WD rate: How do you think about taxes?

[Another Reader]

Okay that is fair.

A high COL may need more than what your SS will provide. So even with SS you may still need cash flow from investments. But that is after you have turned 65.

If you want to Retire Early, you need that same level of cash flow without SS.

Many people rely on their investments early in retirement and then reduce their withdrawal rate when Social Security and pensions kick in. You can retire very early and have decades before you are eligible to collect Social Security if you do it right. Look at some of the blogs written by early retirees, including Root of Good, written by ER member FUEGO, Go Curry Cracker, and Mr. Money Mustache, to name a few.

I live in the highest COL area in the country, Silicon Valley, and did not collect Social Security when I retired early. It's a nice check to get every month now, but I would be fine without it.

 

[kgtest]

I wrote my own RIP (retirement income planner) tool and it includes taxes, but as others have said, many RIP tools assume tax to be an expense. I used actual tax tables for ordinary income and capital gains so it is always calculating the correct tax. In practical terms though our effective tax rate since we retired has been about 10%. It is low because a lot of our income is from cap gains. When SS kicks in, our tax bracket will change and so will the effective rate, unfortunately. The real killer is when I have to start taking RMDs from the IRA in two years. It will be a double whammy of the delayed SS and the RMDs. Income goes up but a whole lot of that ends up going towards taxes because of the new bracket. Not sure how the new tax law will affect all of this.

Word on the street is that the calculations for RMD will be altered, assuming moving the needle towards a longer withdrawal period to match the longer life expectancy. Which would equate to having to take a little less as its stretched over a longer period. Of course this is just a guess.