Market Mini: 20 Years of Safe Withdrawal Rates

Posted By on Mar 28, 2014|0 comments

Imagine starting your first year of retirement with a withdrawal rate of 10.5%. This sounds like a crazy dream, as it is vastly different from the original research by Bill Bengen in 1994 that supported a safe 4% rate.

However, higher withdrawals can be possible with layering of different decision rules before and throughout retirement. As I mentioned before, a 10.5% withdrawal rate would only occur if everything was in your favor.

Alternatively, withdrawal rates could be as low as 1.25% based on the decision rules that Michael Kitces discussed in a 2012 article titled, “Practical Applications of 20 Years of Safe Withdrawal Rate Research,” from The Kitces Report (To learn more about the newsletter and sign up, visit

Kitces’ research provides financial advisors with the ability to help clients answer one of their primary questions: “What is the safe withdrawal rate for my particular goals?”

He mentions that individuals should start with safe withdrawal rates no higher than 4% and adjust this over time based on varying factors.

Layering a Client’s Needs to Determine Safe Withdrawal Rates

The approach presented by Kitces builds on a theory Bengen suggested in 2006, termed the “Layer Cake” approach. His theory was that the initial withdrawal rate should be adjusted based on clients’ needs, with each need representing a layer.

Kitces suggests 10 adjustments:

  • Base Withdrawal Rate
  • Fee/Alpha
  • Taxes
  • Legacy/Longevity Hedge
  • Time Horizon
  • Diversification
  • Spending Flexibility
  • Risk Tolerance
  • Valuation Environment
  • Tactical Asset Allocation

Adjustments vary as each client is different. For example, a client who is beginning retirement at age 55 must deplete investment accounts before tapping into his Social Security. This particular client may have different needs than an individual who chooses to continue working in some capacity or a client who wishes to pay for her grandchildren’s education.

The basis of these rules is a compilation of research conducted and published by a variety of researchers. However, as Kitces explains, no research has been conducted to determine if the layers are additive. What this means is that a 10.5% initial withdrawal rate may not, in fact, work because some layers may cancel each other out.

Kitces’ Rules to Adjust a Withdrawal Rate throughout Retirement

Below are the rules that Kitces provided as well as an example of how it works in practice.

  • Safe Withdrawal Rate Baseline: 4% – 4.5% with a ‘balanced’ asset allocation (e.g., stock exposure of 40% to 70%).
  • Impact of Expenses and Alpha: Subtract or add 1% for associated expenses and investment advisory fees to increase the safe withdrawal rate by any expected portfolio alpha.
  • Impact of Taxes: Reduce the safe withdrawal rate by approximately 0.25% to 0.75% based on low, moderate and high taxation.
  • Leaving a Legacy (or Hedging Against Longevity): Reduce the safe withdrawal rate by up to 0.4% based on the amount of money being left to beneficiaries.
  • Impact of Time Horizon: Decrease the withdrawal rate by 0.5% for periods longer than 40 years, and add as much as 1% for periods of 20 years or less.
  • Diversification Benefits: Increase the safe withdrawal rate by 0.5% to 1.0% for significant multi-asset class diversification.
  • Spending Flexibility: Increase the safe withdrawal rate by 0.5% to 1.0% for clients willing to make modest to significant spending changes.
  • Risk Tolerance: Increase the safe withdrawal rate by 0.5% to 1.0% for clients with significant tolerance for risk and a willingness to make drastic spending changes.
  • Impact of Market Valuation: Increase the safe withdrawal rate by 0.5% in moderate to average valuation environments and 1.0% in favorable valuation environments.
  • Tactical Asset Allocation: Add 0.2% to the safe withdrawal rate for portfolios that will tactically reduce exposure in high valuation environments and increase equities at favorable valuations.

Based on the rules above, Kitces provided this example:

Assume a conservative client starts with a safe withdrawal rate of 4.0%. The client pays a total fee of 1.2%, reducing the safe withdrawal rate to approximately 3.6%. The client also faces a moderate tax rate of 15% on capital gains and 25% on ordinary income, which reduces the safe withdrawal rate by another 0.5%, down to 3.1%. However, the client couple is already in their late 60s and decides that a 25-year time horizon is sufficient, increasing the safe withdrawal rate by 0.5%. In addition, their portfolio is extremely well-diversified across multiple asset classes, further pushing their safe withdrawal rate 0.75% higher, to a total of 4.35%.

The couple also has moderate flexibility for making spending cuts, as they are willing to cut travel and some other expenses for a few years if markets are difficult. This spending flexibility increases their safe withdrawal rate by another 0.5%, up to 4.85%. However, given their conservative nature, the couple still prefers an extremely high probability of success and to minimize the risk of spending cuts, so they do not want to increase their safe withdrawal rate further based on their risk tolerance.

In addition, the environment the clients are retiring in would be one characterized by fairly average long-term valuation levels, which increases their safe withdrawal rate by 0.5%. Furthermore, they are more concerned about preserving their assets than being exposed to maximal growth, and are willing to adjust their asset allocation tactically to reduce equity exposure if valuations rise excessively, increasing their safe withdrawal rate by an additional 0.2%. This brings their total safe withdrawal rate up to 5.55%.

Given their conservative nature, though, the clients ultimately decide that they would like to hedge against longevity by reducing their spending to increase the likelihood of a legacy to be available for long life (or “at worst” to leave to their children, reducing their safe withdrawal rate by 0.25% to 5.3%.

Thus, as a result of the various safe withdrawal rate adjustments available, the client’s safe withdrawal rate would be 5.3% of their current assets, with the dollar amount adjusted annually for inflation in future years.

Applying the Rules for a Safe Withdrawal Rate

Based on the information Kitces provided, I specifically believe his research leads to two important areas that advisors and clients need to discuss:

  1. Consider reducing the safe withdrawal rate in extreme combinations of high valuation and low interest rate environments.
  2. Adjust stock exposure higher throughout retirement based on willingness to make adjustments to income, and/or take on more stocks for growth inflation and income erosion.

The final point that Kitces makes is on the use of annuities, both with a single premium immediate annuity and a variable annuity. The immediate annuity decreases the risk of running out of money; however, due to low interest rates, a safe withdrawal rate may be lower than 4%. Additionally, expenses on variable annuities with a guarantee and restrictions on inflation adjustments increase the probability of having money throughout retirement, though it does not necessarily increase the chances of a sustainable withdrawal rate.

Financial advisors can effectively provide advice to clients on safe withdrawal rates using the compiled research in order to adjust their needs based on their own circumstances.

Other Kitces’ articles you may find interesting that relates to this post can be found here:

To learn more about The Kitces’ Report newsletter and to sign up, visit

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