25x Your Expenses — But Pre-Tax or Post-Tax?
The 4% rule is one of the most widely cited numbers in financial independence planning. Multiply your annual expenses by 25, and that's your FI number. It's clean, intuitive, and a genuinely useful starting point.
But there's a quiet assumption buried in that math: it treats every dollar you withdraw as a dollar you can spend. In reality, withdrawals from traditional 401(k) and IRA accounts are taxed as ordinary income. And depending on how much you withdraw, how your accounts are structured, and where you live, that tax bill can be substantial.
If you need $100,000 a year to live on, you may need to withdraw $120,000–$135,000 to cover both your expenses and the taxes on those withdrawals.
For modest retirement spending, this gap is small — the standard deduction absorbs most of the tax. But at higher spending levels, the progressive tax system stacks up quickly, and state taxes in places like California compound the problem. The 4% rule doesn't account for any of this.
The Tax-Free Zone: When Taxes Barely Matter
Not every retiree needs to worry about this. If your retirement spending is modest, federal taxes on withdrawals are minimal or even zero.
For a married couple filing jointly in 2024, the standard deduction is $29,200. That means the first $29,200 withdrawn from a traditional 401(k) or IRA is taxed at 0% — no federal income tax at all. The next ~$23,200 falls in the 10% bracket, adding about $2,320 in tax.
At $50,000/year in Retirement Spending
A married couple withdrawing $50,000 from traditional accounts would owe roughly $2,300 in federal tax — an effective rate of about 4.6%. The "real" multiplier is roughly 26x instead of 25x. The 4% rule is close enough.
This is why the 4% rule works well for LeanFIRE — when your annual spending is under $60,000 or so, the standard deduction and low brackets keep taxes manageable. The gap between 25x and what you actually need is small enough to absorb.
How Taxes Scale with Spending
The real problem appears as retirement income grows. The U.S. federal tax system is progressive — each additional dollar of income is taxed at a higher rate. At $100,000 in spending, you're into the 22% bracket. At $200,000, you're hitting 24%. And at $300,000, a meaningful portion is taxed at 32%.
The table below shows what happens when a married couple needs to withdraw from traditional (pre-tax) accounts to fund different levels of annual spending. Federal taxes only — we'll add state taxes in the next section.
| Target Spending | Est. Federal Tax | Total Withdrawal Needed | Effective "Multiplier" | vs. Simple 25x |
|---|---|---|---|---|
| $50,000 | ~$2,300 | ~$52,300 | ~26x | +4% |
| $100,000 | ~$10,500 | ~$110,500 | ~28x | +12% |
| $150,000 | ~$22,000 | ~$172,000 | ~29x | +16% |
| $200,000 | ~$35,000 | ~$235,000 | ~29x | +18% |
| $300,000 | ~$58,000 | ~$358,000 | ~30x | +20% |
These are approximate figures for a married couple filing jointly, withdrawing entirely from traditional (pre-tax) accounts. The key pattern: the gap between 25x and the "real" multiplier widens as spending increases, because each additional dollar is taxed at a higher marginal rate.
The State Tax Layer: California as a Case Study
Federal taxes are only half the picture. If you live in a state with income tax, retirement withdrawals from traditional accounts are taxed at the state level too. And some states are far more expensive than others.
California has among the highest state income tax rates in the country, with a top marginal rate of 13.3%. For a couple withdrawing $200,000–$300,000 per year, California adds roughly $12,000–$22,000 in state tax on top of the federal bill.
| Target Spending | Federal Tax | CA State Tax | Total Tax | Effective Multiplier |
|---|---|---|---|---|
| $50,000 | ~$2,300 | ~$500 | ~$2,800 | ~26x |
| $100,000 | ~$10,500 | ~$4,500 | ~$15,000 | ~29x |
| $150,000 | ~$22,000 | ~$9,000 | ~$31,000 | ~30x |
| $200,000 | ~$35,000 | ~$14,000 | ~$49,000 | ~31x |
| $300,000 | ~$58,000 | ~$22,000 | ~$80,000 | ~32x |
At $300,000 in target spending, a California couple needs a portfolio roughly 28% larger than the simple 25x calculation suggests. That's the difference between needing $7.5 million and needing $9.6 million. Not a rounding error.
