BiggerPockets Money Podcast - No, Taxes Won’t Derail Your FIRE: Here’s What You’ll Really Pay in Retirement

Episode Date: May 20, 2025

No, Taxes Won’t Derail Your FIRE: Here’s What You’ll Really Pay in Retirement Podcast Description Taxes in retirement have been called a “silent wealth killer” for those pursuing FIRE—but does the data tell a different story? If you’re worried about a ticking tax bomb wiping out a huge chunk of your investment portfolio or even delaying early retirement, you won’t want to miss this one! Welcome back to the BiggerPockets Money podcast! Today, we’re joined by fellow investor and self-proclaimed data nerd Mark Livingstone, who has created a free resource and spreadsheet YOU can use to estimate your tax burden in retirement. For most early retirees, taxes are negligible compared to the amount of income they can withdraw, and Mark will demonstrate this with a step-by-step walkthrough of his powerful FIRE tax tool! Along the way, you’ll learn the key differences between marginal and effective tax rates and why people who retire today pay much less tax than in decades prior. You’ll also hear about the four income “levers” you can pull in retirement, when income tax and capital gains tax kick in, and how to build the most tax-friendly withdrawal strategy possible! In This Episode We Cover Why taxes in retirement aren’t nearly as bad as you probably think A step-by-step walkthrough of Mark’s free retirement tax spreadsheet How the United States’ progressive income tax system works Marginal and effective tax rates explained (and how they impact your tax burden) The four income “levers” you can pull in retirement (and how each is taxed) How taxes impact the safe withdrawal rate (and why the 4% rule works) And So Much More! Check out more resources from this show on ⁠⁠⁠⁠⁠⁠⁠BiggerPockets.com⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠https://www.biggerpockets.com/blog/money-642 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email ⁠⁠⁠⁠⁠⁠⁠[e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

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 Bigger Pockets Money podcast. My name is Mindy Jensen.

And with me, as always, is my giant tax nerd co-house. host Scott Trench. Yeah, Mindy, I used to be IR yes. Now I'm going to be IR no after this episode, I think. Bigger Pockets has a goal of creating one 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 as the headline. Mark Livingstone emailed Mindy and I a few months back when I was perseverating over this topic, because my intuition was telling me, hey, if I want to spend a little more than maybe the $50,000,

that seems to be a target baseline for a lot of people in the five 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 Bigger Pockets 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 I feel like you guys are in my head constantly as I'm doing my walks and listening to you and friends of mine. So this feels great to be here. Thank you. Awesome.

Would you mind just kind of telling me what triggered you to do this? this exercise and how did you go about it? How did you start thinking through the problem? Sure. Well, as you know, 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 tax implication? And I also thought, Offman, 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 need to prove to myself, but that's really the reality. 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 opportunities you have with the different tax advantage 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-dollar withdrawals over a year, there's some bigger, right, amounts, but not dramatically larger.

I was just surprised to see that. Awesome. And just for the record, you like Mindy and I are complete amateur at these things, but you're not professional tax preparer. And this episode is entirely for entertainment and laughing purposes only for this as a quick disclaimer on this. Is that right? Absolutely, yes.

My data nerdiness only helps me in my work here. within the IT space and budgeting managing large budgets. But yeah, no 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. Absolutely. Yes, you're not a professional, but also math works. And you didn't even do the math by hand yourself. did it in Excel and their math is always right. Assuming you do 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. Mark, this is the 640th. Don't quote me on that. We might be 637 or 643, depending on the timing 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. You are the king of guests so far, the Bigger Pockets, Buddy podcast. This is a pretty good presentation here. And I would love to walk through that to guide our thought process here since you did all that work.

So I'm going to pull it up on my screen here. Folks, we should be able to follow along if you are listening in your car or 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 Mark has put together here. So with that, I will share my PowerPoint. We got this presentation, effective tax rates for retirement. 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. And I think that's where some people might misguidedly in their heads when they're modeling or thinking about what the tax implications are. They might be thinking more about their marginal tax rate. Again, with this progressive tax rate system we have in the U.S. today and have had for quite a period of time, 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% tax rate if you're making significant dollars. 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 earned, what is the overall tax I'm paying on that entire amount? And that's what we call the effective tax rate. 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 punchline, you know, even if I just earned $350,000 as a married file jointly individual, right,

my marginal tax rate will be, you know, around that 32% 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%. percent, it actually goes down to 18 percent. 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 the reality is it's 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 is the big headline here. But stay tuned because the rest of the

presentations and walk through exactly how that works and all of the intricate inputs that go into building to that. Is that correct? Yes. Yes. Yeah. awesome. Yeah, I mean, so this is just kind of demonstrating. Just thinking about progressive tax rates, this was that $350,000 example. And I just put together here the table of, and this is for the assumption of 2024, Mary File jointly, you can do the same thing and plug in the numbers for single or head of household or whether the case may be. But in this example, I tried to show really that $350,000 of income, you know, what is the taxes I'm actually paying? And, And what portion of that $350,000 is subject to each of those increases of tax rates?

