Quote:
Originally Posted by aljetmet
Do you really need inflation protection if you take out less than your earn?
For example, I plan on managing my own investments. I plan to withdraw 4% per year. If I earn 5% year, inflation is automatically taken care of. For example, $1 million initial investment turns to be worth $0.763 million after 30 years. Withdrawls equate to $1.756 million. In this case I forecast to increase the withdrawl by 2.5% a year.
If I earn only 4% a year then I withdraw the same but am left over with $0.188 Million.
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I'm not sure I'm following your numbers. Depending upon the inflation rate, at some point the amount that you will need to live on will be greater than the amount that you will be getting from the annuity. At that point you will be eating into whatever reserves you may have accumulated by your initial plan to live under your means. How soon you begin eating into the reserves and how long they last is a function of the inflation rate.
If you assume only a 2.5% inflation rate, that may not be adequate over a long horizon. By my back-of-the envelop calculations, a 5% inflation rate will deplete your reserves by year 10. If we get to a hyper-inflation as some are predicting based on deficits, etc. (say 10%) your reserves will be depleted by year 6. Even if we could go on at 2.5% inflation indefinitely, by year 19 your reserves would be negative.