Thanks for the detailed comment, BF!
I'll try to respond to all your points/questions in order.
First, yes, Bengen has upped his safe withdrawal rate (SWR) recommendation as a result of diversifying the assumed asset allocation to include international equities and small-caps. However, Morningstar's research projects that with current market projections, the SWR is 4% (up from 3.3% and 3.8% in the past couple of years).
Research does show that the ability and willingness to trim expenditures in down markets lets you increase your SWR (if memory serves, it's up to 7.2% if your non-discretionary expenses are just 20% of your budget).
As I mention in the article, passive income can include selling assets gradually - after all, your total return will be much higher than your dividend payments most years. However, if you do this (which I plan to), you need to have a lower initial WR (I'm planning on starting around 3%) and the ability to reduce spending by at least 20% (the more the better). You also need to plan for large one-time expenses such as roof replacement, major car repairs, major medical and dental expenses, and - on the more pleasant side - lots of travel early on. My plan addresses that by allocating about 1/3 of our budget to travel, knowing that some years much if not all of that could be eaten up by the less pleasant items above.
We too have major tax considerations for similar reasons. This is why my plan includes the estimated taxes with the assumption that any spending will need to be in after-tax dollars using the wage income tax brackets.
Re your first question, see my thoughts above on sale of assets. I assume we'll sell enough to cover whatever isn't covered by passive income. To avoid selling into a bear market, I plan to hold three years' worth of expenses in cash equivalents and another six years' worth in bonds. That way, when the stock market and bonds are down, we'll use the cash. When stocks are down and bonds aren't, we'll sell bonds. When stocks are up, we'll sell those.
Regarding taxes, as I allude to above, I include in our budget an estimate of taxes based on current tax rates with brackets assumed to go up with inflation. I simply back out from the post-tax spending how much we'll need in pre-tax dollars.
