Hello, I am enjoying using the Retirement Planner sheet, but I have a question about the withdrawal rate. If I set the withdrawal rate to 4.0% starting in 2040, for example, the initial withdrawal is 4% of the value of my portfolio, and the subsequent withdrawal years should be that initial value adjusted for inflation. Is this what the formula is doing? It looks like the value in column L is getting smaller as the portfolio dwindles, but it should be getting slightly larger each year, no?
Also, I want to model annual contributions to my investments that are not captured as expenses or transfers coming from my Paycheck category (My paycheck category is shown as the after tax, healthcare, 401k and 457b deductions). I see that I can do that in the Cash Flow sheet or the Investment Adjustments section of the Retirement Planner. My question is whether these are handled the same? Is choosing either option going to reflect that these contributions come from “extra” money (not the Paycheck category)?
I think the reason you see the value in column L getting smaller is because the value of the portfolio might be declining. And 4% of a smaller number will be a smaller withdrawal.
While William Bengen’s 4% rule assumes the withdrawal starts at 4% and then is adjusted for inflation after every year, this sheet doesn’t add the inflation adjust to the withdrawal rate.
You can make inflation adjustments in the Cash Flow Forecast that effect yearly income and expense. But not the withdrawal rate.
(There is only so much we could build into the sheet. If you want, you could add some formulas in the hidden section of the sheet that would increase the withdrawal rate by an inflation amount.)
I’m not sure whether you should add the contribution in the Cash Flow sheet or the Investment Adjustments section of the Retirement Planner. They might have the same effect, but it’s been years since I built this sheet and I don’t remember all the intricacies.
I’m not exactly clear on what you mean by the “extra” money not the Paycheck category.
To help you answer this and other questions, it might help to understand the basic formula of the sheet, which is:
Investment Gain/Loss - Investment Withdrawal + Cash Flow Forecast + or - Investment Adjustments = the Yearly Net Gain or Loss.
Adding the Yearly Net Gain or Loss to the Start of year Investments gives the next year’s Investment start value.
Of course, there are many simplifications and assumptions used by the formula that might not fit everyone’s situation, but hopefully it can provide some general guidance.