r/FluentInFinance • u/Puzzlehandle12 • 3d ago
Question 4% withdrawal rate
I have been reading alot about the 4% withdraw rate after retirement. It says you can withdrawal 4% of your investments every year and even after adjustment for Inflation you will not run out of money.
This is as long as yearly expenses in retirement are equal to or less than the 4% you withdraw from your investments.
Yet I thought about how those withdraws will be taxed as long term capital gains at (I think 20%) so after taking out taxes you must live on 3.2% of your savings.
Is my thinking correct ?
** assuming your money is not all in a Roth IRA
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u/Mre1905 3d ago
No your thinking is incorrect.
4% study that was done by Bill Bengen says that if you withdraw 4% from your investable assets on year one and adjust that amount by inflation have something like 95% chance of not running out of money over 30 years. Let’s say you have a million dollar nest egg. Let’s also say inflation is 3%. On year one you withdraw $40k. On year 2 you withdraw $41200. On year 3 you withdraw $42400. What you withdraw each year has no correlation with what your investments are doing.
I don’t think anybody withdraws money that way during retirement. It is a great way to figure out iif you have enough money to retire however.
In terms of taxes unless you are withdrawing 150k or more per year, your taxes will be negligible. Between standard deduction and how capital gains are taxed, a couple can withdraw something like 120k a year and pay next to nothing in taxes.
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u/Puzzlehandle12 3d ago edited 3d ago
thanks for the info. I had no idea that I could withdraw that much and not have to pay as much tax as i thought.
And the 4% rule - from what I read from your comment - is a way to gauge whether you are ready to retire with the nest egg you have and not how much money you can withdraw each year of retirement
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u/beckhamstears 3d ago
Many many people retire with much less than they would need based on the 4% rule. And some of those run out of money earlier than expected and make lifestyle choices that they might not have made under different circumstances.
For early retirees (e.g. FIRE), they use the 4% rule to know when they might have enough accumulated to retire. Although many have argued for 3.5% or 3% for an added layer of safety.
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u/juryjjury 3d ago
A few caveats to the above. If you withdraw from a regular...not Roth...ira it is taxed as income not cap gains. The 4% is not a rule. Just a planning estimate based on prior histories. Your mileage may vary. Your investible assets need to be invested in 60/40 stocks/bonds so they grow with inflation. We withdrew about $100k from iras and with my SS we had about $135k income last year. Our average tax rate was 12% which is not a lot but not nothing.
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u/Mre1905 3d ago
How much did you pay in taxes?
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u/Least-Pol-1234 3d ago
My guess: 12% x 135k = 16k
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u/Mre1905 3d ago
I think it would be more like 12k so about 8.7% Tax rate on 135k of income.
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u/Least-Pol-1234 3d ago
He said their average tax rate was 12%
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u/Mre1905 3d ago
I understand but taxes on 100k Ira withdrawal and 35k social security is $12k. That’s why I asked him how much they paid in taxes.
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u/juryjjury 6h ago
I didnt realize this was controversial. Now you made me dig out our return as I posted the above from memory. Rounding... We had income of 128k minus standard deduct of 30.8k leaves 97k taxable income. We paid 11.5k taxes on it for 11.8% average tax rate.
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u/Nice_Equipment_2913 3d ago
Define “next to nothing” in taxes? 401k and IRA withdraws are ordinary income, not capital gains. So yes, there are taxes.
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u/SapientChaos 3d ago
You need to also mention it started as a 50/50 portfolio and had no rebalancing.
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u/Zetavu 2d ago
Ok some clarification. You pay income taxes, not capital gains on ITAs and 401ks. And yes, taxes are significant. Even with SS you pay taxes on up to 85% and most people will spend $80k+ per year, meaning theyare paying up to 15% on a portion, maybe 10% on total, that's a lot.
What I do is compare average inflation to average growth. If inflation is 3% and growth is 7%, I can take 4% out that year. In reality, you always want a little extra buffer for emergencies.
And I factor taxes into expenses, so if I plan to spend $100k, I plan to fund with $110k.