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 from a traditional 401K, there'll be zero tax I need to pay on that. And even the next $X, $X, et cetera, right, slowly increasing to that $10, the 12, the 22%, you don't get into, you know, the 30s until significant. significantly higher amounts. And overall, when you average it out, you can see here what I was mentioning about that 18% rate on a $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 as a business expense offsetting real estate income. You know, talk to your tax pro about that, though. I also wonder if the losses you incur at the craps table would count against your tax bill in that situation. I don't know. That one might be more iffy. Tax season is one of the only times all year when most people actually look at their full financial

picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch

subscription with the code Pock. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves in Edle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at monarch.com for half off your first year. That's 50% off at monarch.com code pockets. I love Matt, said no one ever. Nobody starts a business thinking, you know what would make this more fun? Calculating quarterly estimated taxes. But somehow every small business owner ends up doing it. Your dreams of creating, selling, and growing get replaced by late

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and I still regularly re-listen to the highest impact titles. Lately, I've been listening to Bigger Liener Stronger for Fitness, the Anxious Generation for Parenting Perspective, and several Arthur Brewer, Brooks audiobooks that have been excellent for mental well-being. What makes Audible so powerful as its breadth. Beyond audiobooks, you also get Audible Originals, podcasts, and a massive back catalog across business, health, parenting, and more, all accessible in one app.

If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BPMoney. Thanks for singing 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 love when people are just listening on audio too. But this is a definite got to watch it on YouTube episode. This is fascinating. Yeah, I think that's right here because Mark's work is too good and too professional and polished here for us to not react to the images he's sharing. But we still were released on the podcast episode.

And I think people will get value from it. But yeah, the headline here is at $350,000. that the taxes of $63,000 on that is pretty negligible. And that leaves you with $290,000, 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 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?

So for those under a couple hundred thousand dollars, I mean, we're still in the teens in terms of tax rates, effective tax rates. Awesome. One more thing, you know, for those listening here, can you walk us through the tax table that we're looking at? What tax are we talking about here? This is income or capital gains? This is solely income. So this picture is just, again, forget about even retirement at this time, right? This is just around income. So if I was a W-2 employee and I made $350,000 of standard income, income, this is the type of tax I would be paying. As we talked about with 401k, like traditional, you know, same thing. When you pull that money out, it's taxed as standard income. 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 impacts by, 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 low. 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. I wanted to go back and take a look at, you know, where are we today, right? There's always been the situation of we know, or this kind of new, tax rates were relatively low 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 for the last 50 years and we just took every five-year increment, how much would I pay in the effective tax rate? You can see back in the mid-70s when there were definitely different tax implications, especially for higher earners back then. You were paying almost half, right? So that 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, then I really have to consider the tax situation. Here, we're at the lowest tax, effective tax rates that we've ever bid. Now, it could change. And so I think that's just something to be, to be aware of. 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 in real adjusted dollars, that a good assumption would be that these rise back to something closer to the average for the last 50 years? I mean, I think they'd have to go up to some. I think there is a challenge for politicians to raise taxes. I think that's not necessarily a favored opinion by many. So I don't think we're going to go back to the world of the 1970s in this case. But something to consider and think about. 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 set of years, my guess is it will be.

offset by some of the conservative assumptions they may have somewhere else in terms of what they need. I can't imagine it going back, but again, I'm no expert in what might happen with tax policy in the future. Awesome. So yeah, this one basically breaks down. If we think about kind of getting those levers in retirement, really there's, typically they talk about the three-legged stool. Here I've got a four, which starts with just knowing that oftentimes, especially folks on the five journey, they may still have income coming in. So they may actually still have either residuals or some type of side income or a side gig that they're doing. So I'm just to breaking down, you know, what is, how does the tax work?

