Today, we are tackling what most people think is the silent wealth killer in early retirement: taxes during retirement. Few people understand how little taxes will actually impact their withdrawal strategy. Now, today’s episode relies heavily on visuals. So if you’re listening to this episode on audio, you might want to hop on over to our YouTube channel to follow along.
Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me as always is my giant tax nerd co-host, Scott Trench.
Yeah, Mindy, I used to be IR yes, now I’m gonna be IR no after this episode, I think. BiggerPockets has a goal of creating 1 million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting. And the tax payments, the taxes you’ll pay in early retirement should be pretty negligible is the headline.
Mark Livingston emailed Mindy and I a few months back when I was perseverating over this topic because I was my intuition was telling me, “Hey, if I want to spend a little more than maybe the 50, 60, 70,000 dollars that seems to be a target baseline for a lot of people in the FI community, but if I wanted to spend 150, for example, I’m going to have to realize a lot more income, right? And that’s going to result in a tax burden and how does that geometrically compound, you know, grow the asset base required to sustain a higher spending level?” And Mark picked up on that and decided to say, “Scott, your intuition is completely wrong. That impact doesn’t really exist,” as the headline, and here’s a very detailed mathematical model to prove out how that works. And Mark, I couldn’t be more grateful and excited and thankful that you did that. Welcome to the BiggerPockets Money podcast.
Well, thank you for having me. I appreciate it. I’ve been a big fan of the show for a long time and uh, I feel like you guys are uh in my head constantly as I’m doing my walks and listening to you and friends of mine. So uh this feels uh feels great to be here. Thank you.
Awesome. Well, would you mind just kind of telling me what what triggered you to to do this this exercise? And how did you go about it? How’d you how’d you start thinking through the problem?
Sure. Um well as you noted, you you talked about it a couple of times on previous podcasts. And I listened as well and said, okay, yeah, if I wanted to increase the amount I was going to spend in retirement, what would that take from a a tax implication? And uh I also thought uh offhand, I I was nodding my head along saying, Scott, I think you’re right. That makes sense to me. But I’m one of those data nerds who I I I need to prove to myself that that’s really the the the reality. Uh and so in my life I am love looking at data, I love putting models together and really seeing from a variable perspective, how can I tweak and twist and try to optimize things? And as I put this together, I started digging into the worlds of really tax code and what the tax rates are and all the different uh opportunities you have with the different tax-advantaged accounts that we have. And I was actually surprised to see that the implications were not that large, even as you get into the multi-hundred-thousand uh withdrawals over a year. Um, they’re some bigger, right, amounts, but not dramatically larger. I was just surprised to see that.
Awesome. And and just for the record, you, like Mindy and I, a complete are a complete amateur at these things. We’re not you’re not a professional tax preparer and this episode is entirely for entertainment and and uh uh laughing purposes only for this as a quick disclaimer on this. Is that right?
Absolutely, yes. My my data nerdiness only helps me uh in my work here within the IT space and budgeting management large budgets, but uh yeah, no uh professional tax experience.
Awesome. and with that, we’ll get into the very detailed tax planning work that you have put together for us.
Hold on, I’m going to stipulate that, but also then Mark, I need you to stipulate that math doesn’t lie. Numbers are numbers and one plus one is always two.
Very true, very true. Uh, absolutely.
Yes, you’re not a professional, but also, math works and and you didn’t even do the math by hand yourself. You did it in Excel and their math is always right.
Assuming you did your formulas correctly. Yes, that’s always the trick.
Okay, well thank you for the disclaimers. Now, let’s jump in to all this data.
Alright Mark, this is the 640th. Don’t quote me on that, we might may be 637 or 643 depending on the timing of when we release it, but let’s call it the 640th episode of the Bigger Pockets Money Podcast. And for the first time in Bigger Pockets Money history, a guest has come in with a PowerPoint presentation prepared to discuss a subject here. So you are uh the king of of guests so far the Bigger Pockets Money Podcast. This is a pretty good presentation uh uh here and I would love to walk through that uh to guide our thought process here since you did all that work. So I’m going to pull it up on my screen here. Uh Folks, we should be able to follow along if you are listening to your car or uh at the gym, but this might be a good one to go back on YouTube and follow along with so you can see the great work visually that uh Mark has put together here. So with that, I will uh share my PowerPoint. we got this this presentation, effective tax rates for retirement. Please help please set the stage here and let us learn from you.
