Safe Withdrawal Rate

Purpose of the Inflation Buster

Inflation can be one of the most dangerous threats to your retirement savings. Many people start with a comfortable budget in retirement only to find out years down the roads that their budget can only buy a fraction of the goods they could purchase at the beginning of their retirement journey.

Inflation attacks the buying power of your money by slowly but surely increasing the cost of goods.

The Inflation Buster strategy builds in the threat of inflation to ensure that the buying power of your portfolio withdrawals not only matches the rate of inflation, but actually increases even more than inflation.

In other words, the Inflation Buster allows you to take yearly withdrawals that grow at a rate higher than inflation.

By itself, inflation will decrease the amount of goods you can purchase each year. The Inflation Buster will give you a tool to actually increase the amount of goods you can purchase each year.

Because you are gaining more and more buying power each year, another way to think of this plan is that it provides you with an automatic raise each year, since you are able to afford more and more goods and services as your withdrawals increase at a rate higher than inflation.

If you want your buying power to be increasing each year at a rate higher than inflation, than the Inflation Buster is the way to go.

What is the Inflation Buster?

The inflation Buster strategy runs with the same rules as the Four Percent Rule with two major changes.

Change #1 (Yearly Raises): Instead raising your yearly withdrawals at the same rate as inflation, like in most Safe Withdrawal Rate strategies, the Inflation Buster raises your withdrawals by tacking on 0.5% on top of the inflation rate. So, if the previous year's inflation was 2.8%, you would raise your next year's withdrawal by 3.3% (2.8+0.5). This way you will not only maintain your buying power, but you will actually gain more buying power each year. To make the pace increase even more, our calculator allows you to select the "Track +1.0%" option to add an entire percentage point on top of the inflation rate.

Change #2 (Withdrawal Rate): In order to compensate for the added risk of increasing the withdrawals at a faster pace, the Inflation Buster counteracts that risk by decreasing the starting withdrawal rate from 4.0% to 3.75%. This means you start with smaller withdrawals, but end up increasing the amounts over time at a rate faster than inflation. To make it even more conservative, you could decrease the withdrawal rate that you choose for your own personal plan.

Strategy Example

Let's say you start with a portfolio balance of $2,000,000. Our Inflation Buster strategy calls for a 3.75% withdrawal rate which would mean that your first year's withdrawal would be $75,000.

If the inflation rate of the first year was 3.02%, you would then increase your second year's withdrawal by 3.52%. This is because the Inflation Buster tracks the inflation rate and then adds a half percentage (0.5%) on top of the inflation rate.

Your new withdrawal amount, for your second year, would be found by multiplying $75,000 by 1.0352 which equals $77,640. That is a $2,640 raise.

If the inflation rate in the second year was 3.98%, you would increase your withdrawal by 4.48%. So, your third year's withdrawal would then be $81,118 (77,640 x 1.0352).

You would continue this pattern throughout the length of your plan in order to make sure that your yearly budget not only keeps up with inflation but actually gives you more and more buying power throughout the life of your retirement.

You can always check our Historical Inflation Rate page to get the updated inflation data each year for your calculations.

This strategy takes a little bit more math than other simple strategies, but if beating inflation is an important goal in your financial plan, then you will find that the time it takes to make these calculation will be well worth it.

High Inflationary Periods

High inflationary environments are where the cost of goods raise in prices considerable and continually over a period of time.

In a high inflationary period the hope is that your exposure to equity investments grows your portfolio at a rate that somewhat matches the inflationary bubble. This is due to the fact that owning publicly traded companies is often times the most effective way to keep your savings growing in line with inflation.

If goods and services in the economy are selling for higher and higher amounts, the hope is that the companies you own in your portfolio are also growing profit margins consistent with the higher priced items they are selling.

Ultimately, as long as the economy does not crater and crumble to its knees, a diversified portfolio owning parts of companies that are able to raise prices in line with inflation will be able to hopefully grow along with the rate of inflation.

Risk Profile

The risky aspect of the Inflation Buster is that it builds in an ever growing withdrawal amount each year. The heightened withdrawals create a risk that you will draw down a larger and larger amount of your portfolio at the risk of depleting it too fast.

Therefore, a tradeoff in this strategy is that it forces you to start with a slightly lower initial withdrawal rate in order to offset the risks associated with higher withdrawals down the road.

In order to mitigate this risk, you could select a lower withdrawal rate to increase the length of time that this method will continue to provide you with income.

Take a look at the below table to see how this strategy has performed throughout different lengths in history.

Frequently Asked Questions