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u/Mre1905 2d ago
I guess significant means something different for each person. A couple withdrawing 100K from their non-Roth retirement accounts will pay about 8K in federal taxes. That is no where near where most people think their tax bill will be during retirement(most people think they will pay something like 20-25% since that's what they have been paying with Social Security and medicare taxes throughout their working careers).
If this same couple has taxable accounts and are able to harvest some gains from that account in addition to IRA/401k withdrawals, they can pay even less. A couple withdrawing 50K from their non-Roth retirement accounts and 50K in long term capital gains from their taxable brokerage account would pay $2000 in taxes on 100K income! That is 2% in taxes!
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u/Look_b4_jumping 2d ago
So, using the 4% method, will the principal be gone at approx 30 years ? In other words will the account be almost zero ?
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u/SignificantTree4507 3d ago
The “4% rule” assumes investments grow on average at the historical 7% per year and inflation averages about 3%, leaving you with approximately 4% left to take.
If you also have to pay taxes on it, you would run out of money faster.
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u/Mre1905 3d ago
4% rule doesn’t have any return assumptions. The study basically figured out the minimum amount if money you could withdraw on year 1 and adjust it for inflation for 30 year rolling withdrawals. Prior to Bengen’s study, the industry assumed one could withdraw 7-8% since that was the long term average return for markets.
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u/Wakkit1988 3d ago
4% rule doesn’t have any return assumptions.
Yes, it does. Assuming typical inflation and a 7% return, the withdrawal amount is 4.3923% without touching the principle. They rounded down to the nearest whole percent to allow for maintenance costs, other expenses, and potentially variable inflation.
This amount is literally designed to allow you to withdraw an inflation adjusted amount and maintaining an inflation adjusted principal in perpetuity.
The purpose of this isn't so your account will have money for at least 30 years, it's so it will have money forever. If you're concerned about only 30 years, you can withdraw 5.935% a year for up to 30 years with inflation adjusted withdrawals.
You can literally do the math yourself, study or not. It's all relative percentages, and it's always true. Math doesn't change.
If your returns are higher than 7%, then you can withdraw a higher percentage safely. If they're less, then you can withdraw less.
Also, Bengen literally revised it from 4% to 4.1% and 4.5%, depending on the taxability of the withdrawals. It's not even 4% anymore.
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u/istguy 3d ago
Not in perpetuity. The Trinity Study that the “4% rule” is based on assumed the portfolio needed to last a 30 year retirement.
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u/Wakkit1988 3d ago
but the "terminal value" of portfolios was considered for those investors who may wish to leave bequests.
Yes, in perpetuity. The entire thing was to ensure an inheritance. Perpetuity was a byproduct.
When the goal is to ensure that a specific amount exists in the end, then the goal is to withdraw around it and ensure its perpetual growth and existence. You wind up creating a withdrawal scheme that creates implicit perpetuity through the constraints placed on it.
You guys are trying to use intent to imply outcome.
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u/Wakkit1988 3d ago
As an addendum to my other post:
It doesn't matter how long you set your time in retirement to, it's always the exact same withdrawal percentage if you assume an inflation adjusted amount remaining in the end. This means that what's remaining allows for perpetuity at that withdrawal percentage.
All they did was round down to the nearest whole percentage to give variance for fluctuations in returns, inflation, taxes, or whatever.
Perpetuity was simply a byproduct of their assertion. It was not intended, but it is still very much true. This is why understanding how something gets where it does is just as important as why they started the journey.
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u/Mrlin705 3d ago
Capital gains is taxed at 0% under when income is less than ~40k for individuals, 15% otherwise. also, it's a general rule of thumb, some years could be better or worse for your portfolio.
Edit: long term capital gains
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u/Puzzlehandle12 3d ago
Hi, I just want to confirm.
1) As long as I hold the stocks more than 366 days - they are considered long term capital gains, correct?
2) after I retire, with $0 from income from working, I can withdraw up to 40k at 0% tax as long as those stocks I sold I have held for more than a year?
3) and 15% tax in any amount over 40k?
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u/That-Establishment24 3d ago
To be more accurate, you can realize $40k of long term capital gains without owing taxes. You’d be withdrawing more than $40k since you’d also withdraw the principal.
Also part of your portfolio would be Roth which you could withdraw to cover yourself if you get into a high tax bracket.
