No such things as "4% rule" because of taxes? (2024)

This question is in relation to taxable brokerage accounts, not RMDS with ROTH/Traditional IRAs.

I'm confused about something and feeling a bit stupid asking but here it goes. When I enter numbers into the https://www.mycalculators.com/ca/retcalc2m.html calculator to get a general idea on how long a certain sum of money might last, the 3% or 4% rule seems like a fallacy because of taxes forcing higher withdrawal rates than only 3% or 4%. Taxes which would make my withdrawals be far higher than only 3% or 4% because in order to be able to even afford to pay those taxes I would have to withdraw more than 4% just to pay taxes on a 2M sized portfolio. From what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

If that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year on a portfolio that size if they want to withdraw only 3% to live off of and they want portfolio last 50 years? It seems like this is not even possible because of taxes and 2M not being enough.

Thanks

There are two ways to handle this: Either include taxes in your estimated future withdrawals, or subtract them from your estimated future assets.

For example, if you expect to have after-tax expenses of around $65,000/yr and pay taxes of around $5,000/yr, then you your expected withdrawals are around $70,000/yr. The 4% rule would tell you to plan for a portfolio value of $70K * 25 = $1.75M at the start of retirement.

Tropical wrote: ↑Fri May 24, 2024 9:41 amThis question is in relation to taxable brokerage accounts, not RMDS with ROTH/Traditional IRAs.

I'm confused about something and feeling a bit stupid asking but here it goes. When I enter numbers into the https://www.mycalculators.com/ca/retcalc2m.html calculator to get a general idea on how long a certain sum of money might last, the 3% or 4% rule seems like a fallacy because of taxes forcing higher widthdrawal rates than only 3% or 4%. Taxes which would make my withdrawals be far higher than only 3% or 4% because in order to be able to even afford to pay those taxes I would have to withdraw more than 4% just to pay taxes on a 2M sized portfolio.

If that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year on a portfolio that size if they want to withdraw only 3% to live off of and they want portfolio last 50 years? It seems like this is not even possible because of taxes and 2M not being enough.

Thanks

First, it's not a "rule" but an historical artifact, in my opinion. Nobody knows for certain what a correct SWR is going to be in the future and whether 3% or 4% are good enough percentages.

Secondly the 3% or 4% "rule" is already inclusive of tax. It's ALL spending. It's up to the investor to calculate taxes for their personal situation, leaving the rest to be spent on everything else.

Cheers.

Normally, the 4% rule says how much one may withdraw each year. For $2 million, then the first year is $80k. The $80k gets adjusted based on inflation for subsequent years.

The $80k must cover all expenses including taxes, food, healthcare, ....

The amount one pays in taxes is very dependent upon the person's situation. If the person is filing joint with no other income, I don't think there would be any taxes due on $80k of long term capital gains and dividends. You could run it through a tax calculator to see for your situation.

Lots to unpack here. For starters:

Tropical wrote: ↑Fri May 24, 2024 9:41 amFrom what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

This only partly correct. You pay taxes on dividends and capital gains distributions (the latter are extremely rare for individual stocks and ETFs). You do not pay taxes on unrealized capital gains until you sell. Most people assume about 2% of the principal in distributions each year, which at 15% qual div/LT gains rate is .3% of the portfolio balance in tax drag each year.

Tropical wrote: ↑Fri May 24, 2024 9:41 am...the 3% or 4% rule seems like a fallacy because of taxes forcing higher widthdrawals rates than only 3% or 4%. Taxes which would make my withdrawals be far higher than only 3% or 4% because in order to be able to even afford to pay those taxes I would have to withdraw more than 4% just to pay taxes on a 2M sized portfolio.

When people quote a 4% Trinity rule (or 3% "perpetual" rule), they are considering taxes as just another expense. That is, your after-tax spendable amount is something less than 4%/3%.

Tropical wrote: ↑Fri May 24, 2024 9:41 amIf that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year on a portfolio that size if they want to withdraw only 3% to live off of and they want portfolio last 50 years? It seems like this is not even possible because of taxes and 2M not being enough.

