Assume one wants a $1Mil porfolio and 3% SWR to keep the math simple. This would mean we can draw $30,000 each year inflation adjusted out of this portfolio in year one. Now in year two at 3% inflation, we are at $30,900 a $900 increase (and i am ignoring taxes).
Your spending has to include taxes, so both the $30K and $30.9K are assumed to include taxes - at least, if you want to use
Trinity Study assumptions that led to "SWR".
To fund this $900 would one now not need to have saved another $900X33 = $29,700 in their portfolio. I think for most people saving $30,000 is quite abit (we are fortunate to save more than that) each year....seemingly this would mean they are just saving enough for inflation for future years.
If one has $1,000,000 in investable assets and gets a 7% return, even after deducting $30K, that is $67.9K, so at the end of the first year there is $1000K - $30K + $67.9K = $1037.9K in the portfolio. The second year WR (note the difference between SWR and WR) is then $30.9K/$1037.9K = 2.98%.
Or does the SWR model kinda sorta take that into account once one retires? What about before retirement? Let's assume the same numbers above but let's say we are ten years away from inflation. Wouldn't that then mean a guy would need 10 X 29,700 = 297,000 from starting point just to keep up with 10 years of inflation (ignoring future year inflation impact). I guess the take away is we have to be careful about using todays dollars to plan....we must factor in a guess about inflation over the next X number of years to retirement.
This is why one often talks about "real" returns instead of "nominal" returns: 0% real just keeps up with inflation, while anything above that beats inflation.
At this point, a reasonable question would be "but what if returns are lower than historical?" Using a 3% WR, annual real returns could be -0.6% (that's 0.6% worse than inflation) and one would still be successful (i.e., still have a positive portfolio) per the SWR definition. For a 4% WR, one needs ~1.3% annual real return for "success."
Of course, it's the likely "sequence of returns," not the annual, constant, returns that are of interest. But enough for one post....