Sure. Yeah, I mean really, I mean the key word there is that effective tax rate. Uh and I think that’s where some people might misguidedly in their heads uh when they’re modeling or thinking about what the tax implications are, they might be thinking more about their marginal tax rate. Uh again with this progressive tax rate system we have in the US today, uh and have had for quite a period of time. Um a lot of people think about that last dollar that they bring in and what we call that is the marginal tax rate, right? The last dollar that you bring in, what’s that going to be taxed at? And that might be at a 32 or 35% uh tax rate if you’re making significant dollars. Uh but the reality is, if you think about the effective tax rate. So effective tax rate is, if I take all the income I have, all the way from zero, all the way up to whatever number I’ve I’ve I’ve earned, uh what is the overall tax I’m paying on that entire amount? And that’s what we call the effective tax rate. And that effective tax rate is usually significantly smaller. And we’ll go through a presentation or we’ll go through an example here, but just a punch line, you know, even if I just earned $350,000 uh as a married filed jointly individual, right? My marginal tax rate will be, you know, around that 32% uh level. But that effective tax rate would I pay because of the progressive tax system because that first set you get a standard deduction and then the first X amount is 10% and then 12%, it actually goes down to 18%. And so I might be way off on my calculations and thinking about, hey, a third of my retirement money is going to go to taxes when uh the reality is is actually quite a bit smaller.
Awesome. So love that love that framing and obviously that you know, until you get to really large amounts of income, the problem that I was worried about really doesn’t come into play at all. Um, is the big headline here. But stay tuned because the rest of the presentation is going to walk through exactly how that works and all of the intricate inputs that go into building to that. Is that correct?
Yes, yeah.
Awesome.
Yeah. I mean so this is just uh kind of demonstrating, just thinking about progressive tax rates. This was that $350,000 example and I just put together here the the table of and this is for the assumption of 2024, married filed jointly, you can do the same thing and plug in the numbers for uh single uh or head of household, whatever the case may be. But in this example, I tried to show really that $350,000 of income, you know, what is the the taxes I’m actually paying? And what portion of that 350,000 is subject to each of those uh increases of of tax rates. Uh where that first $29,000 in this example, no tax at all, right? So again in retirement think about if I’m pulling out $30,000 uh from a uh traditional 401K, there’ll be zero tax I need to pay on that. And even the next uh X dollars etc, right slowly increasing to that 10, the 12, the 22%. Um you don’t get into, you know, the 30s until significantly higher amounts. Um and overall when you average it out, it it you can see here what I was mentioning about that 18% uh rate on for $350,000.
Now we need to take a quick ad break, but listeners, I’m so excited to announce that you can now buy your ticket for BPCON 2025 which is October 5th through 7th in Las Vegas and I’d argue it’s a a business expense offsetting real estate income. Um you know, talk to your tax pro about that though. Um I I I I also wonder if the losses you incur at the craps table would count against your tax bill uh in that situation. I don’t know that one might be more iffy.
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Thanks for sticking with us. Okay, I want to stop, Scott, I’m sorry to jump on on top of you. I want to stop right here and say that I know that I am supposed to not pay, you know, my tax rate is not 38% on my entire amount, but you just have that in the back of your head. I have never seen it laid out like this, which makes it so easy to understand the effective tax rate and the progressive tax on $350,000. So if you are listening to this episode on your audio only, this one, I hate to say it because I I love when people are just listening on audio too, but this is a definite got to watch it on YouTube episode. This is Yeah I I think that’s right I think that’s right here because Mark Mark’s work is too good and and too professional and polished here for us to not react to the images he’s sharing, but we still will release it on the on the on the podcast episode and I think people will will get a value from it. But yeah, the head the headline here is that at $350,000, the the the taxes of $63,000 uh on that is pretty negligible and that leaves you with $290, something almost $290,000 in spending, $287,000 in spending power on this, which is far more than the vast majority of people listening to this podcast will want in an early retirement uh, world post tax, I believe.