So standard income, income tax. I think that's straightforward. As we talked about with tax referred, so traditional 401Ks, IRAs, same thing. Anything you pull out, that'll hit. income tax. Your Roth obviously is tax free. So anything you pull out of your Roth will have no tax implication. And then lastly, your after tax that you pull on the gains of that, you'll be subject to the capital gains tax on, you know, over the cost basis associated to 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 and withdrawing, there's still capital gain impacts that are happening inside their account that they'll need to pay taxes for. But if you're using things like standard index funds, those are pretty relatively low. There'll be less than 2% of your account, and 95% of that is typically long-term capital gains, which are much taxed more favorably. Awesome. So after tax accounts, I just again wanted to kind of spell out here a little bit on thinking about in my, if I got 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, 95% are considered qualified. So those will like the capital gains and around 5% might still have some short-term capital games. So it'll be a little bit amount that's actually hitting that income tax.

And then everything you're withdrawing is just the gains. Your long-term capital gains, again, subject to the capital gains tax rates, which I have later on, and short-term capital gains that you have. So if you sell something that you just recently had purchased, that will also hit your income tax. It's pretty eye-opening. And these are the rookie items here when you state them like this. And they don't really top of mind in these things. And it clearly paints the picture for, oh, wow, taxes are not.

going to be the boogeyman that I had originally thought them to be here. At least not as they're currently laid out. Maybe tariffs changed the opinion, but you made this before tariffs, I believe, right, Mark? Yes. Yeah. And who knows what that story will be tomorrow and the day after and the day after. It's a constant story here, right? Awesome.

Yeah, I think the best thing we can do is keep letting you roll, Mark. This is great. Sure. So I tried to just put together an example. So in this case, the assumption is, okay, I am. I'm an individual, well, married. I'm using married pilot jointly. It was just all my assumptions along the way, just to have an easy assumption there.

And the assumption here is, okay, I have $50,000 of income. 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 4% of my $2.5 million portfolio. So this example, as I'm going to take my 4%. If we follow just the standard 4% rule. And then the assumption was that I had spread. this across tax-affirred Roth and after-tax.

So, one-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-tax, which I think is a pretty common scenario we've seen retirees, kind of be in, percentage-wise, and just walks through, you're taking out your $60,000 from your tax-deverd, that's 4% of your $1.5 million, $20,000 from your Roth. and then taking out the additional 20,000 from your after tax, and then also calculating in, again, that 2% dividend that you'll need to pay taxes on. So we just try to figure out here what your total taxable income tax is.

So you've got basically 110,500 of taxable income that's come in with, again, you go to your tables, an income tax amount of $9,300. And then on the long-term capital gains, you will recognize 24,500 with a capital gains tax rate of 36,000. Amount of 3675. And you can see up here in the top right, the capital gains tax table. We didn't talk a lot about that yet, where the first $90,000 of capital gains, and again, this is after your income, isn't taxed at all. and then up to a 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 I'm, let's say I'm earning 100K,000. a year. Sorry, let's say this. I have no other income sources. And I only realize capital gains from my after-tax brokerage here and dividends. The first $90,000 is taxed at 0%. Correct. Let's say that I

also earn 100K because I'm a traditional retiree and I am forced to realize, you know, begin, begin 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 your income comes in first. So if you've made $100,000, that basically fills up your bucket 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 had 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 it's earning 4% 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 I only have 81,000 of capital gains or

dividends that tax the 0% rate. Is that correct as well? Well, let's be careful. money markets and the income there are typically considered short-term interest and not actual capital gains, right? Capital gains are going to be things I'm invested into the stock market or index funds and things like that. And then over the time period and selling those, things like money markets, all that would just be interest income and would be considered just standard income. Sorry, yes, but what I'm saying is 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. So the answer is no. Again, the ordinary income will fill up that bucket. That 90,000 is including any ordinary income that you have as well.

That's what I'm saying here, right? That simple interest in my money market, for example, would count as ordinary income or short term, you know, like in there. And that would begin filling up this bucket, right? Yes, sorry, yes. Yeah, that's all I'm saying here is this is the first, that marginal piece and the long-term capital gains, but it is, the short-term stuff fills this up.

Right. But I think it's an important nuance for folks. Yeah. So again, there's a lot of levers here that you can do. And, you know, if you, you don't have to take 4% out of every single one of these boxes. If you want to adjust and you have more in your Rop or you want to take more of your Roth, be able to reduce your income in a given year, right? You have those levers to be able to adjust so that you could actually.

