5 Factors That Determine Your Retirement Withdrawal Rate (And Which One Is Most Important). The extent that the household can adjust spending, 3. Blanchett found the level of guaranteed income to be by far the most important factor in explaining optimal spending rates from investments. Click here to download Wade's analysis of the 4% rule's performance around the world. inRead invented by Teads He also found that withdrawal rates should be lowered for people with decreased spending flexibility (i.e., more fixed spending needs and those with a preference of stable spending over time), and higher for portfolios with higher stock allocations and return assumptions. The latter group can be more aggressive because they can afford to have their portfolios fall to zero. Again, the most important factor is the level of guaranteed income—more income from outside the portfolio supports a greater ability to accept a lower success rate for the investment portfolio. In such instances, people often feel comfortable choosing a retirement income strategy with a higher failure rate for the investment portfolio than is commonly considered “safe.” A simple focus on a retirement income strategy that applies a low failure rate for the investment portfolio is woefully incomplete. This narrow focus ignores several elements of retirement income, including: 1. the lost potential enjoyment from spending more, even if it means having to cut back later, 2. the flexibility retirees may have to cut their spending at a later date, 3. the availability of other spending resources outside of the financial portfolio, 4. the lowered survival probabilities in late retirement, 5. any goals to leave a bequest, and 6. the length of the “failure” condition. An overreliance on only spending at a “safe” withdrawal rate may unduly sacrifice lifestyle in early retirement.
There’s a reason workers are advised to save aggressively for retirement. Though you might ultimately end up spending less money in retirement than you do during your working years, there are certain costs, like healthcare, that have a tendency to sneak up on seniors. Throw in the fact that a good 30% of 65-year-olds and over still carry mortgage debt, and it’s no wonder so many retirees wind up struggling financially to some extent. But while you can’t bust out a crystal ball and determine exactly how much money you’ll need in the future, you can do your part to prepare for the lesser-known expenses you’re bound to encounter in retirement — specifically, taxes.
While most of us don’t necessarily consider taxes an expense in the conventional sense of the word, in reality, you might underestimate your taxes more so than any other individual spending category. And if you don’t factor tax payments into your retirement budget, there’s a good chance you’ll come up short on a whole. Here are some of the taxes you might face as a senior:
1. Retirement plan withdrawals
Unless you have a Roth IRA or 401(k), the money you withdraw from your retirement savings will be taxed as ordinary income. This means that the tax bracket you fall into as a senior will dictate the percentage of savings you lose to the IRS each time you take a withdrawal.
Furthermore, once you turn 70 1/2, you’re actually required to start taking minimum distributions from your retirement plan unless you hold your savings in a Roth. This means that there will come a point when you’ll be forced to pay taxes, like it or not. And if you think you can get away with ignoring those required distributions, try again — for every dollar you fail to withdraw, you’ll lose $0.50 as a tax penalty. So if your mandatory withdrawal amount for the year, based on your account balance and life expectancy, is $3,000 and you don’t take a dime of it, you’ll lose $1,500 of your hard-earned savings.
2. Social Security benefits
While some people — namely, those without much else in the way of income — don’t pay taxes on Social Security, you shouldn’t count on getting those benefits tax-free. To see whether you’ll be taxed on Social Security, you’ll need to calculate what’s known as your provisional income.
To do so, add up the amount of income you receive outside of Social Security (such as your retirement plan withdrawals) plus 50% of your yearly Social Security benefit amount. If your total falls…