Let's say you have a portfolio that throws off 2% each year in distributions. You pay tax on those whether you spend them or not (the .3% noted above) and are free to spend the other 1.7% (85% of the distribution). To spend 3% annually, you would have to sell another 1% of the portfolio on top of distributions, which would be taxed at probably a long-term capital gain of 15% (note, this analysis assumes no state income tax, but it also ignores the standard deduction and 0% LTCG, which can be pretty wide if you have no other income source. SS and pensions can sometimes fill these lower buckets.) So, you have another .85% of the portfolio to spend after-tax. Under these assumptions, you would have $2M * (.017+.0085) = $51,000 to spend from the portfolio. You would have paid $2M * .0045 = $9,000 in federal tax on that withdrawal. Whether that is "enough" depends on your budget.

Tropical wrote: ↑Fri May 24, 2024 9:41 amThis question is in relation to taxable brokerage accounts, not RMDS with ROTH/Traditional IRAs.

I'm confused about something and feeling a bit stupid asking but here it goes. When I enter numbers into the https://www.mycalculators.com/ca/retcalc2m.html calculator to get a general idea on how long a certain sum of money might last, the 3% or 4% rule seems like a fallacy because of taxes forcing higher withdrawal rates than only 3% or 4%. Taxes which would make my withdrawals be far higher than only 3% or 4% because in order to be able to even afford to pay those taxes I would have to withdraw more than 4% just to pay taxes on a 2M sized portfolio. From what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

If that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year on a portfolio that size if they want to withdraw only 3% to live off of and they want portfolio last 50 years? It seems like this is not even possible because of taxes and 2M not being enough.

Thanks

In taxable, you can stop reinvesting the dividends and spend those. Those are taxed at 15%. Long term capital gains have close to zero tax for a retired couple up to around $90k of income.

The problem in your example is that bonds are taxed at ordinary income rates. But these would still be low.

The actual tax problem is RMDs from tax deferred pushing up your withdrawal rate. This is why folks will do Roth conversions if the math makes sense. Then, you also have the impact on Medicare premiums.

It’s how do you manage your tax deferred space if it’s large since withdrawals are at the ordinary income tax rate including state taxes.

rockstar wrote: ↑Fri May 24, 2024 10:22 am

Tropical wrote: ↑Fri May 24, 2024 9:41 amThis question is in relation to taxable brokerage accounts, not RMDS with ROTH/Traditional IRAs.

I'm confused about something and feeling a bit stupid asking but here it goes. When I enter numbers into the https://www.mycalculators.com/ca/retcalc2m.html calculator to get a general idea on how long a certain sum of money might last, the 3% or 4% rule seems like a fallacy because of taxes forcing higher withdrawal rates than only 3% or 4%. Taxes which would make my withdrawals be far higher than only 3% or 4% because in order to be able to even afford to pay those taxes I would have to withdraw more than 4% just to pay taxes on a 2M sized portfolio. From what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

If that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year on a portfolio that size if they want to withdraw only 3% to live off of and they want portfolio last 50 years? It seems like this is not even possible because of taxes and 2M not being enough.

Thanks

In taxable, you can stop reinvesting the dividends and spend those. Those are taxed at 15%. Long term capital gains have close to zero tax for a retired couple up to around $90k of income.

The problem in your example is that bonds are taxed at ordinary income rates. But these would still be low.

The actual tax problem is RMDs from tax deferred pushing up your withdrawal rate. This is why folks will do Roth conversions if the math makes sense. Then, you also have the impact on Medicare premiums.

It’s how do you manage your tax deferred space if it’s large since withdrawals are at the ordinary income tax rate including state taxes.

See Also

Importance of saving early - Bogleheads

Thanks for everyone's replies so far, much appreciated!!

@rockstar , I won't be able to have that advantage married people have in relation to taxes because I'm not married and never will be. It's not for me. So I have to base things on single payor status.

Tropical wrote: ↑Fri May 24, 2024 9:41 amThis question is in relation to taxable brokerage accounts, not RMDS with ROTH/Traditional IRAs.

I'm confused about something and feeling a bit stupid asking but here it goes. When I enter numbers into the https://www.mycalculators.com/ca/retcalc2m.html calculator to get a general idea on how long a certain sum of money might last, the 3% or 4% rule seems like a fallacy because of taxes forcing higher withdrawal rates than only 3% or 4%. Taxes which would make my withdrawals be far higher than only 3% or 4% because in order to be able to even afford to pay those taxes I would have to withdraw more than 4% just to pay taxes on a 2M sized portfolio. From what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

If that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year on a portfolio that size if they want to withdraw only 3% to live off of and they want portfolio last 50 years? It seems like this is not even possible because of taxes and 2M not being enough.

