When people use the 25x (or 4%) or similar shorthand to determining their financial independence, I do wonder if they think about where taxes fits into that equation. The typical math is usually something similar to: I spent $100K last year and I've saved $2.5M, so I'm 25x. But how much do you need to withdraw to receive $100K per year? If everything is in a Roth IRA, then fantastic. But for most people, there are tax consequences to their withdrawals, unless their needs are low enough to sit within the 0% tax bracket.
Then of course there are health care expenses to consider on top of current expenses.
And, there's the issue that if your current spending is $100K/year, when you retire in 10 years your spending needs would be $134K at that point (assuming 3% inflation), so your portfolio needs to keep up to be 25x of your retirement date number. In this case, your $2.5M needs to be $3.3M when you retire in 10 years. But again, taxes need to be considered, so the number is higher depending on your asset allocation and tax situation.
The point being that the equation "Current Spending * 25x = FI" is overly simplistic.
Then of course there are health care expenses to consider on top of current expenses.
And, there's the issue that if your current spending is $100K/year, when you retire in 10 years your spending needs would be $134K at that point (assuming 3% inflation), so your portfolio needs to keep up to be 25x of your retirement date number. In this case, your $2.5M needs to be $3.3M when you retire in 10 years. But again, taxes need to be considered, so the number is higher depending on your asset allocation and tax situation.
The point being that the equation "Current Spending * 25x = FI" is overly simplistic.
Statistics: Posted by LeftCoastIV — Sat Jan 06, 2024 1:42 pm — Replies 14 — Views 623