2 people could have a $1 million portfolio but have drastically different after tax values. For example: I could have $1 million in a regular acct where all withdrawals will be taxed at 15% due to everything being LTCG giving me an after tax portfolio value of $850,000. Another person could have $1 million in a 401k where everything will be taxed at their normal income tax rate which may be 25% giving them an after tax portfolio value of $750,000.
Do any of you give any consideration to the after tax value of your portfolio when it comes to deciding on your withdrawal rate?
Technically, net worth is supposed to be reported on an after-tax basis. But as a practical matter, very few people actually do that. My guess is that even fewer people do it when calculating withdrawal rates. It seems more straightforward and intuitive to include taxes as part of one's expenses and leave the portfolio gross. I suppose you could exclude taxes from both the numerator and denominator, but that won't change the rate vs doing it gross... 40/1000=4%... 30/750=4%... 34/850=4%. It would not be correct to exclude taxes from the portfolio but still include them in expenses when calculating WR.
The mix of taxable vs tax-deferred affects my withdrawal strategy (sequence, timing, SS), but it has no bearing on the withdrawal rate. Like Independent, I focus on dollars, not a rate. I withdraw
what I need,
when I need it. Taxes are just part of that need.
The relative advantage of taxable vs tax-deferred has to be considered in the context of an entire lifetime of tax-paying. I deferred tax at a very high rate while working. The most I'll pay now is some mix of 15% and 25% once RMDs start in 16 years, and that could be reduced with Roth conversions. More importantly, those deferred taxes grew, inside my portfolio, at a very significant rate during my working career.
Yes, as I sit here today, I'd love to have a larger after-tax portfolio and smaller tax-deferred. Who wouldn't? But it is what it is. I am comforted by the knowledge of how much tax I avoided via deferral and how much growth that enabled. If (as you suggest) my WR is high today due to embedded tax liabilities in my portfolio, then I would suggest that effect is more than offset by the size of the portfolio itself, which was enabled by deferral at a higher rate than I owe today. So in fact, my net WR today is lower than it would have been without the deferrals.