Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

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was originally published in the May 2013 AAII Journal, I was asked to recalculate the numbers with the initial amount withdrawn adjusted upward for inflation. Under this scenario, 4% was withdrawn from the 2008 ending balance of $115,129.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Since the dollar amount of the withdrawal itself is increased, the total amount withdrawn over the 25-year period did not change, regardless of whether rebalancing was employed or not.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.

None of the four hypothetical portfolios ran out of money, and neither did any of the funds used. This is unlike the non-rebalanced pro rata portfolio. The cumulative dollar amount withdrawn explains why. When the initial withdrawal amount was adjusted upward, $167,716 was withdrawn under all four scenarios. When the withdrawal rate was adjusted for inflation, the cumulative amount withdrawn from the non-rebalanced pro rata portfolio was $307,410. Adjusting the withdrawal rate results in an increasing proportion of the portfolio’s value being taken out, which drains savings faster. Adjusting the withdrawal amount instead of the withdrawal rate will give you less in annual income, but will better ensure you do not outlive your savings.

The upper limit of what could safely be withdrawn when the withdrawal amount is adjusted for inflation seemed to be slightly above 5% for the period studied. When a 6% withdrawal rate was used with the non-rebalanced pro rata portfolio, the international fund ran out of money in 2012. I did not test higher rates, but I suspect they would cause problems. Higher overall rates of inflation would have impacted these findings, a factor that should be taken into consideration.

A few members commented about the period studied. I used a 25-year period to encompass a variety of market conditions. Had the analysis started in 2000 instead of 1988, the portfolios would have declined in value because of the allocation used. A more conservative allocation with a larger portion in bonds would have likely fared better, given the rise in bond prices.

(Added May 30, 2013)

Table 6. Comparison of Non-Pro Rata and Pro Rata Withdrawals

(Initial 4% Withdrawal Amount Adjusted for Inflation) Withdrawals Made on Non-Pro Rata Basis
Portfolio Strategy	No Rebalance	Rebalance at 5% Thresholds
Ending Portfolio Balance	$467,747	$467,995
Annualized Return (Post Withdrawals)	6.4%	6.4%
Total Return Standard Deviation	13.8%	12.3%
Total Withdrawal Amount	$167,716	$167,716
Standard Deviation of Withdrawals	2.8%	2.8%
Largest One-Year Decline in Withdrawals (2008)	0.0%	0.0%
Withdrawals Made on Pro Rata Basis
Portfolio Strategy	No Rebalance	Rebalance at 5% Thresholds
Ending Portfolio Balance	$202,574	$200,885
Annualized Return (Post Withdrawals)	2.9%	2.8%
Total Return Standard Deviation	14.8%	12.2%
Total Withdrawal Amount	$307,410	$303,151
Standard Deviation of Withdrawals	15.4%	12.7%
Largest One-Year Decline in Withdrawals (2008)	42.2%	32.0%

Table 7 (Addendum). Non-Pro Rata Post Annual Withdrawals With Rebalancing Employed

