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 |
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.