Yeah, and the table on the right, you know, it just shows really if we look at each of the different dollar increments, really how does that tax start to ramp up a little bit? Um but so for those under a couple hundred thousand dollars, I mean we’re still in the teens uh in terms of uh tax rates, effective tax rates.
Awesome. One one more thing, you know, for for those listening here, can you walk us through the tax table that we’re looking at? What what tax are we talking about here? Is this income or capital gains?
This is solely income. So this picture is just forgetting forget about even retirement at this time, right? This is just around income. So if I was a W2 employee and I made $350,000 of standard income, this is the type of tax I would be paying. Uh as we talked about with 401K like traditional, uh you know, same thing, when you pull that money out, it’s taxed as standard income. Uh so you would use the same kind of tax table. We’ll talk about in a little bit, there’s other levers that you can use to help reduce your overall tax impact by uh you know, leaning into things like capital gains from your after tax or obviously Roth, which is not going to be taxed at all, right? So you’ve got numbers of levers to even go lower than 18% if you really need $350,000 in retirement.
Perfect. Let’s keep rolling.
Yeah, so this one is another eye opener here to me. Um I wanted to go back and take a look at um you know, where are we today, right? There’s always been the situation of we know or at least kind of knew tax rates were relatively low uh from based upon history, but I didn’t know how bad it was. And so went back and calculated that same $350,000 and said, okay, if we just adjusted for inflation back the last 50 years and we just took every five-year increment, how much would I pay in the effective tax rate? Uh you can see back in the mid 70s uh when there were definitely different tax uh implications uh especially for higher earners back then. Uh you were paying almost half, right? So that would be a totally different story. So back to the world of if I wanted to withdraw a lot of money back in the 1970s, uh then I really had to consider the tax situation. Here we’re at the lowest tax uh effective tax rates that we’ve ever been. Um now it could change uh and so I think that’s just something to be to be aware of.
Yeah is that a reasonable response to this that this is actually a huge risk to the early financial independence world because we’re at such a historically low effective tax rate on this level of income and real adjusted dollars that a good assumption would be that these rise back to something closer to the the the average the last 50 years.
I mean, I think they’d have to go up some. I think there is uh a challenge for politicians to raise taxes. Uh I think that’s you know, not necessarily a favored opinion by many. Uh so I don’t think we’re going to go back to the world of the the 1970s uh in this case. Uh but something to consider and think about. Uh but I also believe that especially people on the five journey have a number of conservative assumptions that they have built in and so even if we know taxes might go up over the next several years, my guess is it’ll be offset by some of the uh conservative assumptions they might have somewhere else uh in terms of what they need. Uh I can’t imagine it going back but again, I’m no expert uh in in what may have happened with tax policy in the future.
Awesome.
So yeah, this one uh basically breaks down uh if we think about kind of again those levers in retirement. Uh really there’s we we typically they they talk about the three-legged stool. Uh here I’ve got a four, uh which starts with just knowing that often times, especially folks on the five journey, they may still have income coming in. Um so they may not actually still have either residuals or some type of side income or uh uh side gig that they’re doing. Uh so I’m just breaking out, you know, what what is how does the tax work? So, standard income, income tax. I think that’s straightforward. Uh as we talked about with tax referred, so traditional 401Ks, IRAs, same thing, anything you pull out, that will hit uh income tax. Your Roth, uh obviously is tax uh free. Uh so anything you pull out of your Roth will have no tax implication. Uh and then lastly your after tax uh that you pull on the gains of that, you’ll be subject to uh the capital gains tax on, you know, over the cost basis associated with that. Some of it will be long-term capital gains, some of it will be short-term. As well as one of the things I think people don’t think about is if they have a large after tax portfolio, there’s still some capital gains, even if they’re not selling them with drawing, there’s still capital gain impacts that are happening inside their account that they’ll need to pay taxes for. Um but if you’re using things like uh standard index funds, those are pretty relatively low. Um and they’ll be less than 2% uh of your account and 95% of that is typically uh long-term capital gains, which are much uh tax more favorably. Awesome. So after tax uh accounts, I just again wanted to kind of spell out here a little bit on thinking about in in my uh if I got an after tax brokerage and I have just a standard S&P 500, as I mentioned, dividends there that are being paid out on an annual basis is usually around 2%, usually a little bit less than 2%. Of that, uh 95% are considered qualified, so those will hit the capital gains. Uh and around 5% might still have some short-term capital gains. So there’ll be a little bit of amount that’s actually hitting that income tax. And then everything you’re withdrawing is just the gains. Uh your long-term capital gains again subject to the capital gains uh tax rates which I have later on. Uh and short-term capital gains that you have. So if you sell something that you just recently uh had purchased, uh that will also hit your your income tax.
