Is there an intuitive way to understand the effect of health care costs on safe withdrawal rates? a/k/a "not convinced that health care costs greatly affect safe withdrawal rates?!"

Think of this topic this way: Fidelity Investments publishes annually an amount of assets that has to be set aside from a portfolio to pay for future health care costs.  Although their calculation does not include long-term care costs, and is assumed to be for a couple with a fixed set of conditions (fixed life expectancy, no chronic conditions and others), it is a good number to use for this blog.  The asset amount has been above $200,000, but I’ll use exactly that number to make the example easy.

First, assume a couple aged 65 has a portfolio of $600,000.  $200,000 is earmarked for health care costs, leaving $400,000 for spending.  Assume the 4% rule is applicable to that amount.   4% of $400,000 is $16,000, which is the amount of spending allowed.  But $16,000 is 2.67% of $600,000.  So a safe withdrawal rate here is 2.67% and not 4%.

Now assume that couple has a portfolio of $1,200,000.  The amount left after $200,000 is set aside for health care costs is $1,000,000.  4% of $1,000,000 is $40,000.  So the safe withdrawal rate percentage of the portfolio is $40,000 divided by $1,200,000, or 3.33%.

This is very rough, but is a good example of how health care costs can affect safe withdrawal rates downward, and how the calculation is specific to the individual retiree (much more so than is illustrated here!).