Annual withdrawals equaling 4% of the 1988 year-end portfolio value and adjusted for inflation were taken evenly from each fund. The portfolio was rebalanced only when the allocation to one or more funds was off target by five percentage points or more.
	Vanguard 500 Index	Vanguard Ext Mkt Index	Vanguard Mid-Cap Index	Vanguard Small-Cap Index	Vanguard Int’l Value	Vanguard Total Int’l Stock Idx	Vanguard Total Bond Idx	Total	Annual
Year	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Portfolio	Withdrawal
Starting	$20,000	$30,000	—	—	$20,000	—	$30,000	$0	—
1988	$23,244	$35,924	—	—	$23,756	—	$32,205	$115,129	$4,605
1989	$29,021	$43,152	—	—	$28,475	—	$35,289	$135,937	$4,817
1990	$26,893	$36,056	—	—	$23,927	—	$37,034	$123,910	$5,120
1991	$33,353	$49,329	—	—	$24,902	—	$41,206	$148,791	$5,274
1992	$34,412	$53,996	—	—	$21,527	—	$42,735	$152,670	$5,432
1993	$32,360	$50,572	—	—	$38,427	—	$48,447	$169,806	$5,584
1994	$31,329	$48,308	—	—	$38,977	—	$45,799	$164,414	$5,730
1995	$41,093	$62,718	—	—	$41,166	—	$52,433	$197,411	$5,873
1996	$48,691	$72,059	—	—	$43,755	—	$52,789	$217,294	$6,073
1997	$56,265	$80,277	—	—	—	$41,917	$69,348	$247,807	$6,176
1998	$70,404	$85,310	—	—	—	$46,672	$73,622	$276,008	$6,275
1999	$65,313	—	$62,522	$32,881	—	$70,087	$80,305	$311,108	$6,444
2000	$58,224	—	$72,315	$30,750	—	$58,056	$88,016	$307,362	$6,663
2001	$50,053	—	$70,628	$30,330	—	$45,292	$93,991	$290,294	$6,770
2002	$37,912	—	$59,155	$23,174	—	$37,311	$100,289	$257,841	$6,939
2003	$64,482	—	$67,313	$36,538	—	$70,423	$78,259	$317,015	$7,078
2004	$68,645	—	$74,604	$37,161	—	$74,904	$96,924	$352,237	$7,311
2005	$70,387	—	$83,331	$38,327	—	$84,877	$97,753	$374,675	$7,553
2006	$79,649	—	$92,946	$42,580	—	$105,573	$100,352	$421,100	$7,741
2007	$87,128	—	$87,649	$41,814	—	$95,504	$132,589	$444,684	$8,059
2008	$53,858	—	$50,053	$25,701	—	$52,485	$137,591	$319,689	$8,059
2009	$78,836	—	$87,392	$42,418	—	$85,216	$99,033	$392,896	$8,284
2010	$88,687	—	$107,564	$52,061	—	$92,851	$103,627	$444,790	$8,400
2011	$88,997	—	$85,436	$42,417	—	$74,570	$140,814	$432,235	$8,652
2012	$101,072	—	$96,931	$48,026	—	$86,053	$144,717	$476,800	$8,805
Ending Value	$99,311	—	$95,170	$46,266	—	$84,292	$142,956	$467,995	—
Ending Allocation	21.2%	—	20.3%	9.9%	—	18.0%	30.5%
	Annualized Return (Post Withdrawals)							6.4%
	Total Return Standard Deviation							12.3%
	Total Withdrawal Amount							$167,716
	Standard Deviation of Withdrawals							2.8%
	Largest One-Year Decline in Withdrawals (2008)							0.0%

Table 8 (Addendum). Non-Pro Rata Post Annual Withdrawals Without Rebalancing

Annual withdrawals equaling 4% of the 1988 year-end portfolio value and adjusted for inflation were taken evenly from each fund.
	Vanguard 500 Index	Vanguard Ext Mkt Index	Vanguard Mid-Cap Index	Vanguard Small-Cap Index	Vanguard Int’l Value	Vanguard Total Int’l Stock Idx	Vanguard TotalBond Idx

								Total	Annual
Year	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Portfolio	Withdrawal
Starting	$20,000	$30,000	—	—	$20,000	—	$30,000	$100,000	—
1988	$23,244	$35,924	—	—	$23,756	—	$32,205	$115,129	$4,605
1989	$29,021	$43,152	—	—	$28,475	—	$35,289	$135,937	$4,817
1990	$26,893	$36,056	—	—	$23,927	—	$37,034	$123,910	$5,120
1991	$33,353	$49,329	—	—	$24,902	—	$41,206	$148,791	$5,274
1992	$34,412	$53,996	—	—	$21,527	—	$42,735	$152,670	$5,432
1993	$36,323	$60,265	—	—	$38,427	—	$48,447	$169,806	$5,584
1994	$35,339	$57,831	—	—	$38,977	—	$45,799	$164,414	$5,730
1995	$46,604	$75,459	—	—	$41,166	—	$52,433	$197,411	$5,873
1996	$55,463	$87,048	—	—	$43,755	—	$52,789	$217,294	$6,073
1997	$71,850	$108,355	—	—	—	$41,917	$69,348	$247,807	$6,176
1998	$90,455	$115,733	—	—	—	$46,672	$73,622	$276,008	$6,275
1999	$107,615	—	$62,522	$32,881	—	$70,087	$80,305	$311,108	$6,444
2000	$96,693	—	$72,315	$30,750	—	$58,056	$88,016	$307,362	$6,663
2001	$83,898	—	$70,628	$30,330	—	$45,292	$93,991	$290,294	$6,770
2002	$64,261	—	$59,155	$23,174	—	$37,311	$100,289	$257,841	$6,939
2003	$80,792	—	$67,313	$36,538	—	$70,423	$78,259	$317,015	$7,078
2004	$87,901	—	$74,604	$37,161	—	$74,904	$96,924	$352,237	$7,311
2005	$90,562	—	$83,331	$38,327	—	$84,877	$97,753	$374,675	$7,553
2006	$102,979	—	$92,946	$42,580	—	$105,573	$100,352	$421,100	$7,741
2007	$106,898	—	$87,649	$41,814	—	$95,504	$132,589	$444,684	$8,059
2008	$66,309	—	$50,053	$25,701	—	$52,485	$137,591	$319,689	$8,059
2009	$81,836	—	$87,392	$42,418	—	$85,216	$99,033	$392,896	$8,284
2010	$92,134	—	$107,564	$52,061	—	$92,851	$103,627	$444,790	$8,400
2011	$92,236	—	$85,436	$42,417	—	$74,570	$140,814	$432,235	$8,652
2012	$104,823	—	$96,931	$48,026	—	$86,053	$144,717	$476,800	$8,805
Ending Value	$103,062	—	$192,531	$68,510	—	$20,604	$83,039	$467,747	—
Ending Allocation	22.0%	—	41.2%	14.6%	—	4.4%	17.8%
	Annualized Return (Post Withdrawals)							6.4%
	Total Return Standard Deviation							13.8%
	Total Withdrawal Amount							$167,716
	Standard Deviation of Withdrawals							2.8%
	Largest One-Year Decline in Withdrawals (2008)							0.0%