try to optimize the tax you're paying. But again, you have to think about in the future, right? We believe tax rates are going to go up. Maybe we want to take some of that hit now. And then, you know, save that Roth for when the tax impacts might be higher. Right. So again, you get choices as you go along with having money in each of these different investment strategies. Awesome. We don't talk about real estate here. Does that come up in a little bit? It does not. I did not necessarily use that as an assumption. in here. Typically, real estate income will just be your standard income. I'm assuming that you're making that. Obviously, that's offset a lot with depreciation and other expenses and such, right,

just like any business income. But that really does not help us necessarily in the Roth or deferred. It really just be in your income bucket, anything that's coming up from there. So 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 tax is ordinary income at that point at the marginal tax rate for that. But let's say you had a million dollar real estate investment that's say, let's pretend it's all building. So the depreciation is on the entire million dollar amount, generating 67 billion. $60,000 in cash flow here, you would offset that $60,000 in income, essentially, buy $275 in depreciation and be left with $335 in income on there,

filling up that bucket with $60,000 in cash flow. So the game can get really fun, I imagine when we start layering those types of things, which was not even contemplated in your model here, and there's additional opportunity for folks to explore. Absolutely. Yeah. Okay, awesome. And so what are we looking at on this last slide that summarizes your work here?

Yeah, so this is just trying to really kind of show as we went from low income to higher amounts of income at retirement, what is that effective tax rate? And, you know, yes, it does go upright and it goes up as you pull out more money. But it's a little bit more linear than I would have expected, again, where I think the original assumption was I was going to see some type of logarithmic or type exponential impact. The reality is that effective tax rate just really does not take off. I didn't go beyond the situation where I think was a $20 million portfolio here and taking 4% of that. I'm still was only paying, whether that 18 or so percent on that. And, you know, I'm sure as I go out into the ride and I have $100 million portfolio, it will pay a lot more taxes, but I wouldn't mind being in that situation.

Yeah, absolutely. So obviously as money compounds, you will pay more taxes in most cases. But real estate, again, there's plenty of ways to play around with this. We have to take one final ad break. But more from Mark after this. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch.

Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and few. future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code Pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle.

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agent.com slash money free. 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, I think maybe one other person has built a spreadsheet coming into a Bigger Pockets Money podcast. So thank you again for being the most prepared guest in Bigger Pockets Money history, Mark.

We appreciate it. My pleasure. So this tool effectively allows you to play. with all of those toggles that we just went through and the assumptions that you based your, you know, your base case on and you're in the PowerPoint presentation. Both of these will be available at biggerpockets.com

slash money tax tools as a free resource. Thank you so much, Mark, for producing this. I think it's going to help a lot of people. Walk us through how to use this tool in the way you built it. And I'll zoom in a little bit here for making it. Yeah, that would be as well. Perfect.

Yeah, I mean, really the key variables are what I identify on the left hand. top side there. That's really the things that you play with. So really lines one through 11 there in cell B. Those are the things that you can kind of play and adjust with. And the first three lines are really, okay, how is my net worth allocated, right? Between tax deferred, Roth, and after tax. So 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. And then the next one really thinks about a growth. So originally I was going to build this out to year over year over year and think about growth and acceleration of your portfolio. And what does that look like? Right now, I don't think that will have much of an impact on this spreadsheet. dividend we talked about the estimation of you know for my after tax what types of dividends am I going to see on average in this case I put in 2% if you have a lot higher type of stock portfolio that maybe pays a

little bit higher of dividends you can up that to 3, 4 or 5% if you think it's a little bit lower you can change that down to 1.5% so again we allow that to change and then the qualified dividend rate is just thing, again, that what percentage of that is long term versus short term? Again, when I looked up the standard like an S&P 500 index fund, about 95% of that was long-term capital gates. So we plugged that in 95%, but you can change that down to 90%, or 80%, to see how, you know, things might change over time. The withdrawal percentage is pretty straightforward.

What are you going to take out of your portfolio? The assumption here is 4%. 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. Line 9, actually, I've removed. So it's there, but I actually, in the pink or purple capital gains table, I updated my spreadsheet to calculate in the capital gains tax so that 0.15 and 20%. So that line actually doesn't do anything in that one.

So I actually can get removed. And then the- That's a note. This is all for the 2025 tax code. Is that correct? This is all 2024. is 2024. Okay. So if you're looking at this and it's five years in the future and you find our episode and the annals of the internet, you will need to update these tax tables with the correct assumptions for that year. Yeah. And then Roe 10, the taxable that's growth. That's basically the

assumption of, okay, how much is actually going to be a gain when I sell? So in this case, we used 75%. So the assumption is I put in 25% of it. It's just the cost basis and it's grown. 75%, you can change that. If you think it's more around 50% for you in your situation, you can alter that. And then the last item there is, again, am I going to make any income in addition to all the things that I'm pulling from my retirement accounts? So in this case, the assumption was 50,000 that I would be making in addition to if you feel like, okay, nope, I'm actually fully retired. You can take that down to zero and it will recalculate everything. Again, we talked about those buckets of income tax rates.