It’s it’s pretty eye opening. These are the rookie items here when you state them like this and they are not really top of mind in these things. And it clearly paints the picture for, oh wow, taxes are not going to be the boogie man that I had originally thought them to be here. Um at least not not as they’re currently laid out. Maybe tariffs change the opinion, but you made this before tariffs, I believe, right, Mark?
Yes, yeah. Uh and who knows what that story will be tomorrow and the day after and the day after. It’s a it’s a constant story here, right?
Awesome.
Yeah, well I think the best thing we can do is keep letting you roll Mark. This is great.
Sure. So, I tried to just uh put together an example. uh and so in this case uh the assumption is, okay, I am an individual, well married, I you again, I’m using married filed jointly was just all my assumptions along the way, just to have an an easy uh assumption there. And the assumption here is, okay, I have $50,000 of income. Uh so I’m still got some kind of maybe part-time job or something else that’s still bringing in some income. And then I’m taking uh 4% of my two and a half million dollar portfolio, in this example, I’m assuming it’s a two and a half million dollar. I’m going to take my 4% uh if we follow just the standard 4% rule. Uh and then the assumption was that I had spread this across tax deferred, Roth and after tax. Um so one and a half million in a traditional after tax, or sorry, in our tax deferred 401K, traditional 401K, $500,000 in our Roth and a half million dollars in a half after tax, which I think is a pretty common scenario we’ve seen uh retirees kind of be in in terms of percentage wise. Uh and just walks through uh you taking out your $60,000 uh from your tax deferred, that’s 4% of your one and a half million. $20,000 from your Roth and then taking out the additional um $20,000 from your after tax. And then also calculating in again that 2% uh dividend uh that you’ll need to pay taxes on. So we’re just trying to figure out here uh what your total taxable income tax is. Uh so you’ve got basically $110,500 of taxable income that’s come in. With again you go to your tables and then come tax right uh income tax amount of $9,300. And then on the long-term capital gains, you’ve uh will recognize 24,500 uh with a capital gains tax rate of 36 uh amount of 3675. Um and you can see up here uh in the top right the capital gains tax table. We didn’t talk a lot about that yet. Uh where the first $90,000 of capital gains uh again this is after your income isn’t taxed at all. And then up to half a million dollars is 15% tax rate. So that’s again thinking about when I was thinking of those 32 and 35% assumptions, if a lot of that money is coming from capital gains, I’m only going to pay 15% up to a half a million dollars. And again, if you’re taking out more than half a million dollars a year, great, you probably will have to think a little bit more about your tax implications, but even after that we’re talking 20%.
So Mark, if if I’m, let’s say I’m earning 100k a year, sorry, let’s let’s let’s say this. I have no other income sources. Yeah. And I only realize capital gains from my after tax brokerage here and dividends. The first $90,000 is taxed at a 0% rate. That’s correct. Is that correct? Right. Let’s say that I also earn 100k because I’m a traditional retire and I am forced to realize, you know, begin begin my um my 401K distributions in there. How does that impact the tax bracket that I’m in for this capital gains item here?
Yeah, it comes after the fact. So you’re your income comes in first. So if you’ve made $100,000, that basically fills up your bucket of eligible in terms of the capital gains. And then anything above that $100,000 all the way up to a half a million would be taxed at 15%. So the capital gains in this example would all be at 15%. If you have zero income, all that would be at 0%.
Awesome. So if I, let’s say I have a big cash cushion, let’s say I have 200k in a cash position, right? Big big cash position there. And I it’s earning 4% um uh in a money market or something like that, right? So that would be 8 grand, that would that interest, that would first hit here. So then I only have $81,000 of capital gains or dividends that tax at the 0% rate. Is that correct as well?
