Saving for retirement is only half the story. The other half is using the money you accumulated and paying taxes on the money as you use it.
Everything you save in tax-deferred accounts is taxable as ordinary income (except Roth accounts), after you reach relatively low thresholds a good portion of your Social Security will be taxable. Meeting the requirements for minimum distributions from IRAs and 401k plans can throw you into higher tax brackets and cause higher Medicare premiums and possibly higher Social Security taxes.
High tax costs in retirement can sharply increase your risk of running out of money, according to Putnam Investments. Using a portfolio invested 60 percent in stocks, 30 percent in bonds and 10 percent in cash, and assuming that investment performance matched long-term historical levels, the firm calculated that an investor withdrawing 5 percent of savings every year and paying no taxes had a 77 percent chance of making the money last for 30 years. But if that same person had a 15 percent tax rate, the odds of the money lasting drop to 58 percent.
At a 25 percent tax rate, the odds fell to 44 percent, and the investor would be more likely than not to run out of money.