Table 9 (Addendum). Pro Rata Post Annual Withdrawals With Rebalancing Employed

Annual withdrawals were split based on each fund’s targeted asset allocation weight. The starting 4% withdrawal amount was adjusted each year for inflation.
The portfolio was rebalanced only when the allocation to one or more funds was off target by five percentage points or more.
	Vanguard 500 Index	Vanguard Ext Mkt Index	Vanguard Mid-Cap Index	Vanguard Small-Cap Index	Vanguard Int’l Value	Vanguard Total Int’l Stock Idx	Vanguard Total Bond Idx

								Total	Annual
Year	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Portfolio	Withdrawal
Starting	$20,000	$30,000	—	—	$20,000	—	$30,000	$100,000	—
1988	$23,244	$35,924	—	—	$23,756	—	$32,205	$115,129	$4,605
1989	$29,323	$42,866	—	—	$28,765	—	$35,028	$135,982	$5,689
1990	$27,419	$35,603	—	—	$24,393	—	$36,488	$123,902	$5,474
1991	$34,371	$48,324	—	—	$25,696	—	$40,282	$148,672	$6,743
1992	$35,788	$52,569	—	—	$22,492	—	$41,462	$152,311	$7,039
1993	$32,281	$50,449	—	—	$38,334	—	$48,329	$169,392	$7,952
1994	$31,532	$47,913	—	—	$39,173	—	$45,413	$164,030	$7,774
1995	$41,766	$61,806	—	—	$41,695	—	$51,637	$196,904	$9,417
1996	$49,878	$70,640	—	—	$44,661	—	$51,661	$216,840	$10,489
1997	$56,144	$80,105	—	—	—	$41,827	$69,199	$247,275	$11,855
1998	$70,646	$84,788	—	—	—	$46,925	$73,125	$275,485	$13,026
1999	$65,187	—	$62,401	$32,817	—	$69,951	$80,149	$310,505	$14,589
2000	$58,109	—	$72,172	$31,315	—	$57,941	$87,125	$306,662	$14,357
2001	$49,952	—	$70,486	$31,599	—	$45,200	$92,302	$289,539	$13,259
2002	$37,833	—	$59,033	$24,731	—	$37,233	$97,728	$256,558	$11,600
2003	$64,152	—	$66,969	$36,351	—	$70,063	$77,859	$315,394	$14,049
2004	$68,286	—	$74,214	$36,966	—	$74,512	$96,417	$350,394	$15,479
2005	$70,011	—	$82,886	$38,903	—	$84,424	$96,485	$372,709	$16,270
2006	$79,214	—	$92,440	$44,120	—	$105,000	$98,242	$419,016	$17,890
2007	$86,689	—	$87,208	$41,603	—	$95,023	$131,921	$442,442	$18,687
2008	$53,581	—	$49,796	$26,082	—	$52,216	$136,043	$317,718	$12,710
2009	$78,338	—	$86,840	$42,150	—	$84,678	$98,407	$390,411	$15,320
2010	$88,114	—	$106,870	$52,776	—	$92,253	$102,079	$442,092	$16,579
2011	$88,447	—	$84,908	$42,155	—	$74,109	$139,944	$429,563	$15,655
2012	$100,435	—	$96,320	$48,738	—	$85,508	$142,911	$473,912	$16,642
Ending Value	$98,674	—	$94,559	$47,858	—	$83,747	$140,269	$465,107	—
Ending Allocation	21.2%	—	20.3%	10.3%	—	18.0%	30.2%
	Annualized Return (Post Withdrawals)							6.3%
	Total Return Standard Deviation							12.4%
	Total Withdrawal Amount							$167,716
	Standard Deviation of Withdrawals							2.8%
	Largest One-Year Decline in Withdrawals (2008)							0.0%