Thanks

You seem to have been under the impression that 4% means spending 4% on what you want, not what you have to - like taxes.

In your example you have a portion of investments in global equities and the backtested number there is in the low/mid-3% range not 4%. Plus, it's not just income taxes; you have state/local taxes, Medicare taxes and all sorts of other mandatory expenses. And unlike when you had a salary you don't have any deductions for tax-deferred savings, if you'd been doing that, so your effective tax rate might actually be higher in retirement than before.

tibbitts wrote: ↑Fri May 24, 2024 10:40 am

Tropical wrote: ↑Fri May 24, 2024 9:41 amThis question is in relation to taxable brokerage accounts, not RMDS with ROTH/Traditional IRAs.

I'm confused about something and feeling a bit stupid asking but here it goes. When I enter numbers into the https://www.mycalculators.com/ca/retcalc2m.html calculator to get a general idea on how long a certain sum of money might last, the 3% or 4% rule seems like a fallacy because of taxes forcing higher withdrawal rates than only 3% or 4%. Taxes which would make my withdrawals be far higher than only 3% or 4% because in order to be able to even afford to pay those taxes I would have to withdraw more than 4% just to pay taxes on a 2M sized portfolio. From what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

If that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year on a portfolio that size if they want to withdraw only 3% to live off of and they want portfolio last 50 years? It seems like this is not even possible because of taxes and 2M not being enough.

Thanks

You seem to have been under the impression that 4% means spending 4% on what you want, not what you have to - like taxes.

In your example you have a portion of investments in global equities and the backtested number there is in the low/mid-3% range not 4%. Plus, it's not just income taxes; you have state/local taxes, Medicare taxes and all sorts of other mandatory expenses. And unlike when you had a salary you don't have any deductions for tax-deferred savings, if you'd been doing that, so your effective tax rate might actually be higher in retirement than before.

Thanks for your reply. What has me confused is whether the 3% I withdraw will be enough to over my living expenses and to pay for taxes on a portfolio inside a taxable brokerage account. Not having any deductions is what concerns me because I have always had a lot of itemized deductions being a business owner so it appears I will be paying a lot more in taxes when retired.

If I end up having to withdraw more than 4% (in order to be able to pay taxes) the money will run out based on what calculator shows me.

Tropical wrote: ↑Fri May 24, 2024 10:50 amThanks for your reply. What has me confused is whether the 3% I withdraw will be enough to over my living expenses and to pay for taxes on a portfolio inside a taxable brokerage account. Not having any deductions is what concerns me because I have always had a lot of itemized deductions being a business owner so it appears I will be paying a lot more in taxes when retired.

If I end up having to withdraw more than 4% (in order to be able to pay taxes) the money will run out based on what calculator shows me.

You need to go about it the other way. Ignore the business, ignore everything. Calculate your expenses, say $20k a year.

Then you work out how much you'd need to withdrawal to cover the $20k, and then how much would be taxed from that (if an IRA/etc) or how much taxes the taxable portfolio "generates" (only on dividends, stock sales, etc).

Then you can run that against the IRS and see what deductibles you qualify for (some will still work, some only work against earned income).

Either the numbers line up, or they don't. If they don't, you need to reduce expenses or increase income somehow.

If you hold stock in a taxable account and it never pays dividends you pay no taxes until you sell. You can work out what the tax load on various ETFs over the last year would have been by looking at their reporting (if you already have the accounts, you should be able to see this in last year's taxes).

Tropical wrote: ↑Fri May 24, 2024 10:50 am

tibbitts wrote: ↑Fri May 24, 2024 10:40 am

Tropical wrote: ↑Fri May 24, 2024 9:41 amThis question is in relation to taxable brokerage accounts, not RMDS with ROTH/Traditional IRAs.

