[Gary]

Has anyone done analysis on what is the ratio of taxable to real income for FIREd folks?

I haven’t seen good analysis on this topic yet. When you FIRE, presumably you are not drawing down on your Roth or Traditional 401k/IRA, and are drawing from taxable.

Also given FIRE folks front-load their savings, it’s likely taxable accounts will be a huge portion.

With this context in mind, how do you project out how much of your income after FIRE will be taxable?

To a first approximation it seems this can be determined by how much you withdraw from taxable is cost basis vs growth (subject to tax).

What numbers for taxable vs “real” income do you use in your projections at retirement?

[Cody]

The typical tax-optimized way for FIRE folks to distribute early retirement income is to draw from checking/savings and taxable brokerage to meet their living expenses, but THEN they fill up their desired taxable income with Roth conversions – often to the top of the standard deduction or the 10-12% marginal brackets (sometimes even higher).

They also consider the impact of conversions on the health insurance Premium Tax Credit (PTC).

This often results in an effective tax rate under 10% throughout retirement.

Keep in mind that growth within taxable brokerage accounts is usually long-term and subject to favorable LTCG tax rates (usually 0% and 15%) – separate from ordinary income tax brackets.

[Adam]

I’m 38, targeting RE at 50-55 range. My strategy is drawing from:
1) Mega Backdoor Roth conversions I’ve been making the last few years and intend to continue until retirement.

2) Rental Income / Long Term Capital Gains from sale of said rental properties.

3) Likely some “fun” money from a tbd “passion / hobby job” which will honestly fund roth conversions of pretax 401k.

I’m starting some brokerage investments, however I’m capped out and at this point am still trudging on with Mega Backdoor Roth as I’m already on year 3 of my “ladder”.

P.S. I will definitely be capable of RE at 50, the only reason I might extend to 55 is supporting kids in/finishing college.

The additional pension growth is just gravy (utilities sector)

[Bill]

Your assumptions are wrong and would make horrible tax planning. Early retirees draw from all 3 of those buckets and often use Roth conversions to minimize total taxes and access their retirement accounts before 59.5.

[Rick]

If done methodically (medium to high savings rate) and not in an instant (inheritance, big stock liquidity event, sale of a business, etc), I expect most fire journey people feel that taxable income is something they control, both pre and post RE.

Pre RE, we decide pre tax vs Roth, tax loss harvesting, and investment real estate as the main levers to control taxable income.

Post RE, the levers expand to include tax gain harvesting, Roth contribution withdrawals, 72t plans, use of house sale and downsize proceeds, etc add more levers.

Then we will often “create” taxable income to fill up low tax brackets via things like Roth conversions.

So, I think you will find the ratio of taxable to total income is skewed by the “weird” behavior of a fire journey person compared to non fire journey people

[Author]

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