Addendum: Adjusting Retirement Withdrawals for Inflation
After my article “Taking Retirement Withdrawals From a Fund Portfolio” was originally published in the May 2013 AAII Journal, I was asked to recalculate the numbers with the initial amount withdrawn adjusted upward for inflation. Under this scenario, 4% was withdrawn from the 2008 ending balance of $115,129. The initial withdrawal amount of $4,605 then served as the basis for determining all future withdrawal amounts. Adhering to this method ensures the annual withdrawals always rise, as long as inflation persists and the savings are not drained.
The math for calculating these withdrawals is simple. During the second year of retirement, the initial withdrawal amount is increased for the rate of inflation. In 1989, the CPI (U.S. Consumer Price Index) ran at 4.6%. The second-year withdrawal was therefore calculated as $4,605 × (1 + 0.046) = $4,817. The withdrawal amount for the third year is the second year’s withdrawal rate increased by the third year’s rate of inflation. Using the 1990 CPI of 6.3%, the math is $4,817 × (1 + 0.063) = $5,120.
Since the dollar amount of the withdrawal itself is increased, the total amount withdrawn over the 25-year period did not change, regardless of whether rebalancing was employed or not. The total withdrawal amount was also unaffected whether the withdrawals were evenly split across all funds or the pro rata method was used.
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