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The 4% Draw Down Theory (again)

On Monday I asked about the 4% Draw Down Theory for retirement savings planning, and what readers thought, and as usual there were some very smart responses, and because of that I have come back with a better model for your perusal.

The major comment was that the model didn’t take into consideration Inflation, and that is an important thing to consider in your future. The other important thing to remember is not to retire carrying a large debt load (if any, really).

Our new model is a bit more conservative, where we only have $1M “nest egg” and assume we grow our nest egg by a generous 2%, however, this time assume an inflation rate of 3% (which is comparable to now, unfortunately). With inflation, you need to adjust your withdrawal to compensate for your shrinking spending capabilities, so you increase your yearly “allowance” by 3% (unfortunately each year).

Spoiler Alert: Note the red numbers at the bottom of the table, no you don’t make it to 25 years.

How Long Do We Have?

Also note that your withdrawal doubles in about 24 years following that rule of 72 as well.

Savings Amount at 65 $1,000,000.00  
Savings Growth assumption after 65 2.00%  
Assumed Inflation 3.00%  
Initial Amount to draw every year $40,000.00  
Age Amount Left Inflation Adjusted Withdrawal
65 $960,000.00 $40,000.00
66 $938,000.00 $41,200.00
67 $914,324.00 $42,436.00
68 $888,901.40 $43,709.08
69 $861,659.08 $45,020.35
70 $832,521.29 $46,370.96
71 $801,409.63 $47,762.09
72 $768,242.87 $49,194.95
73 $732,936.92 $50,670.80
74 $695,404.73 $52,190.93
75 $655,556.17 $53,756.66
76 $613,297.94 $55,369.35
77 $568,533.46 $57,030.44
78 $521,162.78 $58,741.35
79 $471,082.45 $60,503.59
80 $418,185.40 $62,318.70
81 $362,360.85 $64,188.26
82 $303,494.16 $66,113.91
83 $241,466.73 $68,097.32
84 $176,155.82 $70,140.24
85 $107,434.48 $72,244.45
86 $35,171.39 $74,411.78
87 -$40,769.32 $76,644.14
88 -$120,528.16 $78,943.46
89 -$204,250.49 $81,311.76
90 -$292,086.62 $83,751.12

Feel Free to Comment

  1. I’d think and guess and hope that we could net 5% to 6% annual with a Balanced Model. Might be able to make money last a looooong time. That said we need to be prepared for a dynamic spending plan in case of a major recession or correction. Last 10 years a retiree could have spent like a drunken sailor, that may change.

  2. The current estimates on a diversified portfolio of stocks, bonds, cash – for example 55%/40/5 – predict a return of about 5%. A return of only 2% would come from a very conservative portfolio of primarily cash with perhaps some bonds. In an environment of 3% inflation where you are withdrawing 4%, you must diversify and get a higher return than 2%, which is what your table illustrates.

  3. Interesting follow-up to your previous post on this (I left s comment there today, but you guys were all here commenting.. oh well). I still maintain that living in the equity world, you can beat inflation far better. I’ve come to the recent realization that many of you are from the Ottawa Valley. Cheers, and I love reading this groups many comments throughout the interweb on other financial blogs – Phil retired in Kemptville

    1. Kemptville? Well Phil we the National Capital Financial Bloggers Association would welcome you to join in the next time we meet (which is rarely (if ever) scheduled). As for equities beating inflation, they can, if you are good at it (but I am not, that is why I stick with Indexes).

      1. Cool. I have one further comment, but why does everyone look to start with some arbitrary enough number? would it not be better to track your current spending, and then ensure your investment gain exceed that spending? We spend about 60K each year on living (nicely granted…). So what I track is how much after taxes my investments generate each year. that way when that number overlaps my spending curve I know I am covered… If not I find ways to reduce the spending, or increase the income flow. anyways, its a common point I see missing from most people’s retirement calculations that sure helps define that enough number. – Cheers.

  4. Thanks for reading my comments 🙂

    “The major comment was that the model didn’t take into consideration Inflation….”

    I hope, with dividend stocks, I can get paid about 4% yield which will be the same as a “withdrawal rate”.

    I also hope my growth rate on stocks will be about 3%, over a few years, which should cover inflation at 3% as well. This way, I never have to withdraw capital.

    It will take me to age 55, at my current savings rate, to reach $1 M in invested assets not including my pension. I hope that’s my enough number.

    Good follow-up post about inflation as an important part of financial planning. This cannot be discounted.


  5. This is an excellent scenario to use a tool lime firecalc so that you can run through a bunch of time ranges through history and see exactly how many times your assumptions failed. The goal isn’t always to make a 100% success rate, but instead to find a nice balance of risk and longevity. It’s a pretty interesting tool to play with.

  6. While I agree in principal with the use of inflation in the calculations, I am not sure that I would be comfortable with a growth rate that was less than inflation for each and every year (3% inflation and 2% growth).

    If this were true, then we are in a viscous downward spiral. At some point, investments have to do better than inflation, otherwise why invest? You’d be better off working forever as an owner of a franchise(business) with steady cash flow.

    This is why that although I am technically retired, I am still comfortable with a 60/40 split in my investments between equities and fixed income. It is also the reason why I am working so hard to reduce my investment costs by migrating to ETFs from mutual funds. A 2% MER saving does wonders to the bottom line.

    1. Agreed, the scenario is pedagogical, I would assume that if Inflation was heavily outstripping the growth of my funds, I would adjust my lifestyle accordingly to make the funds last. As for the volatility of the market, everybody wants to forget 2008, wonder why?

  7. I guess your point is you can’t expect to withdraw 4% if only keep your money in savings accounts that pay less than inflation? Looks like it will take 5 or 6 more posts in this series to cover the basics of retirement income- invest money you don’t need in the sort term in a diversified portfolio of stocks and bonds.

    An interesting exercise is to calculate how much somebody would have to invest per year over a 40 year career to save $1,000,000 today with this 1% less than inflation investment return. In a spreadsheet formula that would be about “=pmt(-1%,40,0,1000000)” which is a little more than $30,000 every year in today’s dollars.

    1. Greg, if you want a copy of my worksheet, I will send it to you gladly, you can futz around with it and see if there are more interesting scenarios to create (these two scenarios are quite simplistic in nature).

  8. Hello Canajun Man,

    The 4% drawn looks good on paper but the other factor is wild swings in the market. Also what if inflation picks-up?

    Taxes…if you can lower you tax bill as well, that is a big plus!

    I have a few ideas for you if you are interested. Drop me a line.



    1. Brian, agreed, the model is simplistic and static for a world that will be neither of those (i.e. over 25 years inflation will cycle up and down at least once, and the market should have at least one catastrophic adjustment), if you have ideas send me a note at bigcajunman @ canajunfinances DOT com I like to read differing opinions, keeps me on my toes.

  9. That’s looks about right. Although our personal rate of inflation tends to be higher than 3% thanks to property tax and home insurance increases, and electricity and water rates….
    Thank goodness for GIS as then we can at least look forward to one meal a week after we turn 87.

    (To be honest, though, how many people live past 86? In our extended family only a couple have so far. Far more scary to me is that some have died before reaching 70. It would feel criminal to save 1,000,000 by stark denial only to die before needing it. We try very hard to make anything that really matters to us a priority and do it, just in case. There are times I resent quite strongly the demise of the DB pension.)

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