4% Rule Question

[mastrr]

Should we calculate the income taxes we pay into our yearly spend when we use the 4% rule?

Let's say I spend $40,000 a year (not including federal or state income taxes) and use the 4% rule which says I'll need $1MM to retire.  However, that $40,00 doesn't account for the taxes I'll have to pay in retirement.

Should we be adding the expected taxes I will pay in retirement to that $40,000 number?

[ixtap]

It should include everything you will spend, including taxes. It is one reason to put some thought into your withdrawal process ahead of time. Taking $40k all from traditional will have different tax consequences than taking the same.amoint entirely from Roth or taxable.

Put another way, if you have $1M and withdraw $40k + taxes, you have withdrawn more than 4%.

[Villanelle]

Yes, taxes are an expense, no different than groceries or your mortgage.  The number that you use to calculate what you need in order to withdraw 4% should include your best estimate on taxes in retirement. 

[GilesMM]

You withdraw 4% of your savings from where ever you like as spend it as required. If taxes are due on the withdrawal, they probably should be paid.

[nereo]

Just adding that you if you are withdrawing $40k from your brokerage account, your federal tax bracket (LTCG) will be 0%. You may have additional state taxes, or other sources of income which are treated differently (eg as earned income). But broadly speaking the tax burden on a $40k spend in retirement will be very low in the US

[vand]

Paying your taxes seems like a good idea, so yeah.

[reeshau]

Just adding that you if you are withdrawing $40k from your brokerage account, your federal tax bracket (LTCG) will be 0%. You may have additional state taxes, or other sources of income which are treated differently (eg as earned income).

True, from a taxable account.  (Or Roth, which wouldn't be taxed on any account)  Not true from a traditional IRA or 401k.

But broadly speaking the tax burden on a $40k spend in retirement will be very low in the US

Still true, despite what I said above.  Even for a single filer, $40k leaves you in the 12% federal bracket, if withdrawing fron a trad IRA.

[mistymoney]

mmmm my comment was definitely wrong......

[MDM]

Should we calculate the income taxes we pay into our yearly spend when we use the 4% rule?

Yes, and also add any brokerage and/or adviser fees.  See p. 17 of https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf:

The study did not adjust for taxes or transaction costs.
An investor’s own experience would differ depending
on how much of his assets were in tax-deferred accounts,
and the extent to which transaction costs could be held
to a minimum using low-cost index funds.