Um well let’s be careful. Uh money markets and the income there are typically uh considered short-term uh interest uh and not actual capital gains, right? Capital gains is going to be things I’ve invested into the stock market or index funds and things like that and been over uh the time period and selling those. Uh things like money markets, all that would just be interest income uh and wouldn’t be considered just standard income.
Sorry, yes, but what I’m saying is can you can I have a high ordinary income and still pay zero for capital gains taxes? The first the first $90,000 for long-term capital gains. Uh so the answer is no. Again, the ordinary income will fill up that bucket that $90,000 is including um any ordinary income that you have as well.
That’s what I’m saying here, right? So that that simple interest from my money market for example would count as ordinary income or short-term, you know, like the thing there. And and that would begin filling up this bucket, right?
Yeah, yes, sorry, yes.
Yeah, that that’s all that’s all I’m saying here is this is this is the first the the the the that that marginal piece on the long-term capital gains, but it is the the short-term stuff fills this up. But I thought I think it’s an important nuance for folks.
Yeah, so again, there’s a lot of levers here that you can do. Um and you know, if you you don’t have to take 4% out of every single one of these boxes. Uh if you want to adjust and you have more in your wth or you want to take more of your wth to be able to reduce your income in a given year, right? You have those levers to be able to adjust so that you can actually try to optimize uh the tax that you’re paying. But again, you have to think about in in the future, right? We believe tax rates are going to go up. Maybe we want to take some of that hit now. Um and then, you know, save that wth for when the the tax impacts might be higher, right? So again you you get choices as you go along with having money in each of these different uh investment strategies.
Awesome. We don’t talk about real estate here. Did is that come up in in a little bit?
It does not. Uh I did not uh necessarily use that as an assumption in here. Uh typically real estate income will just be your standard income. Uh I’m assuming that you’re, you know, making that. Obviously, that’s offset a lot with uh depreciation and other expenses and such, right? Just like any business income. Um but that really does not um help us necessarily at in the wth or deferred, it really just be uh in your income bucket uh anything that’s coming in from there.
So what if we factor in real estate into this situation, then things begin to continue to get really interesting, right? Real estate income, as you just mentioned, after depreciation and all these other things have been taken out of it, is generally taxed as ordinary income at that point at the marginal tax rate for that. But let’s say you had a uh a million dollar uh real estate investment that’s say let’s pretend it’s all building. So it’s fully depreciate the the depreciation is on the entire million dollar amount, generating 67 $60,000 in in cash flow here. You would offset that $60,000 in in income essentially by 27.5 in depreciation and be left with $33.5 in income on there filling up that bucket with $60,000 in cash flow. So the game can get really fun I I imagine um when we start layering those types of things which was not even contemplated in your model here. Um there’s additional opportunity for folks to explore.
Absolutely.
Yeah. Okay, awesome. Uh and so what are we looking at on this last slide that summarizes your work here?
Yeah, so this is just uh trying to really kind of just show uh as we went uh from low income to higher amounts of income at a retirement, what is that effective tax rate? Um and you know, yes, it does go up right. uh and it goes up as you pull out more money. But it’s a little bit more linear uh than I would have expected. uh again where I think the original assumption was I was going to see some type of logarithmic or type exponential uh impact. The reality is that effective tax rate just really does not take off. Uh I didn’t go beyond uh the situation where I think it was a $20 million dollar uh portfolio here. Uh and taking 4% of that. Uh I’m still was only paying what is it that uh 18 or so uh percent on that. Um and uh you know, I’m sure as I go out in into the right and I have a $100 million dollar portfolio, uh I will pay a lot more taxes, but I wouldn’t mind being in that situation.
Yeah, absolutely. So, obviously as the money money compounds, you will pay more taxes in most cases. Um but real estate again, there’s there’s plenty of ways to play around with this.
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Welcome back to the show. Now we’re going to switch over to the spreadsheet that you built to power the slides that we just discussed. Again, you are you I think maybe one other person has built a spreadsheet uh coming into a bigger Pockets money uh podcast. So thank you again for being the uh the most prepared guest in Bigger Pockets money history, uh Mark. We appreciate it.