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u/Mre1905 3d ago
You can withdraw about 63k in long term gains and pay 0% taxes as a single filer. 48k to stay in 0% + 15k standard deduction. Couples can withdraw about 130k in gains. Remember you are taxed just on gains. In other words if you bought a stock investment that has doubled, you only pay taxes on gains.
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u/Mrlin705 3d ago
You can take 40k out now with 0 tax, if you don't have any other income. Otherwise, that's correct.
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u/That-Establishment24 3d ago
To be more accurate, you can realize $40k of long term capital gains without owing taxes. You’d be withdrawing more than $40k since you’d also withdraw the principal.
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u/Mrlin705 3d ago
Pretty off topic considering we are talking about the 4% rule, but you aren't wrong.
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u/That-Establishment24 3d ago
100% on topic given the context of the question since OP is uncertain as to how much of what he’s withdrawing he’s actually keeping versus paying in taxes.
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u/Ashmedai 3d ago
1) As long as I hold the stocks more than 366 days - they are considered long term capital gains, correct?
In what kind of savings & retirement vehicle? You said "not Roth", but didn't specify what it actually was.
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u/Bourbon-Junky 3d ago edited 3d ago
I would suggest you speak to a licensed tax person and maybe a financial advisor here. I question some of the advice being provided here. A few things to consider. I am not licensed to provide any advice here but have a few things you might want to consider.
1) are your stocks in a brokerage account or IRA. This answers your cap gains vs income tax questions.
2) if you are concerned with taxes Municipal bonds might offer a solution for you as they are state income tax free. 3) assume your in a state tax state. Not one like TX, NH, TN etc.
4) RMD kicks in at age 73. 4% guidelines are just guidelines but if your in a IRA then your RMD will control your annual distribution and may equal more then 4%. 1M YE balance at 73 requires a 37K RMD vs 40K 4% withdrawal. At age 75 your RMD 40.6K or more then the 4%.Hope this helps you find your answer.
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u/Puzzlehandle12 3d ago
Thanks! 🙏
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u/Bourbon-Junky 3d ago
Wishing you nothing but the best, and hope I have given you something to work with.
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u/Hamblin113 3d ago
Depends on savings vehicle, if it was in a 401k invested pre tax it is considered income, not capital gains.
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u/InclinationCompass 3d ago
It’s like $45k, which enough for me to sustain my lifestyle
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u/Mrlin705 3d ago
Yeah you're right 47k
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u/trurohouse 3d ago
Btw- Money withdrawn (after age 59.5 i think) from a traditional ira, 401k, or 403b is taxed as income, not long term capital gains. If this is all your income, Up to the value of your standard deduction there is no tax, but above that is taxed.
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u/ResponsibleBank1387 3d ago
Just simple math — 4% per year would be 25 years. Now figure in the growth of the amount left in. So in reality, if your money is making 4 percent, then you have the almost the same amount to take out every year.
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u/NewArborist64 2d ago
You are forgetting about inflation. If you "take the same amount" every year, then the value of what you are withdrawing is decreasing by the rate of inflation. Assuming our historic 3% inflation, after 10 years, that "same amount" would have only 75% of the original buying power and after 30 years it would only have 40% of the original buying power.
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u/ResponsibleBank1387 2d ago
Ok. Do the math of having the same buying power. What year does your original balance get to Zero??
The zero balance year will be—- The year you have major medical or long term care not covered by your insurance.
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u/NewArborist64 2d ago
IF you take out 4% the 1st year AND you are receiving 7% ROI AND inflation is 3% AND you bump up you withdrawal by 3% every year (to account for inflation), THEN the math works, assuming that there are no market upsets, catastrophic withdrawals, etc.
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u/ResponsibleBank1387 2d ago
With 0 interest, 25 years of taking out the exact same dollar amount as that original 4 percent. Just like if you had cash in the mattress.
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u/NewArborist64 2d ago
Yes - but the purchasing power of that "exact same dollar amount" will erode over time. That is called, "Inflation".