I'm confused about something and feeling a bit stupid asking but here it goes. When I enter numbers into the https://www.mycalculators.com/ca/retcalc2m.html calculator to get a general idea on how long a certain sum of money might last, the 3% or 4% rule seems like a fallacy because of taxes forcing higher withdrawal rates than only 3% or 4%. Taxes which would make my withdrawals be far higher than only 3% or 4% because in order to be able to even afford to pay those taxes I would have to withdraw more than 4% just to pay taxes on a 2M sized portfolio. From what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

If that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year on a portfolio that size if they want to withdraw only 3% to live off of and they want portfolio last 50 years? It seems like this is not even possible because of taxes and 2M not being enough.

Thanks

You seem to have been under the impression that 4% means spending 4% on what you want, not what you have to - like taxes.

In your example you have a portion of investments in global equities and the backtested number there is in the low/mid-3% range not 4%. Plus, it's not just income taxes; you have state/local taxes, Medicare taxes and all sorts of other mandatory expenses. And unlike when you had a salary you don't have any deductions for tax-deferred savings, if you'd been doing that, so your effective tax rate might actually be higher in retirement than before.

Thanks for your reply. What has me confused is whether the 3% I withdraw will be enough to over my living expenses and to pay for taxes on a portfolio inside a taxable brokerage account. Not having any deductions is what concerns me because I have always had a lot of itemized deductions being a business owner so it appears I will be paying a lot more in taxes when retired.

If I end up having to withdraw more than 4% (in order to be able to pay taxes) the money will run out based on what calculator shows me.

Now that I've been retired for a while I feel less well-off than when I retired (at the beginning of the pandemic.) I hadn't fully appreciated - even if I'd somewhat calculated them - the effects of taxes, plus investment returns haven't conformed to the historical averages that most of us use (since we have no choice) in planning for retirement. I'm fortunate in that I still have "enough", but I definitely don't feel I have as much financial flexibility as I thought I'd have in retirement.

Tropical wrote: ↑Fri May 24, 2024 10:50 am

tibbitts wrote: ↑Fri May 24, 2024 10:40 am

Tropical wrote: ↑Fri May 24, 2024 9:41 amThis question is in relation to taxable brokerage accounts, not RMDS with ROTH/Traditional IRAs.

I'm confused about something and feeling a bit stupid asking but here it goes. When I enter numbers into the https://www.mycalculators.com/ca/retcalc2m.html calculator to get a general idea on how long a certain sum of money might last, the 3% or 4% rule seems like a fallacy because of taxes forcing higher withdrawal rates than only 3% or 4%. Taxes which would make my withdrawals be far higher than only 3% or 4% because in order to be able to even afford to pay those taxes I would have to withdraw more than 4% just to pay taxes on a 2M sized portfolio. From what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

If that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year on a portfolio that size if they want to withdraw only 3% to live off of and they want portfolio last 50 years? It seems like this is not even possible because of taxes and 2M not being enough.

Thanks

You seem to have been under the impression that 4% means spending 4% on what you want, not what you have to - like taxes.

In your example you have a portion of investments in global equities and the backtested number there is in the low/mid-3% range not 4%. Plus, it's not just income taxes; you have state/local taxes, Medicare taxes and all sorts of other mandatory expenses. And unlike when you had a salary you don't have any deductions for tax-deferred savings, if you'd been doing that, so your effective tax rate might actually be higher in retirement than before.

Thanks for your reply. What has me confused is whether the 3% I withdraw will be enough to over my living expenses and to pay for taxes on a portfolio inside a taxable brokerage account. Not having any deductions is what concerns me because I have always had a lot of itemized deductions being a business owner so it appears I will be paying a lot more in taxes when retired.

If I end up having to withdraw more than 4% (in order to be able to pay taxes) the money will run out based on what calculator shows me.

Please take a look at other withdrawal methods. If you can live with your withdrawals being variable, then take a look at ABW, VPW and TPAW - all of which are available on this forum. The trade off is that your money will last as long as you want it to, but the withdrawals will vary from period to period.

Cheers.

mhc wrote: ↑Fri May 24, 2024 9:54 amNormally, the 4% rule says how much one may withdraw each year. For $2 million, then the first year is $80k. The $80k gets adjusted based on inflation for subsequent years.

The $80k must cover all expenses including taxes, food, healthcare, ....

The amount one pays in taxes is very dependent upon the person's situation. If the person is filing joint with no other income, I don't think there would be any taxes due on $80k of long term capital gains and dividends. You could run it through a tax calculator to see for your situation.

Right, and OP, you have come face to face with one of the potentially big differences between the accumulation phase and the withdrawal phase.