My pleasure.
Um so this tool effectively allows you to play with all of those toggles that we just went through um and the assumptions that you based your, you know, your base case on and your in the in the in the PowerPoint presentation. Both of these will be available at biggerpockets.com/moneytaxtools as a free resource. Thank you so much Mark for for producing this. I think it’s going to help a lot of people. Walk us through how to use this tool and the way you built it. And I’ll zoom in a little bit here for
that will be as well. Uh perfect. Yeah, I mean really the the key variables are what I identify on the left hand top side there. That’s really the the things that you play with. So really lines one through 11 there uh and and cell B. Uh those are the things that you can kind of play and and adjust with. Uh and uh the first three lines are really, okay, how is my uh my network’s allocated, right? between uh tax deferred, uh Roth and after tax. Uh so if you if you’re in a situation where you know 80% of it is in a standard 401K, you can change that to 80% and say that my taxable after tax is 10% and my Roth is 10% again you can modify those they should just add up to 100% ideally. Uh and then the next one uh really thinks about um a growth. Uh so originally I was going to build this out to year over year over year and and think about growth and acceleration of your portfolio and what does that look like? Um right now I don’t think that will have much of an impact on this spreadsheet. Uh dividend, we’ve talked about uh the estimation of, you know, for my after tax, what types of dividends am I going to see on average? Uh in this case, I put in 2%. If you have a lot higher uh type of stock portfolio that maybe pays a little bit higher of dividends, you can up that to three, four, five percent. If you think it’s a little bit lower, you can change that down to one and a half percent. Uh so you can me allow that to to change. Uh and then the qualified dividend rate is just thing again that what what percentage of that is long-term versus short-term. Uh again when I looked up the standard like an S&P 500 index fund, about 95% of that was uh long-term capital gains, so we plugged that in 95%, but you can change that down to 90% or 80% uh to see how, you know, things might change over time. Uh the withdrawal percentage is pretty straightforward. What are you going to take out of your portfolio? The assumption here is 4%. Uh if someone wants to play with a 3% because they want to be a little bit more conservative, they can go ahead and put 3% in there. Uh line nine actually I’ve removed. So it’s there uh but I actually in the uh pink or purple uh capital gains table, I I I’ve updated my spreadsheet to calculate in the uh capital gains tax uh so that 0 15 and 20%. Uh so that line actually doesn’t do anything uh in that one. So that actually can get removed.
And that’s a note. This is all for the 2025 tax code. Is that correct?
This is all 2024. I used 2024. so 24.
Okay so so so if you’re looking at this and it’s five years in the future and you find our our episode in the annals of the Internet, um you will need to update these tax tables um with the correct assumptions for that year.
Yeah. And then row 10 the uh taxable uh that’s growth that’s basically the assumption of okay how much is actually going to be a gain when I sell. Um so in this case we used 75%. so the assumption is I put in 25% of it is just the cost basis and it’s grown uh 75%. Uh you can change that. if you think it’s more around 50% for you uh in your situation you can alter that. And then the last item there is again am I going to make any income um in addition to all the things that I’m pulling from my retirement accounts. So in this case the assumption was 50,000 uh that I would be uh making in addition to. If you feel like okay nope I’m actually fully retired, you can take that down to zero uh and it will recalculate everything. and you know we’ve talked about those buckets of income tax rates, it’ll remove that from that uh to be able to calculate what things impacted at income tax and then the capital gains tax.
Awesome. So perfect. This is these are the basic things that you’ll need to play around with um to do it. It’s a very simple model even though that might have been, you know, there’s a lot there’s a lot of good detail that goes into it, but boiling it down to these inputs is really wonderful. um making it a lot easier on folks here. Can you give us some high-level overviews of the key other parts of the model that folks should know the power your work?
