Because of this, there can be no ‘right’ answer … you have to select a level of variation that you are happy to live [pun intended] with.

And, you will find that almost none of these methods allow for an a variation in inflation rate e.g. you may be able to select, say 4%, but then you have to assume it will remain at 4% for the entire, say, 30 year period … ooops! Very unlikely

I haven’t written a post on this yet because it requires a LOT of analysis before I will be happy making a recommendation.

For now, I have settled on the Rule of 20 (i.e. 5%) for calculating Your Number, but I actually plan for a 2.5% to 3.5% withdrawal rate in my personal spending.

For me, any withdraw rate that I would consider must be conservative (low) enough to allow periodic withdrawals forever. A lot of the higher withdrawal rates I’ve seen either deplete the nest egg to 0 over a fixed period (usually 30 years), have optimistic expected investment returns, or underestimate the effect of investment risk (variance in return).

The general rule (as I understand it) is to find a real return of an investment by removing the inflationary component from the expected long term (systemic) return of your selected investment. You can safely withdraw a portion of the real return, with the remaining portion be used as a cushion for the eventual downturns of the investment. For instance, if you have a diversified equity/bond portfolio that has a 10% annualized expected return, assuming 4% annual inflation, you should be able to withdraw up to 6% annually forever (depending on how you calculate your cushion). Plus, because your nest egg grows at least as much as inflation (because you don’t withdraw the inflationary and cushion components), in theory, you should be able to keep the same standard of living forever.

Interesting calculator, it has some major flaws, but utilizing 1000 monte carlo simulations to determine expected market results is always a good idea. The books “Four Pillars of Investing” and “The Intelligent Asset Allocator” have a good analysis of a maximum withdraw rate (turns out to be 4%) that allows you to have your money last forever without a reduction in standard of living (assuming worst case scenerio market conditions over a 30 year period with various asset allocations).

Now, if you want to get really scared, try using a Monte Carlo Simulation: http://www3.troweprice.com/ric/ric/public/ric.do

The way I did it was a bit more involved, but essentially the same. I figured out how much I needed if I wanted to retire today (assuming a 4% withdrawal rate while investing in a relatively conservative 60/40 stock/bond split during retirement). Then, I projected that number out over several years (or decades) to take inflation into account.

This gave me multiple numbers and dates to choose from, each requiring a different investment rate of return (based on the amount you currently have invested and your monthly/annual contributions). I selected a range of numbers and dates that I felt were obtainable given my selected investment strategy–and then reapply the process every couple of years.

It was suprising to see that if you simply waited a couple of extra years, how fast the required RoR drops–allowing for a wider range of investment options.