Tax management. When working, I maxed out the 401ks, tried to be tax efficient in the brokerage accounts (some tax loss harvesting, plus tax efficient funds).

Then in retirement, you have to decide how much work you are going to put into minimizing taxes. Do you want to do Roth conversions (pay taxes now, hoping for lower taxes later). How do you divide withdrawals between brokerage and tax-deferred accounts? What happens to my taxes when I'm taking SS and RMDs start? Etc. When do I start taking SS? My withdrawal rate changes once I start SS ... all sorts of things.

Tax management is one of the more complicated aspects of retirement financial management. The good news is that there are plenty of reasonable plans, even if you don't try and micro-optimize everything. But, one has to spend some time thinking and learning about how the taxation works.

And of course, the 4% includes taxes paid.

Note that tax management becomes much harder if all your investments are in "one place" - if you don't have the option to take from a 401(k) or a Roth or taxable, etc, you severely limit your options for tax reduction. This is one of the reasons to diversify across types of accounts, even if your current predictions say you'll do X. You can't predict the future and you can't predict future tax law.

Another strange thing about the calculation is that the amount you need in tax changes depending on how much you take out which changes depending on how much you need in tax ... Excel can run the "solver" on these kinds of looping questions, or you can do it by hand by jumping the distribution amounts up by $Xk and watching the taxes change. If increasing distributions by $X results in $X.Y in tax, something is horribly wrong (this maybe in theory can happen if you badly hit a cut-off of some sort for assistance).

Build a "retirement spending" list. This is NOT related in many ways to what you spend while working. Some bigger things you might list include:

Health care: Insurance premiums, co-pays, drug expenses.

Taxes: Property tax, state income tax, federal income tax. If you take money out of traditional IRA or 401k, that generates tax liability. If you Roth convert, that generates tax liability.

My own list compared to my "while working" list is 50% higher in retirement. For us, Roth conversions are the majority of our generation of taxable income. We do have interest and dividends in taxable accounts but they're much smaller than our Roth conversions are.

If that's the case, then if someone has 2 million windfall invested in VTSAX/VTIAX/VBTLX in their taxable brokerage account with 60/40 or 70/30 asset allocation... how much in taxes would someone like that have to pay in a given year

if you have a $2m windfall, and you put it in your brokerage and take it back out, the answer to how much tax is zero, because taxes are only charged as a percent of your realized gains.

if that $2m earns dividends, you pay taxes on those no matter if you withdraw the money or not

if that $2m rises in value, you don't pay taxes until you sell, and when you do, it is a percent of the gains, not the money you started with. and since you can choose exactly which shares to sell, you can control your taxable income by selecting shares that have more or less gains than others. so there is no one answer to your question. it depends what you want to do.

Let's take the simplest example.

VTI is currently $260 a share, and in 2023 it recorded dividends of $3.4128, which isn't perfect, but let's play.

$2m is 7,692 shares of VTI. Each year you get $26,251 as dividends from VTI. Most people holding VTI just reinvest those and buy more VTI, but if you're in an income scenario, you're paying tax on that and you might as well use that as your cash. So you get the $26k, and pay taxes on that. Even if it's ordinary income, the first $26k isn't taxed hard.

Now if you need more than $26k, you need to sell some VTI. Whatever you sell will be taxed on the difference between what VTI is that day, and the $260 you bought it at. The first year, that would be minimal, say you need $40k, you need to sell 50-60 shares, and pay tax only on the increase over the year.

If you have multiple funds when you need to sell, you can choose to sell those that have dropped in value (tax loss harvesting).

Thanks so much for all the replies it has been very helpful.

I'm confused how converting to ROTH IRA would make any huge difference because I believe you can only invest approx $6,500 per year? So if someone is trying to avoid future RMD taxes going forward (because they have Traditional IRA) or if they want to convert brokerage to ROTH they can only convert about $7,500 each year into ROTH IRA. So to me it seems like it wouldn't be making me jump up and down from joy because it's such a tiny amount I can convert to ROTH. Am I missing something?

Tropical wrote: ↑Fri May 24, 2024 1:17 pmThanks so much for all the replies it has been very helpful.