Sure Yeah. Sure. Uh on the notes, I just there’s a lot of assumptions that are made. I you cannot do this for every single scenario. So I just try to highlight some of the assumptions I assumed. Uh in these calculations, these are not going to be precise, right? I think they’ll accurately put you in the right direction, but they’re not going to be a precise predictor of exactly what down to the penny that you’re going to uh owe uh at the end of any given year. but there are some assumptions built in there, so I tried to at least detail that out. Um and then in the center section there, those are the different portfolios as they grow. So I had a $500,000 portfolio, a million dollar portfolio. I think uh 2 million, 5 million, 10 million. Um so that just continues to to go down all the way up to I think I did a $20 million dollar portfolio. I figured that was probably sufficient. Um and then in the third columns, uh the JKL ones there, those are just the tables. Those are all the calculation tables I use. So here it was all the Mary Pilt jointly. Uh if you really want to change that to single, you can go pull the the single table and actually update those and and put that information in or we can uh update that for folks if they’d like. The capital gains table
And for folks who are totally new to this and don’t don’t you’re not used to this, you just Google income tax brackets, take the income tax table and you will find these for the latest year and they will populate in a very similar format to this. Um, if it’s not instantly available for you to copy and paste with whatever site you went in there, you will spend a little bit of time entering the data manually into the spreadsheet to plug those in, but that’s not a very difficult task uh once you just Google it um to find those rates, whatever year you’re looking at and whatever your tax status is.
Sorry. And then that last table in blue there, the net worth and effective tax rate, that’s just kind of the the overall, uh you know, where do we land? What’s the what’s the net result? So based on a certain net worth, based on all those assumptions, what’s the effective tax rate I’m going to pay and how much cash am I actually pulling? So between my income and my withdrawal, how much cash do I actually uh pull out? And then we just graph that uh here on the very far right.
I want to call out here, um I want to call out another resource that you did not construct um on this that I think is a wonderful companion resource to this, which is um uh Cfire Sim. Are you familiar with that product?
Uh I am yes. I haven’t used it a lot, but I I have heard a lot of good things about it.
Uh we interviewed the creator of Cfire Sim Lauren and it’s a really powerful tool that has a large amount of of historical data to power assumptions. You can plug in different types of portfolios that you plan for and all these things. One issue that we pointed out on the show and that she uh she owned was that it does not consider the tax impact of those portfolios. So between this tool, uh Cfire sum.com which is completely free uh resource for folks in the fire community. Um you could build the type of portfolio that you’d be really comfortable with in terms of feeling like they would it would support a certain amount of withdrawals and then you can increase that amount by the pretax uh amount needed uh to to Fundfire uh using Mark’s spreadsheet that we’ve built here. Uh I think those two things would really be a really powerful way to feel comfortable with how much you need on a pretax base you know how much you need to generate what kind of portfolio you need to generate the pretax spending power to fuel your lifestyle uh these rates and I think that the answer is I was delighted to find that it’s not as big a deal the tax impact as I had initially feared um for someone who’s looking for maybe twice as much as what the most the average uh person is searching for fire once. I think that’s the I think that’s that’s the answer to a lot of these these uh uh playing playing for uh scenarios here. Mark, what are you what are you thinking about for your personal allocations uh in your life?
Getting back to flexibility is really where I’d like to be. Uh so I try to uh have as many different levers that I can pull uh so that based upon how what the environment’s like in the future, uh I will be able to have that flexibility uh to be able to move about. Uh over the last several years, um get getting a little bit more into real estate. so I’ve been allocating a little bit more into uh single family rentals and syndications to have that as an option uh to play with. uh but also looking at, you know, making sure I’m balancing my wth and my traditional accounts and even building up my after tax and thinking about if I was to actually retire early, uh meaning before I’m going to withdraw from my traditional or my roths, um how do I best do that? Um and so, yeah, definitely continuing to keep an eye on making sure I have at least kind of irons in each fire so I can leverage and use that.
Mark, I let Scott take almost all of the questions today simply because he’s going to be the one that’s asking much better questions about this, but I have to say you have explained this for those of us who don’t have brains like Scott’s so easily and the illustrations that you first shared in the slideshow are so helpful to just drive this point home. Your taxes after fire are not nearly the huge burden that you might be thinking they are.
Yeah, I I think that’s the headline of the show. Taxes really aren’t a major factor in planning for retirement for early retirement. That’s a that’s a remarkable headline and I I I love it. Um and that’s what you’ve proved out here. I think pretty well. Um with the with these documents and really powerful resources.
