I have met more than one individual that have wanted to take more than 10% out of their investments for retirement.

They did not actually consider what percentage they needed, they were just thinking about the amount they wanted.

If one is to have enough money to last through retirement then there are several things one must consider.

Individuals can start safe withdrawal rates of greater than 4% and adjust this over time based on varying factors.

Michael Kitces’ research provides individuals with a great way to answer, “What is the safe withdrawal rate for their goals in particular?”

The approach presented by Kitces (2012) builds on an initial withdrawal rate adjusted up or down based on an individuals needs, like a “Layer Cake” (Bill Bengen, 1996).

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

Below, I will present the rules that Kitces provided followed by 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 Outperformance: Subtract or add plus or minus 1% for associated expenses and investment advisory fees and increase the safe withdrawal rate by any expected portfolio outperformance.

Impact of Taxes: Reduce 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 safe withdrawal rate by up to 0.4% based on the amount of money to leave to beneficiaries.

Impact of Time Horizon: decrease withdrawal rate by -0.5% for periods longer than 40 years, and add as much as 1% for periods of 20 years or below.

Diversification Benefits: Increase safe withdrawal rate by 0.5% to 1.0% for significant multi-asset class diversification.

Spending Flexibility: Increase safe withdrawal rate by 0.5% to 1.0% for clients willing to make modest to significant spending changes.

Risk Tolerance: Increase safe withdrawal rate 0.5% to 1.0% for clients with significant tolerance for risk and willingness to make spending changes.

Impact of Market Valuation: Increase safe withdrawal rate by 0.5% in moderate/average valuation environments, and 1.0% in favorable valuation environments.

Tactical Asset Allocation: Add 0.2% to 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:

“For instance, assume a conservative client starts with a safe withdrawal rate of 4.0%. The client pays total fees 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 with the framework, the client’s safe withdrawal rate would be 5.3% of their current assets, with that dollar amount adjusted annually for inflation in future years…”

Consider reducing the safe withdrawal rate in extreme combinations of high valuation and low interest rate environments.

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.

Given today’s market environment of low interest rates and high stock market valuations, a safe withdrawal rate may only be 2.25%.

Individuals can safely withdraw a certain amount and follow rules to adjust incomes distributions based on their own circumstances to increase the likelihood of having enough income in retirement.

By James Cornehlsen, CFA

Keywords: Withdrawal rate, Retirement