I'm confused how converting to ROTH IRA would make any huge difference because I believe you can only invest approx $6,500 per year? So if someone is trying to avoid future RMD taxes going forward (because they have Traditional IRA) or if they want to convert brokerage to ROTH they can only convert about $7,500 each year into ROTH IRA. So to me it seems like it wouldn't be making me jump up and down from joy because it's such a tiny amount I can convert to ROTH. Am I missing something?

Conversions are not contributions

No limits on conversions

They're talking about a Backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth

You'd contribute (non-deductible) a bunch (but not all, need some to pay taxes!) to a traditional IRA, then convert that to a Roth, and pay taxes.

Total amount in dollars is now lower, but it's in a Roth.

Tropical wrote: ↑Fri May 24, 2024 1:17 pmThanks so much for all the replies it has been very helpful.

I'm confused how converting to ROTH IRA would make any huge difference because I believe you can only invest approx $6,500 per year? So if someone is trying to avoid future RMD taxes going forward (because they have Traditional IRA) or if they want to convert brokerage to ROTH they can only convert about $7,500 each year into ROTH IRA. So to me it seems like it wouldn't be making me jump up and down from joy because it's such a tiny amount I can convert to ROTH. Am I missing something?

Well, conversions have only practical limits on amounts, but you aren't missing something that in most cases the success of conversions (in leaving you more money to spend, net) will depend on how events evolve. There are some obvious cases for conversions but most are assumption-dependent.

Tropical wrote: ↑Fri May 24, 2024 2:03 pmAh I see thanks. Now the Roth conversions make more sense especially if done early so you get more tax free years of compounding I suppose.

You can only "convert" to Roth if you have a traditional IRA or 401k-type account. There is no limit to how much you can convert but you will be paying tax on that amount.

You can only "contribute" to a Roth IRA if you have earned income. There is an annual limit of $7000 in 2024, plus $1000 if you are over 50. Once you're retired, you can't contribute since you won't have earned income.

Tropical wrote: ↑Fri May 24, 2024 2:03 pmAh I see thanks. Now the Roth conversions make more sense especially if done early so you get more tax free years of compounding I suppose.

That is not particularly important. The difference in tax rate is what matters. For some situations that is obvious (ie, you can convert pre SS, pre pension, pre RMD). For others, it is more fuzzy guessing because the future is unpredictable. You could decide not to convert, but then just as your RMDs start you receive an unexpected inheritance that changes your tax situation.

https://www.bogleheads.org/wiki/Roth_conversion

Look at this part

The following table summarizes the recommendations for Roth conversions based on current and predicted future marginal tax rates

First of all the 4% rule isn't a rule and it shouldn't be a withdrawal method.

It should be used as a guideline to tell you if you have enough money for a 30-year retirement.

If you have $2million and it is invested 50/50 or 60/40 and you need 30 years of spending $80k per year (including taxes), then you should feel comfortable retiring. But perhaps you feel that your expenses are $70k or $75k and you're not sure what your taxes are going to be.

Let's say you are 50/50 VTSAX/BND and this yields 60k in dividends. Of that 25k if from VTSAX and is qualified. To get the other 20k, you sell from the portfolio. The gain will surely be less than 10k, but let's go with that.

Back of the envelope (very rough):
Filing Single
AGI = 70k, Std ded = 14k, Taxable income = 56k, 21k is fully taxable and 35k is qualified dividends and LTCG. This will be about 7 to 8k in taxes. If I made an error here, hopefully someone will correct me.

Then you need to add state taxes, if there are any.

Based on this, annual expense of 70k looks ok, but not 75k. If you think you need 75k, keep working until your portfolio is larger and run the calculations again (or figure out where you can cut expenses).

ETA: Don't forget that you might have Social Security at some point to help cover expenses.

Tropical wrote: ↑Fri May 24, 2024 9:41 amFrom what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

You would owe taxes on dividends. If your tax bracket is low enough, you pay no taxes on qualified dividends. Otherwise, you pay 15% or 20%. You would include those taxes in your expenses, as well as taxes on any gains, e.g., if you sell $60k of stock that has a $10k gain, you also would owe capital gains tax on the $10k.

Tropical wrote: ↑Fri May 24, 2024 9:41 amThis question is in relation to taxable brokerage accounts, not RMDS with ROTH/Traditional IRAs.

