Systematic Withdrawal Calculator

Understanding the Systematic Withdrawal Calculator

A systematic withdrawal plan is a crucial strategy for individuals, especially retirees, to manage their investments and generate a regular income stream from their savings. This calculator helps you estimate how long your investment portfolio can sustain a series of regular withdrawals, taking into account factors like inflation and investment growth.

The core idea is to determine the longevity of your retirement funds. By inputting your current portfolio value, the amount you plan to withdraw annually, your expected inflation rate, and the anticipated rate of return on your investments, you can gain valuable insights into the sustainability of your financial plan.

How the Calculation Works

The calculator simulates year by year how your portfolio's value changes based on the inputs. In each year, the following steps occur:

• Portfolio Growth: The current portfolio value is increased by the expected portfolio annual return.
• Withdrawal Adjustment: The planned annual withdrawal amount is adjusted for inflation. The withdrawal for the next year will be higher than the current year's withdrawal to maintain purchasing power.
• Withdrawal Deduction: The inflation-adjusted withdrawal amount is subtracted from the portfolio's value.
• Duration Tracking: A counter increments to track the number of years the withdrawals have been made.

The simulation continues until the portfolio value drops to zero or below. The total number of years the withdrawals could be sustained is then displayed as the result.

Mathematically, for each year t (starting from t=0):

Portfolio Value at Year t+1 = (Portfolio Value at Year t * (1 + Portfolio Annual Return)) – (Annual Withdrawal at Year t * (1 + Inflation Rate))

The Annual Withdrawal at Year t is calculated iteratively. If W₀ is the initial annual withdrawal, then the withdrawal at year t (W_t) is:

W_t = W₀ * (1 + Inflation Rate)^t

Key Inputs Explained:

• Initial Portfolio Value: The total amount of money you have invested at the start of the withdrawal period.
• Annual Withdrawal Amount: The fixed amount you plan to withdraw from your portfolio each year, in today's dollars.
• Expected Annual Inflation Rate: The anticipated average rate at which prices will increase over time. This is crucial for adjusting your withdrawals to maintain purchasing power.
• Expected Portfolio Annual Return: The average annual rate of return you expect your investments to generate after fees. This is a critical assumption for the longevity of your portfolio.

Use Cases:

• Retirement Planning: Essential for retirees to ensure their savings can support their lifestyle throughout their entire retirement.
• Financial Goal Setting: Helps individuals understand the sustainability of funding long-term goals, such as educational expenses or starting a business, through phased withdrawals.
• Investment Strategy Evaluation: Allows you to test different investment scenarios (e.g., varying return rates) to see how they impact the longevity of your income.

It's important to remember that this calculator provides an estimate based on your assumptions. Actual market performance, inflation rates, and your withdrawal behavior can vary, so it's always advisable to consult with a qualified financial advisor for personalized planning.