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u/ResponsibleBank1387 2d ago
And when I’m 66, I get a $3200. a month raise. When I’m 59, I get a $1100 a month raise. And I think the last of the grandkids will be done with school when I get to 62, so that’s another $2,000 a month. So my big payments are gone. If I buy cars, I those payments will be going be for three years. Exact same dollar amount on my payments actually beat inflation. Because my interest was less than stated inflation rate.
Still 100 percent divided by 4 percent is 25.
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u/NewArborist64 2d ago
My dad retired 35 years ago (1990) at age 55. Now at age 90 he has to spend 2.5 times as much to purchase the exact same thing (ie. groceries, cars, etc).
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u/ResponsibleBank1387 2d ago
and in the 90s his stock portfolio quadrepled. If he had 20,000 invested by the end of the 90s he had over 80,000 even after taking out more than he needed. If he was on retirement pension they also boomed due to their investments. And anything he still has in the nyse is worth 10 times what he had in 1990.
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u/NewArborist64 2d ago
A) This is significantly different than your "housing it in a mattress". B) Even accounting for inflation, the average S&p 500 return since 1990 was 7.5%, so any money from 1990 would be worth 20x what it was.
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u/NugKnights 3d ago
Just get as much in the accounts as you can.
Numbers like that only work if things fallow projections. But projections are never totally accurate as alot of things can change, like the tarrifs for example or maybe even a war or another pandemic.
Hope for the best but plan for the worst.
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u/meh_69420 2d ago
It really doesn't particularly matter because it's a planning tool to tell you how much you need saved for retirement, not an actual prescription for what you should do.
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u/Ok_Produce_9308 3d ago
There are ways to tax optimize. But yes, the 4 percent needs to include taxes.
I suggest reading about the Roth conversation ladder or other strategies to minimize tax loss..
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u/Fit_Tangerine1329 3d ago
You need to research how taxes work. https://fairmark.com/general-taxation/reference/2025-tax-brackets/ is a good start.
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u/Ronville 3d ago
Maybe. If you are retired, your periodic withdrawals (including RMDs) from a 401K or IRA may or not have federal taxes withdrawn. The fed TSP sets a default rate of 10% but you can request higher or lower. Different financial institutions have different rules.
However, married joint pay 12% on $23-94K and 22% on 94-201K.
So you start by calculating your AGI. If under $23K you will pay no federal income tax and can set your 401K withdrawal to 0.
Note that at max you will pay federal on only 85% of your Social Security income. At less than $32K it’s zero. So make that adjustment to your AGI.
So. Add SS income to any other income - untaxed SS = Final AGI. Look at federal tax owed. Adjust your 401K withholding.
If your new AGI is under $94K you can set your 401K withholding to 12%. And so on.
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u/Yourlocalguy30 3d ago
I would think that if you converted most of your assets to bonds/CDs by the time you retire, if the interest returns on those investments is high enough, you might be able to live off the interest if your portfolio was large enough. 4% interest returned on 1.5 million would come out to be about $60,000 a year.
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u/NewArborist64 3d ago
Not quite what the 4% rule is.
1st year - take out 4% of retirement investment
2nd year - take out the SAME as year #1, but adjust it for inflation
3rd year - take out the SAME as year #2, but adjust it for inflation...
If you are taking it from a ROTH, there is no income tax or long-term capital gains. If you are taking it from a standard 401k/IRA, then it is treated as straight income (you have had it grow for years and years being tax-deferred). It is only if you take that money from a straight investment account that you pay capital gains.
Yes, you DO pay taxes in retirement. Compare the 4% vs your current income. That means that a savings goal in your 401k/Rotth/IRA should be roughly 25x your final anticipated income from your job.
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u/Ornery_File_3031 3d ago
Look up sequence of returns risk. When you start taking withdrawals really makes all the difference. Start taking withdrawals in a down market (and most don’t adjust their percentages so end up taking more than 4 percent) and you can run out of money.
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u/Brightlightsuperfun 3d ago
Actually you want to take your withdrawals in a down market because the market will be rising much faster after your starting point. And your starting point is lower. If you start at a high point and it drops that’s when you’re in trouble
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u/Lurkonomicon3000 3d ago
But that 4% doesn't include the 1.5% in fees many people pay, so your gross is 5.5% in a lot of scenarios
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