Table 10 (addendum). Pro Rata Post Annual Withdrawals Without Rebalancing

Annual withdrawals were split based on each fund’s targeted asset allocation weight. The starting 4% withdrawal amount was adjusted each year for inflation.
	Vanguard 500 Index	Vanguard Ext Mkt Index	Vanguard Mid-Cap Index	Vanguard Small-Cap Index	Vanguard Int’l Value	Vanguard Total Int’l Stock Idx	Vanguard Total Bond Idx

								Total	Annual
Year	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Portfolio	Withdrawal
Starting	$20,000	$30,000	—	—	$20,000	—	$30,000	$100,000	—
1988	$23,244	$35,924	—	—	$23,756	—	$32,205	$115,129	$4,605
1989	$29,323	$42,866	—	—	$28,765	—	$35,028	$135,982	$4,817
1990	$27,419	$35,603	—	—	$24,393	—	$36,488	$123,902	$5,120
1991	$34,371	$48,324	—	—	$25,696	—	$40,282	$148,672	$5,274
1992	$35,788	$52,569	—	—	$22,492	—	$41,462	$152,311	$5,432
1993	$38,134	$58,320	—	—	$27,933	—	$43,689	$168,075	$5,584
1994	$37,453	$55,646	—	—	$28,225	—	$40,896	$162,220	$5,730
1995	$49,905	$72,153	—	—	$29,691	—	$46,299	$198,048	$5,873
1996	$59,880	$82,813	—	—	$31,431	—	$46,132	$220,255	$6,073
1997	$78,136	$102,605	—	—	—	$29,982	$48,493	$259,216	$6,176
1998	$98,941	$109,168	—	—	—	$33,232	$50,642	$291,983	$6,275
1999	$118,268	—	$82,893	$43,594	—	$41,545	$48,389	$334,689	$6,444
2000	$106,381	—	$96,373	$41,805	—	$33,970	$51,747	$330,277	$6,663
2001	$92,422	—	$94,566	$42,414	—	$26,060	$53,942	$309,404	$6,770
2002	$70,896	—	$79,596	$33,381	—	$20,980	$56,199	$261,051	$6,939
2003	$89,318	—	$104,909	$47,601	—	$27,496	$56,266	$325,590	$7,078
2004	$97,344	—	$124,558	$56,224	—	$31,514	$56,438	$366,078	$7,311
2005	$100,455	—	$140,244	$59,578	—	$34,731	$55,546	$390,556	$7,553
2006	$114,419	—	$157,597	$68,033	—	$42,070	$55,556	$437,675	$7,741
2007	$118,955	—	$165,445	$68,036	—	$46,812	$56,917	$456,164	$8,059
2008	$73,903	—	$95,311	$42,980	—	$25,266	$57,252	$294,712	$8,059
2009	$91,441	—	$131,384	$57,407	—	$32,342	$58,086	$370,659	$8,284
2010	$103,171	—	$162,756	$72,262	—	$34,097	$59,170	$431,456	$8,400
2011	$103,490	—	$157,677	$69,422	—	$27,697	$60,933	$419,219	$8,652
2012	$117,858	—	$180,586	$80,925	—	$30,677	$60,700	$470,745	$8,805
Ending Value	$116,097	—	$178,825	$80,044	—	$28,916	$58,058	$461,940	—
Ending Allocation	25.1%	—	38.7%	17.3%	—	6.3%	12.6%
	Annualized Return (Post Withdrawals)							6.3%
	Total Return Standard Deviation							14.3%
	Total Withdrawal Amount							$307,410
	Standard Deviation of Withdrawals							2.8%
	Largest One-Year Decline in Withdrawals (2008)							0.0%