You should really consider all your accounts since all of them will be available to you in retirement. If you need to spend another $X besides your SS in retirement, possibly your RMD would be more than that, so you might not even touch your taxable assets.

. . . the 3% or 4% rule seems like a fallacy because of taxes forcing higher withdrawal rates than only 3% or 4%.

This is not true if you think of taxes as just another expense in your budget. Just like electricity, you need to pay it whether you are working or not.

From what I understand you have to pay taxes every single year with a broker account even if you do not sell any stocks?

Do you pay that now? I've never heard of anything like this, But I know that any interest received will be taxed, unless it is from some government agencies (munis, treasuries). Those may be tax-free on the state or federal level. Dividends are also taxed (but usually at a favorable rate). Then your other incomes (wages, rental income, maybe SS) may be taxed, even if that money does not stay in your taxable account.

Look at your last income tax return. Retirees use the same form but leave the wages blank but may have SS or other kinds of income. There is no place on the form where the size of your portfolio (tax-free, tax-deferred, or taxable) is even referenced. As far as taxes, your entire $2M taxable portfolio could be in cash, earning no income. Then there would be no taxes owed unless you had some kind of INCOME. That's why it is called "income tax", not "portfolio tax".

livesoft wrote: ↑Fri May 24, 2024 2:20 pmNot only are taxes an expense, but if you happen to have to pay an advisor 1% of your assets under management each year, then that 1% is also an expense leaving you only 3% annually for your other expenses and your taxes.

This is under appreciated I think. If you’re paying Edward jones 1%, they are getting 25% of your annual spending in retirement. Or as I’d say to my mom. You’d have 33% more to spend, right now, if you’d fire EJ.

GaryA505 wrote: ↑Fri May 24, 2024 5:25 pmIt seems everyone talks about the "4% rule" but hardly anyone actually uses it.

It isn’t really a withdrawal method. It is a metric with which one looks at durability and sustainability of one’s portfolio.

I don’t personally know anyone who uses any analytical withdrawal method except a few here on BH.

And of course, the 4% includes taxes paid.

Same as your work income, your take-home pay was less than what you earned due to the taxes that were immediately withheld.

What follows is not fully on this topic, but it is relevant for new retirees seeking a portfolio spending method.
Bill Bengin was the very first to research sequential retirement withdrawals. His work was preceded by those who only looked at long term average returns, not sequential annual withdrawals during each historical 30 year retirement period. As with many pioneering efforts, further research has improved on his initial work. The certainty of 4% SWR is very attractive to new retirees, but even it has a problem for those who retired just before the high inflation starting in the 1980s. Those retirees had not completed 30 years of retirement when Mr. Bengin began his research. Now we know some of them would have exhausted their portfolios before the end of 30 years of retirement, if they had steadily boosted their initial withdrawal amounts with every annual inflation boost of the 4% SWR spending method. That is Strike One on 4% SWR.

Strike Two is the precise opposite. Many of Bengin's specific 30 year retirement periods that did not encounter the worst cases, then had significant amounts of assets unspent at the end of thirty years. That may be good for your spouse and progeny, but not if you had no children or very successful children, and your spouse has pre-deceased you.

The solution is to use a spending method that takes some percentage of each recent annual portfolio value during your retirement. Sun and Webb at Boston College's Center for Retirement Research suggest using your age-based (therefore rising) RMD percentage of each recent annual portfolio value (plus spending annual interest and dividends).
Note how you can see next year's withdrawal change as your portfolio value fluctuates this year, so there is not a surprise each January in those minor income fluctuations. There are RMD percentages for taxpayers of all ages due to children and grandchildren inheriting traditional IRAs (tIRAs) that are then required to be progressively spent down.
Link to the research paper on the RMD portfolio spending method: https://crr.bc.edu/wp-content/uploads/2 ... 19-508.pdf

heyyou wrote: ↑Fri May 24, 2024 5:55 pm

And of course, the 4% includes taxes paid.

Same as your work income, your take-home pay was less than what you earned due to the taxes that were immediately withheld.

