Discuss Latest POF Blog Post: Everyone is Using The 4% Rule Wrong

[Tim]

Always remember taxes in your planning.

Great rule of thumb!
Using social media for retirement planning might not be wise.

“I fear this error will cause many people to retire with not enough saved to last the rest of their lives as they try to cut the amount they have saved as close as possible to retire as early as possible.”

Cutting it as close as possible is self correcting.
That first year will be very educational. Back to work.

[Guest]

Great rule of thumb!
Using social media for retirement planning might not be wise.

“I fear this error will cause many people to retire with not enough saved to last the rest of their lives as they try to cut the amount they have saved as close as possible to retire as early as possible.”

Cutting it as close as possible is self correcting.
That first year will be very educational. Back to work.

If most people were retiring with 25x spending but forgetting about taxes, we would all be much better off (as opposed to the average American).

[Lordosis]

I actually think he was talking about his marginal rather than effective rate.

In the example he reports his effective federal rate to be 15% and a 6% state or something.

[SLC OB]

I was surprised at how much the rental income offset his expenses... however he never mentioned the rental expenses (water heaters, damage to property, maintenance), the taxes on the income nor the depreciation. Maybe that was too complex? But if you are bring in the taxes...
However, it really makes me want to have more Roth space. Right now I have about 14% of all retirement fund in Roth... hoping with backdoor Roth and Mega backdoor Roth that this increases more for this exact reason of taxes in retirement!

[TheDangerZone]

I was surprised at how much the rental income offset his expenses... however he never mentioned the rental expenses (water heaters, damage to property, maintenance), the taxes on the income nor the depreciation. Maybe that was too complex? But if you are bring in the taxes...
However, it really makes me want to have more Roth space. Right now I have about 14% of all retirement fund in Roth... hoping with backdoor Roth and Mega backdoor Roth that this increases more for this exact reason of taxes in retirement!

I agree in theory it would be nice to have a large Roth component but in practice, it seems most people draw their Roth down last. A large taxable account should work very well.

[Hatton]

I think he was trying to simplify his situation to make a point. You have to factor in taxes. They do change with retirement and you completely stop payroll taxes. The money that comes out of retirement plans either by needed withdrawals or RMDs is NOT favorably taxed like capital gains. I think some people do not grasp this fact.

[SLC OB]

I agree in theory it would be nice to have a large Roth component but in practice, it seems most people draw their Roth down last. A large taxable account should work very well.

Yes, but I am feeling lucky that I now (just in the last 2 years) have the options of the Mega Backdoor Roth as having no capital gains tax is better than having it!

[PhysicianOnFIRE]

Right, and if you are an early retiree physician that taxable account will mostly be filled by contributions, not decades of gains.

POF had a really informative post at some point on how early retirees who are reasonable spenders can expect to pay little to no income tax.

It could use an update, but here's that post from 2016. The same principles apply:

• The Taxman Leaveth: Taxes in Early Retirement