, so I am accounting for those changes 16 years in advance (planning FIRE in 1 year). I could lower or eliminate all income taxes, at least for the first 15 years, but that would also mean moving to a different state (which I might for other reasons) or lowering my spending to a much lower amount, but that wouldn't make sense to put such a spending restriction on myself when my stash is already more than enough to fund a fat spending FIRE and cover the 1.6% to state income tax prior to reaching SS age and 4.6% total taxes after SS age. I would rather spend a little more and enjoy retirement with more travel and entertainment than intentionally reduce spending just to cut taxes further leaving a huge amount of stash unspent. Compared to the high taxes I'm paying now, 1.6% is trivial.
Many people are not setup for tax optimization as I am while still wanting to spend for "fat" FIRE, and along with pension income or even SS, they may have to pay much more in income tax than me, depending on the state also.
Between qualified dividends and LTCG taxes should be zero to minimal
Ahh, no, you forgot that many of us have state income taxes that tax these as ordinary income with very little deduction. See my previous post where I break down why I will still have to pay 1.6% of my drawdown due to state income taxes.
also no SS taxes on unearned income.
I wasn't referring to SS/FICA taxes in FIRE. I'm referring to income tax that needs to be paid from the stash/retirement income, not regular jobs. Many people will have taxable pension or SS income as well. However, despite no FICA tax, SS benefits are taxable at certain income levels and are becoming taxed more every year as explained in this post:
https://forum.mrmoneymustache.com/welcome-to-the-forum/what-age-to-take-social-secuirty/msg1928490/#msg1928490