I think it’s best to start on the low end and adjust withdrawals upward if and when necessary.

That’s cool that you run scenarios. You’re a geek like me!

Given the sharp drop in the dollar this past year its obvious that our buying power is much less. Whether the dollar drops or prices increase – it all equals rising inflation.

Perhaps a better inflation rate would be found by looking at the annual growth rate of your own personal expenses.

You said:

“I like the way you deal with commenters – take no s***!”

Normally I’m very nice and forgiving but sometimes the tone of a comment is just too much.

Anyway, your comment about flexibility is right on! That’s why I think retirees need a budget and a plan so that they can have the flexibility to take out less if they don’t really need the money.

According to Bernstein (Four Pillars of Investing) the withdrawals are supposed to be adjusted upward each year for inflation. However he also says that flexibility is the key to any withdrawal strategy so if you have a few bad years (especially at the beginning of your withdrawal phase) then you should reduce the withdrawals, so taking a straight percentage is not a bad strategy, as long as you have enough to survive on.

I like the way you deal with commenters – take no s***!

Mike

JLP, I’ve developed a model similar to what you’ve done in ordder to run all kinds of SWR senarios. What is shocking is how little changes in assumptions can yield massive changes in results – whether you die rich or dirt poor.

I sometimes wonder if the typical 3% inflation figure is a reasonable guide for retirement planning assumptions. While certain things, such as food, fuel, and utilities, r.e. taxes, are bound to increase with inflation, what I’ve noticed about retirees is that they often tend to reduce personal expenditures over time, as they become less energetic and mobile. They don’t eat as much, don’t drive as much, don’t shop as much, etc. Also, if your housing cost is fixed (if you have no mortgage or carry a fixed rate mortgage), then another potential source of inflation is somewhat mitigated.

Also, with respect to the oft-quoted 4% SWR, I could see adjusting this upwards, based on other non-financial assets (such as real estate) that could be monetized later in life. After all, if you make it to age 95, chances are good you won’t be staying in your own home (at least not alone) and even if you did, reverse-mortgage lenders would likely be lining up at your door.

The other thing that seems to make a huge difference in my calc is taxes. I just don’t know enough to figure out what kind of tax issues I’ll face in retirement. Makes a massive difference in how much gross I’ll need to withdraw to meet projected expenses.

Of course the biggest wildcard of all is healthcare – what will you need, how soon will you need it, and how will you pay for it. Maybe this alone is one good reason to err on the conservative side.

Though its early to tell, the inflation rate may be higher this year, just from eyeballing the monthly figures.

In any case, JLP, I’ve seen a somewhat similar thing on Paul Merriman’s site, and he does it over a longer time period with the sort of inflation-adjusted withdrawals Andy suggests, as well as straight percentages at a couple of different levels. he comes, essentially, to the same point you make: if you can take less out, it can make what seems to be a disproportionate difference. it’s worth a look.

http://www.fundadvice.com/articles/retirement/retirement-when-your-portfolio-starts-paying-you-.html

The tone of your comment bugs me.

The point of the post was to show how much a person’s withdrawal rate affects their retirement account balance.

Although I do think inflation is higher than what the government is reporting, I don’t think it is anywhere near the 8-10% number you’re using. If your inflation numbers are correct then people should sell everything and run fer them thar hills!

…seems very obvious that consuming less of one’s savings/investments — causes one to have more of it left, over any given period of time.

Not much of a newsflash.

However, one must also factor inflation into the equation.

Real U.S. monetary inflation is now 8-10% annually — totally negating the average return on the example portfolio. It might well be wiser to cash-out of the entire portfolio … and invest in something that is less vulnerable to large inflationary losses.