Need math help re: adjust for inflation

[COZICAN]

figures are hypothetical

Jan 1st I have $1mm
I draw $5833 monthly (70K includes taxes)
I have 5% return rate
Dec 31st I have $973,473

My annual drawdown is 2.7%
How and where do I adjust my ending balance for inflation?
Inflation for that year 2.5%


I know it sounds silly but I just do not know.

 

[jldavid47]

Are you assuming that your personal inflation rate will be 2.5% and that you will have to spend that much more to consume the same amount? If so, I would increase the annual draw by 2.5% so that in year 2 the draw goes from $70,000 to $71,750, in year 3 the draw goes from $71,250 to $73,544, etc. I would not adjust the ending balance at all.

 

[COZICAN]

aaaah I get it now. I misunderstood a post in another thread. Thank you!

 

[karen1972]

I've always just adjusted my expense so first year $70k, second year $70k*1.025 ($71,750).

If you want to adjust your balance instead, then I would use real net return, so instead of 5%, use 5% return - 2.5% inflation = 2.5%,

Thus at Dec 31st you should have $950,000 ($1M * 1.025 - $70k)

I am confused by your comment that you said your WR is 2.7%, I assume that has nothing to do with the example as 70k on $1M is 7% WR.

 

[COZICAN]

the 2.7% I called drawdown as in the difference between beginning and ending balance. May not be proper terminology.