Passive income and SRW

[starry night]

Help me. Since there are no stupid questions and I have acquired a great deal of regard and respect for many of you that I've been reading out there, help me out with this one. What we have done is split our pot into two nesteggs -- one is set aside as our nest egg "for later" consisting of our retirement accounts (IRA, 401K rollovers, etc. - all the tax deferreds) plus some stock holdings and the equity in our home. All of this is not needed for now - invested for growth and tax-advantages. Second nest-egg is "for sooner" - this is the after-tax savings that we are willing to live off now to pull the plug on employment (I've just put in my notice for 3/15/06, and husband will jump ship 7/1/06 after mid-year bonus). This fund should carry us well up to SS eligibility and beyond.

Anyway, this fund pays us $40K in dividends and distributions annually, so we expect to only have to withdraw about 2% from corpus, and plan to accomplish this when we rebalance portfolio annually - withdrawing from gainers or when allocation needs correction.

How does the receiving of distributions factor in to the calcuated Rate of Withdrawal?? Since reinvested earnings are part of the calculated rate of return, is this also considered as part of the rate of withdrawal? Or is withdrawal viewed as only the actual reduction of principal/corpus? What do I need to know?