Cody Garrett and Sean Mullaney: ‘For Most Americans, You’re Going to Pay Less Tax in Retirement’

Episode Summary

Executive Summary: Christine Benz and Amy Arnott speak with Cody Garrett and Sean Mulaney about tax planning for early retirement, emphasizing that “early” means pre-Medicare age 65. The guests argue that retirees should focus on quantitative planning, not fear-based tax narratives, and that tax-efficient drawdowns often favor taxable accounts first, selective Roth conversions, thoughtful asset location, and updated assumptions about RMDs and future tax rates.

Main Topics: Defining early retirement and the target audience (Priority: 5/5): The guests define early retirement as any retirement before Medicare eligibility at age 65, while noting the book also applies across later retirement phases. The discussion broadens the audience to include people who retire earlier than planned because of layoffs, health issues, or family obligations. Withdrawal rates and spending flexibility (Priority: 5/5): They argue the 4% rule is best treated as a rule of thumb, not a hard rule, and should be paired with variable income sources such as Social Security and pensions. They caution against overly conservative assumptions that can lead to underspending. Moving from fear-based tax talk to quantitative planning (Priority: 5/5): The guests criticize marketing language that overstates tax danger and creates urgency. They prefer scenario analysis and a framework that treats tax decisions as interlocking, adjustable over time, rather than as binary now-or-never choices. Account selection during accumulation (Priority: 5/5): They explain how traditional contributions reduce income at the top marginal rate, while retirement withdrawals are taxed from the bottom up. This supports a nuanced mix of traditional, Roth, and taxable accounts rather than an automatic Roth-first approach. Tax-efficient drawdown strategies in retirement (Priority: 5/5): The book’s core message is to spend taxable accounts first in many cases, preserve Roth assets for strategic flexibility, and consider tactics such as Roth conversions, tax-loss harvesting, and tax-gain harvesting based on bracket management and ACA premium credits. Asset location and portfolio structure (Priority: 4/5): They recommend placing bonds in traditional tax-deferred accounts and equities in taxable accounts when appropriate, to reduce annual tax drag and potentially lower future RMDs. Asset location is presented as a tool for opening more tax-planning options later. RMDs, Social Security, and the changing retirement tax landscape (Priority: 4/5): The guests argue that many worries about RMDs are outdated because the standard deduction is higher, RMD tables were revised, and RMD start age has been delayed. They also contend that recent policy trends have been relatively favorable to retirees.

Key Arguments: Early retirement should be defined as before Medicare eligibility, since that is when health insurance and tax planning constraints change materially. The 4% rule should be treated as a guideline, with variable income sources and spending adjustments incorporated into planning. Fear-based tax narratives can push retirees into unnecessary urgency and bad decisions; better planning comes from scenario analysis and current facts. Traditional contributions get a deduction at the top marginal rate, while retirement withdrawals are taxed from the bottom up, making pre-tax contributions often more attractive than people assume. Taxable brokerage accounts provide flexibility and tax efficiency early in retirement, especially before age 59.5 and before Social Security/RMDs begin. Roth conversions are not universally beneficial; they should be timed around ACA subsidies, Social Security, and RMD timing, with the strongest window often in the 66-69 age range. Asset location matters: bonds generally fit better in traditional accounts, while equities can be efficient in taxable accounts because most dividends are qualified and capital gains can be managed. RMD fears are overstated because current rules are more favorable than in the past, with later start ages, revised tables, and higher standard deductions reducing the burden. Future tax-rate predictions are less useful than asking whether one’s own taxable income will rise, since retirement taxation depends heavily on personal income composition and timing. Politically, retirees are a powerful constituency, making large future tax hikes on retirees less likely than many commentators suggest.

Data Points: Definition of early retirement: Before Medicare eligibility, typically the month of the 65th birthday - Cody Garrett explains the book’s working definition of early retirement Share of Americans retiring before age 65: Around 70% - Garrett cites a study showing many Americans retire before 65 voluntarily or involuntarily Average retirement age: Around 62 - Christine Benz notes the commonly cited average retirement age 4% rule baseline: 25 times annual expenses - Garrett references the common FIRE community heuristic Single filer 2026 22% bracket threshold: About $52,000 of ordinary income - Garrett uses this example to explain marginal taxation Example 401(k) deduction: $20,000 contribution saves about $4,400 at a 22% marginal rate - Illustrates how traditional contributions reduce current-year tax Example retirement distribution needed for same effective rate: Over $240,000 - Garrett explains that withdrawals are taxed from the bottom up, so much more income can be realized before reaching an average 22% rate Employer-sponsored plan total additions limit for 2026: $72,000 - Mulaney describes the mega backdoor Roth opportunity Estimated RMD reduction from new tables: Roughly 7% - Mulaney says the IRS/Treasury updated RMD tables in 2022 RMD start age for those born in 1960 or later: 75 - Mulaney explains the delayed RMD start age under current law RMD percentage at age 75: 4.07% - Mulaney argues this is a conservative withdrawal rate RMD percentage at age 85: 6.25% - Mulaney cites this as another example of a manageable rate Electorate age 50 or older in 2024: 58% - Mulaney uses this to argue retirees are a major political constituency Typical bond yield mentioned: 4% - Mulaney uses it to explain why bonds are tax-inefficient in taxable accounts Typical dividend yield for VTSAX mentioned: About 1.1% to 1.2% - Mulaney uses it to show equity income is relatively tax-efficient in taxable accounts Qualified charitable distributions availability: At the point RMDs start - Garrett notes QCDs can soften the impact of RMDs for charitably inclined investors

Pivotal Quotes: "“We define that as any time before Medicare eligibility, which is typically the month of your 65th birthday.”" — Cody Garrett: Defines the book’s meaning of early retirement "“You should pay tax when you pay less tax.”" — Sean Mulaney: Summarizes the case for traditional contributions and strategic retirement withdrawals "“It’s time to move away from fear-based narratives about retirement taxes and toward quantitative analysis.”" — Cody Garrett and Sean Mulaney: Core framing of the book’s approach to tax planning

Implications: Listeners should plan taxes as a flexible, multi-stage system rather than a one-time Roth-or-traditional decision. For advisors, the message is to update RMD and retirement-tax assumptions, use scenario analysis, and prioritize tax efficiency without creating unnecessary fear or complexity.