It will remove that from that to be able to calculate what things impacted at income tax and then the capital gates tax. Awesome. So, perfect. These are the basic things that you'll need to play around with to do it. It's a very simple model, even though that might have been, you know, there's a lot of good detail that goes into it. But boiling it down to these inputs is really wonderful and 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 do.

Sure. Yeah. The power your work. Sure. I know the notes. I just, there's a lot of assumptions that are made. You cannot do this for every single scenario. So I just tried to highlight some of the assumptions I assumed. 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 owe at the end of any given year. But there are some assumptions built in there. So I tried to at least detail that out. 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 a $2 million, $5 million, 10 million. So that just continues to go down all the way up to what I think I did a $20 million portfolio. I figured that was probably sufficient. And then in the third columns, the JKL ones there, those are just the tables. Those are all the calculation tables I use. So here is all the Mary File jointly. If you really want to change that, up to single, you can go pull the single table and actually update those and put that information in, or we can update that for folks that they'd like, the capital gain table.

And for folks who are totally new to this and don't, don't, you're not used this. You just Google income tax brackets to income tax table and you will find these for the latest year and they will populate in a very similar format to this. 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 once you just Google it 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 overall, you know, where do we lay at? 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 withdrawals, how much cash do I actually pull out? and then we just graph that here on the very far right.

I want to call out here. I want to call out another resource that you did not construct on this that I think is a wonderful companion resource to this, which is Sea Fire Sim. Are you familiar with that product? I am, yes. I haven't used it a lot, but I have heard a lot of good things about it. We interviewed the creator of Seafire Sim, Lauren,

and it's a really powerful tool that has a large amount 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 owned was that it does not consider the tax impact of those portfolios. So between this tool, see Fireson.com,

which is completely free resource for folks in the fire community, you could build the types of portfolio that you'd be really comfortable with in terms of feeling like they would support a certain amount of withdrawals. And then you can increase that amount by the pre-tax amount needed to fund fire using Mark's spreadsheet that we've built here.

I think those two things would really be a really powerful way to feel comfortable with how much you need on a pre-tax basis. How much you need to generate, what kind of portfolio you need to generate the pre-tax spending power to fuel your lifestyle at 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 fees. for someone who is looking for maybe twice as much as what the average person searching for fire wants. I think that's the answer to a lot of these planning for scenarios here. Mark, what are you thinking about for your personal allocations in your life? Again, back to flexibility is really where I'd like to be. So I try to have as many different levers that I can pull so that based upon what the environment's like in the future,

I will be able to have that flexibility to be able to move about over the last set of years, getting a little bit more into real estate. So I've been allocating a little bit more into single-family rentals and syndications to have that as an option to play with. But also looking at making sure I'm balancing my rock and my traditional accounts and even building up my after tax and thinking about if I was to actually retire early, before I'm going to withdraw from my traditional or my Roths, how would I just do that? 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 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 remarkable headline. I love it.

And that's what you've proved out here, I think, pretty well with these documents and really powerful resources. Thank you. Yes. I definitely agree. It's been, eye-opening, 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. 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. Hey, show me what this would look like in these questions that I have. I use these on a very frequent basis. You have to verify and validate some of the information that comes out, but they've been very helpful tools if you're not very

spreadsheet or data oriented. And Mark, well, the last question here. What do you do professionally again? Could you remind us? Sure. I work in IT. I manage teams and budgets at a Fortune 500 government. And it involves building spreadsheets and creating PowerPoint presentations?

Lots of PowerPoints, lots of spreadsheets. And yes. All right. Well, I can tell. That wasn't a big stretch for me on this one 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. 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 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, like that basic fact of life needs to be restated to hit home on effective tax, tax rates. I think he 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 in a lot of years. I think 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 planning tool. And I think, again, the big headline is tax consideration does not change the basis that one needs by so much that it fundamentally changes the equation about how to achieve fire if you're looking for that next level of spending. It's that, you know, a lot of people use the $60 or $80,000 a year mark. And I think a good, about half our audience probably wants more than that. The good news is, the bad news is you've 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 be in a slightly higher marginal tax bracket. You pay a slightly higher effective tax rate. Good grief. I just adjusted the show on it and I still got it wrong in the verbiage. It's a lot of stuff thrown at you. I just can't think 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 method that speaks to you the most.

And like you said, Scott, we are going to include these tax tools. We're calling the money tax tools at biggerpockets.com slash money tax tools. But if you type in money tax tool, it'll take you there too. Yeah. And then if you get into the $50 million net worth range and are dealing with the tax consequences of that, please send me a link to your podcast because I will be subscribing 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.