No-Income-Tax States
If you live in Texas, Florida, Nevada, Washington, or another state with no income tax, the federal-only column is your reality. The gap between 25x and your real number is smaller — but still material at higher spending levels. These states typically make up the difference through higher property or sales taxes, which affect your spending level — but they don't tax your withdrawals.
Account Mix Changes Everything
The tables above assume all withdrawals come from traditional (pre-tax) accounts — the worst case for taxes. In practice, most people have a mix of account types, and that mix dramatically affects how much tax they owe.
Traditional 401(k) / IRA
Withdrawals are taxed as ordinary income at your full marginal rate. This is the most tax-expensive source of retirement income.
Roth 401(k) / IRA
Qualified withdrawals are completely tax-free. Every dollar withdrawn is a dollar you can spend. Roth accounts are the closest thing to making the 4% rule work as advertised.
Taxable Brokerage
Only the gains are taxed, not the full withdrawal. Long-term capital gains rates (0%, 15%, or 20%) are lower than ordinary income rates. Plus, you can control timing to manage the tax bill.
The High-Income Cliff on Investment Gains
Taxable brokerage accounts look favorable at moderate withdrawal levels, but the advantage erodes at higher incomes. Above roughly $583,000 in taxable income (married filing jointly), the long-term capital gains rate jumps from 15% to 20%. And above $250,000 in modified adjusted gross income, the 3.8% Net Investment Income Tax (NIIT) kicks in on investment income — including capital gains, dividends, and interest. At FatFIRE withdrawal levels, that means your "favorable" capital gains rate can effectively reach 23.8%, well above what most people assume when they think of taxable accounts as tax-efficient.
This is why account mix matters so much. A couple with $3 million split evenly across traditional, Roth, and taxable accounts can draw from each strategically — filling lower tax brackets with traditional withdrawals, covering the rest with tax-free Roth, and selling appreciated stock at favorable capital gains rates.
Someone with 100% Roth doesn't need a tax adjustment at all. Someone with 100% traditional needs the largest adjustment. Most people fall somewhere in between.
The optimal withdrawal strategy — which accounts to tap first, when to do Roth conversions, how to manage capital gains — depends on your specific mix, your spending level, and your state. This is exactly the kind of complexity that a personalized projection handles better than a rule of thumb.
What This Means for Your FI Number
The 4% rule is not wrong — it's a useful approximation that has a blind spot. For people with modest retirement spending, the blind spot is small enough to ignore. But if you're targeting $150,000 or more in annual spending, particularly in a high-tax state, the gap between the simple 25x number and what you actually need can be hundreds of thousands of dollars.
The Practical Takeaway
- Under $60K/year spending: the 4% rule (25x) is close enough. Taxes add a small buffer requirement, but you're in the neighborhood.
- $100K–$150K/year spending: plan for 28–30x expenses instead of 25x. The tax markup is 12–20% depending on state and account mix.
- $200K+ spending in a high-tax state: the effective multiplier can reach 31–35x. At this level, the 4% rule becomes closer to a 3% rule once taxes are included.
- Heavy Roth allocation: reduces or eliminates the tax adjustment. If you've been maxing Roth contributions, your 25x number may be accurate as-is.
The MoneyOnFIRE engine models this explicitly. It projects your portfolio year by year, simulates withdrawals from each account type, calculates federal and state taxes on those withdrawals, and determines the actual portfolio size needed to sustain your target spending after taxes. You don't need to estimate multipliers — the engine computes the real number for your specific situation.
Key Takeaways
- The 4% rule (25x expenses) ignores taxes on withdrawals. For modest spending, the gap is small; for higher spending, it's material.
- At $150K/year in retirement spending, you may need 29-30x expenses instead of 25x. At $300K/year in California, the multiplier can reach 32x or higher.
- Account mix is the single biggest lever. Roth withdrawals are tax-free; traditional withdrawals are taxed as ordinary income; taxable accounts fall in between.
- The 4% rule isn't wrong — it's a useful starting point that understates the target at higher spending levels, especially in high-tax states.
What's your real number?
The MoneyOnFIRE engine models taxes on your specific account mix, state, and spending level — so you get a FI number that accounts for what you'll actually owe.
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