Safe Withdrawal Rates – More Things to Know

TL;DR

Don’t forget taxes and advisory fees, the impact can be significant (think a good third of your withdrawals).
Assume a generous time horizon, probably more than the one you currently have in mind.
State and local taxes matter about half as much as you’d think.
A fully fixed withdrawal rate is probably too simplistic.

It is usually assumed that these withdrawals represent your pretax income. You should budget for taxes, especially if your assets are in the seven figures or higher.
If you are paying a financial advisor a percentage fee, that will also come out of the withdrawal amount.
These charges can be substantial. If you determine your safe withdrawal rate to be 3.7%, your average tax rate is 10%, and you pay your advisor a fee of 1% on your financial assets, your initial safe ‘spending’ rate is really 3.7% – .37% (taxes) – 1% (fees) = 2.33%

It’s tempting to look at average life expectancy figures, but that’s misleading (in case you’re curious, according to the CDC, it’s 81.1 and 75.8 years for women and men respectively)
First off, conditional on you already having made it to 65 (or whatever the number may be), these numbers will be greater
Second, you don’t want a 50% chance of running out (I’m simplifying here – median life expectancy is not the same as the average – but you see my point). It’s best to leave a buffer
Third, if you are the type who has significant retirement savings you’re probably also the type who has a greater than average life expectancy
A financial advisor recently suggested I use age 94 as my time horizon on the assumption that I have a 25% chance of making it to or past that age, quite a bit more than my current statistical life expectancy (and maybe a tad optimistic if you ask me)
In summary: err on the side of caution. If you are 60 now, assume at least 30 years, 35 would be better
This is probably worth its own post. I might dig into this a little more later

While playing around with some of these planning tools, I noticed that it doesn’t matter that much which state you live in, even though tax rates can be quite different. Below is an example.

None (e.g. FL, TX)	Mid (most)	High (e.g. NYC, CA)
3.8%	3.7%	3.6%

So only .1% points (or about 3% of the total withdrawal amount) up or down, even though the difference in tax rates would suggest about twice that. Why?
- The safe withdrawal rate generally assumes poor returns. You will be spending mostly the principal, and, if a lot of your assets are in taxable accounts, you won’t pay taxes on that portion (IRAs are a different story).
- Also: there are no state taxes on treasuries, so that portion of your portfolio will be unaffected.
Of course, if returns are great, those tax differences can affect the outcome more, but that’s on the upside and thus somewhat less painful.
As you can tell (and probably already knew), taxes are tricky. A good software and or advisor will take these things into account.

The word ‘safe’ in safe withdrawal rates needs to be taken with a grain of salt. There is no 100% certainty of success. Here are some of the risks:
- Default/counterparty risk: Even if one were to build a pure treasury bond ladder, one would still rely on the United States treasury to pay its debts in full and largely on time. Likely but not 100% certain. Recall we are looking at time horizons of several decades.
- Inflation risk. A Tips ladder should protect against that, but still with the residual risk of a US default.
- Poor market performance: There is always the risk of just plain ill-timed or protracted bear markets.
Ultimately, one should build a reasonably prudent portfolio and be prepared to adjust withdrawal rates when worse comes to worst.
This may or may not be a consolation: with a well-diversified and sufficiently prudent portfolio, these risks will likely only affect you under very adverse economic scenarios, where everyone needs to tighten their belts some. Shared misery, so to speak.
There is good news too: if you set things up well, the odds are in your favor of ending up with more than planned – still, it’s best to be prepared for the worst.

Some providers have tools that account for how your needs are likely to change over time, social security and other income, state and local taxes, etc. Those can be useful.
Speak to your financial advisor or look at their website/app and see what you can find.

There is more to say and look into here, but I’ll leave it at that today. Some topics we might write about later:
- A closer look at life expectancy
- Flexible withdrawal rates
- Sniff checking the industry consensus
- What can you earn on annuities and ladders? Are there ways to inflation proof them?