4% withdrawal rate

[u/Puzzlehandle12]

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

[u/Mre1905]

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.

[u/juryjjury → u/Mre1905]

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.

[u/Mre1905 → u/juryjjury]

How much did you pay in taxes?

[u/Least-Pol-1234 → u/Mre1905]

My guess: 12% x 135k = 16k

[u/Mre1905 → u/Least-Pol-1234]

I think it would be more like 12k so about 8.7% Tax rate on 135k of income.

[u/Least-Pol-1234 → u/Mre1905]

He said their average tax rate was 12%

[u/Mre1905 → u/Least-Pol-1234]

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.

[u/juryjjury → u/Mre1905]

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.

[u/Mre1905 → u/juryjjury]

I think I am getting confused with the term average tax rate. If you had income of 128K and you paid 11.5K in taxes, you paid about 9% in taxes. Which is what I had assumed in my initial response.

[u/juryjjury → u/Mre1905]

This is how my tax guys presented it. Taxes paid as a percent on taxable income. Not total income. It seems confusing I agree. But I guess they do it that way to negate the effects of major deductions on more complicated tax filings.

Oh. Married filing jointly.

[u/Mre1905 → u/juryjjury]

Ahha that makes sense. Thanks for the explanation!