What follows is not fully on this topic, but it is relevant for new retirees seeking a portfolio spending method.
Bill Bengin was the very first to research sequential retirement withdrawals. His work was preceded by those who only looked at long term average returns, not sequential annual withdrawals during each historical 30 year retirement period. As with many pioneering efforts, further research has improved on his initial work. The certainty of 4% SWR is very attractive to new retirees, but even it has a problem for those who retired just before the high inflation starting in the 1980s. Those retirees had not completed 30 years of retirement when Mr. Bengin began his research. Now we know some of them would have exhausted their portfolios before the end of 30 years of retirement, if they had steadily boosted their initial withdrawal amounts with every annual inflation boost of the 4% SWR spending method. That is Strike One on 4% SWR.

Strike Two is the precise opposite. Many of Bengin's specific 30 year retirement periods that did not encounter the worst cases, then had significant amounts of assets unspent at the end of thirty years. That may be good for your spouse and progeny, but not if you had no children or very successful children, and your spouse has pre-deceased you.

The solution is to use a spending method that takes some percentage of each recent annual portfolio value during your retirement. Sun and Webb at Boston College's Center for Retirement Research suggest using your age-based (therefore rising) RMD percentage of each recent annual portfolio value (plus spending annual interest and dividends).
Note how you can see next year's withdrawal change as your portfolio value fluctuates this year, so there is not a surprise each January in those minor income fluctuations. There are RMD percentages for taxpayers of all ages due to children and grandchildren inheriting traditional IRAs (tIRAs) that are then required to be progressively spent down.
Link to the research paper on the RMD portfolio spending method: https://crr.bc.edu/wp-content/uploads/2 ... 19-508.pdf

The RMD + interest and dividends is one solution. It's one of many variable spending methods you can find. From memory one thing I disliked about this method is that the "+ dividends and interest" is sort of a random addition to the RMD method. The authors added dividends and interest because the base RMD method heavily backloads spending; early retirees can't spend any money. I"m not all that fond of any RMD based method, but obviously some are.

Also, the 4% "rule" succeeds across almost all terrible start dates (like 1929, and the late sixties when inflation was high and stock and bond returns were low, a result that studies after Bengen confirmed*), though it does have some failures when starting in the late sixties. Plus, the studies usually go 30 years and some of the "successes" would have run out of money had the retiree been foolish enough to live another year or two. So yeah, rigidly taking out 4% and adjusting for inflation every year is probably not a great idea (though .. it has usually worked out well).

There are many threads on withdrawal methods (search for topics like TPAW and VPW); I think getting heavily into the weeds on different methods might be a little off topic for this thread. One big problem with any of the withdrawal methods is that what the algorithm tells you you can withdraw in year X may not match what you need that year. Some years we spend less than what any method might advise (think 2020 ...); this year I'm looking at maybe needing a new car, and we are not going to buy a 15 year old Toyota with 120k miles on it. In general, we aim for a relatively conservative withdrawal rate and spend what we want in a given year. This has been easy for the last 15 years or so; equity returns have been strong. When the stock market is strong, almost any withdrawal method looks great. Another problem with the variable withdrawal methods is that while they may not deplete the portfolio entirely (that's a good thing) there is still no magic; if stock returns are terrible for a long time, the amount of money you are withdrawing from your portfolio is going to be very much smaller, because the portfolio is indeed going to be small; this will impact your living standards.

The big value of the 4% rule is that it gives you a general idea of how retirement ready you are. If you have 25x of your yearly retirement expenses saved up, and you are retiring at a "normal" age, then probably you have enough money to retire. If you want more security, save and get higher multiples (30x or 33x, etc). A lot of BHers wind up withdrawing less than 4% a year and that withdrawal is lumpy, which is what we wound up doing. Also, very very importantly, we retired well before SS, withdrawing up to 4% (inflation adjusted) but once SS kicks in, the withdrawals will be well below the 4% guideline as SS income streams in. Also very importantly, most of the people asking these questions have plenty of optional expenses; cutting back would be possible without excessive pain if the market had an extended period of poor real returns (see my comment above about not buying a cheap car ... if we had to, we could buy a cheap car ....).

But circling back to the original question, all the withdrawal methods include taxes as one of the expenses.

* minor correction here; when you said "the high inflation starting in the 1980s" I think you meant late 60s when the high inflation started; inflation started to come down in the early 80s as the stock and bond markets began a huge multi-decade run. The early 80s retiree was set .. though of course he or she didn't know that at the time.

You can minimize it by several way, you can move to a state with no income tax for retirement

Residents of every state are going to pay for state government one way or another.