Thank you, yes. Uh I definitely agree. Uh it’s been eye opening uh and and I encourage folks to really start to play with these types of things and you know, build data models if they can. If they can’t, uh other options is you can leverage these AI tools that are out there as well. The chat GPTs and co-pilots of the world. You can actually plug in situations and ask them to calculate. Uh and say, show me what this would look like in these questions that I have. Uh I use these uh on a very frequent basis. You have to verify and validate some of the information that that comes out, uh but they’ve been very helpful tools if you’re not uh very uh you know, spreadsheet or data oriented.
And Mark, last question here, what what do you do professionally again? Could you remind us?
Sure, I work in uh IT. Uh I I manage teams and and budgets uh at a Fortune 500 company.
And it involves building spreadsheets and creating PowerPoint presentations.
A lots of PowerPoints, lots of spreadsheets and uh yes.
All right, well well I can tell. I I that wasn’t a big stretch for me on this one uh on it. So thank you for applying those incredible talents to to this exercise here for the benefit of hopefully a lot of people.
My pleasure.
Yeah, I laughed because that was hilarious. Of course you do. Of course you do. But Mark, thank you so much for reaching out to us. This was such a great episode. This was so helpful. I’m a visual learner. It is so helpful to see this on the screen and follow along and be like, oh, that’s what that means. It’s it this is wonderful. Thank you so much for your time today. And we’ll talk to you soon.
Thank you so much.
Holy cats, Scott. That was such a great episode. I am so thankful that Mark sat down and took the time to type all this out, model this all out for us. It is so helpful even if you just go to the slides and look at slide number three. The effective tax rate on $350,000 is 18%. When you’re married filing jointly and these are 2024 tax rates, but they didn’t change that much for 2025. 18% on $350,000 and it’s just I know this. I know that your tax rate of 10% is only applied to this amount and then your tax, the tax bracket of 12% is only applied to this amount and 22 is this amount, but you forget that when you are when you’re thinking, you know, oh, I made $100,000 last year and that is taxed at 12%. So I made $88,000 last year or I took home $88,000. And that’s not actually true.
Do this all day long, 600 episodes and you just get it like that basic fact of life needs to be restated to hit home on effective tax tax rates. I think you did a great job with that. And then I think that with all the other levers in there, there’s a lot of ways to pay no tax um in a lot of years, I think in in a in a in an early retirement scenario that folks should have been able to clearly put together and he’s absolutely right to have as much wealth across a variety of these different asset classes as possible to be able to take advantage of those dynamics. So this is a really powerful uh planning tool and I think again the big headline is um tax consideration does not change the basis that one needs by so much that it it fundamentally changes the equation about how to achieve fire if you’re looking for that next level of spending instead, you know, a lot of people use the uh 60 or $80,000 a year mark and I think a a good about half our audience probably wants more than that. The good news is, the the bad news is you got to accumulate millions more in order to do that just to satisfy the 4% rule. The good news is that you won’t have to it won’t geometrically compound the way that you might have feared before this episode. You will simply you’ll you’ll be in a slightly higher marginal tax prac you pay a slightly higher effective tax rate. Good grief. I just you just did the show on it and I still got it wrong. uh in in the verbage I use.
It’s a lot of stuff thrown at you. I just can’t thank Mark enough for taking the time to share this because it is, I mean, it’s illustrated right there. There’s colors, there’s numbers, there’s like actual data that you can see and understand in multiple different ways, laid out so that you can choose your own adventure with that one. Choose the the the method that speaks to you the most. And like you said, Scott, we are going to include these uh tax tools, we’re we’re calling them money tax tools at biggerpockets.com/money tax tools. But if you type type in money tax tool, it’ll take you there too.
Yeah, and then if you get into the $50 million dollar net worth uh range and are are trying are dealing with the tax consequences of that, please send me a link to your podcast because I will be subscribed there.
All right, with that, should we get out of here, Mindy?
We should. That wraps up this fantastic tax episode of the Bigger Pockets Money Podcast. He is Scott Trench. I am Mindy Jensen saying goodbye to all of my now future tax nerds.
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