WnW,
The SWR is simply a percentage of the retiree's starting portfolio -- how one does the Withdrawal is up to them. The theory then is that the beginning Withdrawal amount is adjusted for inflation. AND, if you are following the 95% rule, in a down year, your withdrawal will be no more than 95% of the prior year's amount.
Rita,
I think you may be confusing two different withdrawal paradigms. At the risk of using the wrong terms, I'll give it a shot:
- The "conventional" strategy that I think most folks start with is a X% of the portfolio's beginning balance adjusted each year for inflation. After the first year, your withdrawal amount each year is simply the amount you took out the previous year plus an inflation adjustment.
- The "95% rule" you mentioned is from Bob Clyat's book. Using this method, you take out X% of your portfolio's value at the beginning of the year. There is no inflation adjustment: If your investments do well, you take out more money. If the investments go down 30% in value, you get 30% less money the next year. The 95% rule is a slight modification to this method--it says that even f your investments go down in value a lot, you still withdraw 95% of the amount you took out in the previous year, rather than the normal (lower) X% of your portfolio amount. Historically, using the 95% rule has not reduced overall success of these portfolios, and it's a more acceptable approach for many folks (who can't absorb a 10-20% rapid reduction in their "take" from year-to-year).