If you're based in the US, you might want to start by computing how much you can take out tax-free in terms of capital gains from your standard brokerage account.

From there, you can run 2-3 scenarios of how much you eventually need from pre-tax accounts for a year, and come up with a rough overall tax rate as a guide for how much to discount the money in the pre-tax plans.

Obviously the full solution is a LOT of number crunching over a full time series of withdrawals, but that's a LOT of work to get right.

The 4% safe withdrawal rate assumes you pay all of your expenses from this money, which does include all the taxes that you might pay.

So that means you have to estimate how much you'll pay in income tax in retirement, and include that in your expenses. Use a tax calculator too, of course. As you get closer to retirement, redo the calculation for more accurate numbers.

Also remember that you're paying taxes on your cost basis - if you're pulling out $100k per year, but you initially bought those shares for $55k, then you're only paying $45k in taxes, and in this example almost certainly at long term capital tax gain rates. So one more thing to account for! I definitely wish there was a simpler answer.

JeanniBB...

Let me first make sure I understand your question. Based on how you explained your situation, you calculated your expenses to be "after tax" expenses. So your question is, how do you put "taxes" back into equation to determine your FI number. The simplest approach would be to include your Federal, state and local taxes into your expenses and assume (at a minimum) you'll pay the same taxes in retirement as you pay in working. This a "simple" assumption to make, because you can easily look up those numbers from your tax return. But you'll more than likely pay less taxes, but to estimate future taxes is an exercise in itself.

So to answer your question, you need to make an assumption on the taxes you will pay into retirement and include that into your expenses. So if your "after tax" expenses sum up to $100k, you'd want to add your annual tax payments to that number. Let's assume you paid $20k in Federal, state and local taxes (which you can also look up on your pay statement to estimate this number). That would give you $120k in "before taxes" expenses. You multiply 120k * 25 and it calculates your FI number to be $3 million. That's the quick way to do it.

The standard way the FI community calculates your FI number is to first know what your living expenses cost you. You have a degree of control on how much you spend. If you focus first on controlling your expenses and minimize your living costs, you can reach FI much faster. Following this approach might lead one to over fixate on their expenses, and sacrifice today for the future. But there is another way to think about how to calculate the FI number.

Another approach is to focus on your long term savings rate, which I call your "investment rate". By long term savings rate, I'm describing the money you put in a 401k, individual IRA, or taxable brokerage or mutual fund account that you will not touch until retirement. That is your "true" savings rate, when it comes to pursuing FI. All other funds, even if it is going into some "savings" account, is actually savings that will convert to spending at some other time in the future (to buy a car, down payment on home, furniture, vacation, or emergency expenses). For me, it's a much simpler calculation because I know how much I'm contributing to my long term savings accounts (my 401k, my individual IRA and my taxable brokerage account). The rest I assume are expenses. So rather than count every penny I'm spending to live on, I instead look at how much I invest in my long term savings account to calculate my "investment rate". Once you know your investment rate, you can calculate your FI number.

So, let's go back to your example, where your Gross income is somewhere between $130-150k. How much of that is going into "long term savings" vehicles (or accounts such as 401k, Individual IRA or taxable brokerage)? Let's assume you contribute a total of $30k a year into your "long term savings". Subtract $30k from your gross income and your "expenses" will be in the $100-120k range. Multiply that by 25x and you get your FI number. It's a similar approach as earlier, except the ChooseFI approach focuses first on knowing your cost of living (expenses), where as this second approach is focused on knowing what you contribute to your "long term savings" and assume the rest are expenses. Both approaches multiply expenses 25x. The difference is in how you calculate your living expenses.

There is a good calculator that estimates how long it will take you to reach FI, based on your "investment rate" (or savings rate as ChooseFI calls it). Here is a link to that calculator:

Simpli-FI.money | S.E.M. Savings Rate Calculator - Simpli-FI.money

S.E.M. Savings Rate Calculator - Simpli-FI.money

Simpli-FI.money

I hope this answers your questions and good luck on your FI journey!

Coach Holdren