How a retirement withdrawal calculator works (with formulas)

A retirement withdrawal plan is a balance between two forces: growth (your portfolio’s return) and spending (your withdrawals). If growth is higher than spending for long enough, your money can last for decades. If spending is consistently higher than growth, the portfolio eventually depletes — sometimes slowly, sometimes suddenly.

This calculator runs a month-by-month simulation because retirement withdrawals typically happen monthly (rent, groceries, healthcare, travel, etc.). Monthly simulation also makes inflation adjustment feel more realistic than a single once-per-year jump.

Most people think in annual returns, like “6% per year.” But if we simulate monthly, we need a monthly growth rate. We also account for annual fees (expense ratios, advisory fees, platform fees), because fees reduce your net growth.

First we compute a net annual rate:
r_net = r − f
where r is your expected annual return (as a decimal) and f is annual fees.

Then we convert it to a monthly compounding rate:
r_m = (1 + r_net)^1/12 − 1

Example: If your return is 6% and fees are 0.5%, then r_net ≈ 5.5%. Monthly rate becomes (1.055)^1/12 − 1 ≈ 0.446% per month.

Inflation is what turns a “comfortable” retirement income into a “wait… why is everything so expensive?” situation. If you withdraw a fixed dollar amount forever, your real spending power shrinks each year. Many people therefore increase withdrawals with inflation to maintain a similar lifestyle.

The calculator supports both:

• Inflation-adjusted withdrawals: your withdrawal increases over time by inflation.
• Flat withdrawals: your withdrawal stays the same nominal amount.

If inflation adjustment is enabled, we compute a monthly inflation factor:
i_m = (1 + i)^1/12 − 1
and grow the withdrawal amount each month by (1 + i_m).

Example: With 2.5% inflation, the monthly inflation factor is roughly (1.025)^1/12 − 1 ≈ 0.206% per month.

Each month, the portfolio does two things:

• It grows by the net monthly rate (investment return minus fees).
• It pays your withdrawal for that month (fixed amount or percentage-based).

In formula form for a fixed-withdrawal plan:
B_t+1 = B_t · (1 + r_m) − W_t
where B is the balance and W is the withdrawal amount for month t.

If you choose a percent-of-portfolio strategy (like a “4% rule” style rate), we convert that annual percentage to a monthly withdrawal amount tied to the current balance:
W_t = B_t · (p / 12)
where p is the annual withdrawal rate (as a decimal).

Percent withdrawals often make depletion less likely, because spending automatically drops if the portfolio drops. But the tradeoff is income can be less predictable.

This calculator reports both nominal dollars and inflation-adjusted dollars (sometimes called “real dollars”). Nominal dollars are what you see in your bank account. Real dollars answer: “What is this amount worth in today’s purchasing power?”

If the simulation is T months in, the inflation index is:
InflationIndex(T) = (1 + i)^T/12
So a nominal amount X becomes:
X_real = X / InflationIndex(T)

Suppose you retire with $1,000,000, expect 6% annual return, assume 2.5% inflation, and withdraw $4,000 per month ($48,000/year). That’s a 4.8% first-year withdrawal rate. If you enable inflation adjustment, your withdrawals increase each year. The portfolio might still last 30 years depending on assumptions — but turning inflation on will almost always shorten how long it lasts compared to leaving withdrawals flat.

Now compare that to a 4%/year percentage withdrawal strategy. In year one, you might withdraw $40,000. If the market drops early, the withdrawal drops too — which can protect the portfolio, but may feel like a forced lifestyle cut. The “best” strategy depends on your flexibility and your plan for worst-case years.

• Run 3 scenarios: optimistic, base, and pessimistic (e.g., 7%/3%/1% real returns).
• Turn inflation on: most retirees want stable purchasing power, not stable nominal dollars.
• Add fees: if you’re paying 1% all-in, that’s meaningful over 25–35 years.
• Don’t treat “lasts 30 years” as guaranteed: this is math with assumptions, not a promise.
• Use the year table: if balances start collapsing near year 20, you’ll want a backup plan.

If you want the “Omni-level truth”: the biggest missing ingredient is randomness. Real returns come in uneven years. But a clean deterministic simulation is still extremely useful as a baseline, and it’s perfect for comparing strategies side-by-side.

Retirement Withdrawal FAQ

• Is this the “4% rule” calculator?

  It can be. If you choose Percent of portfolio and set the withdrawal rate to 4%, you’ll see how a 4%/year withdrawal behaves under your return and inflation assumptions. For a classic “4% rule” study result, you’d also need historical return sequences — this tool is a simplified model.

• Why does inflation adjustment make the portfolio run out faster?

  Because your withdrawals grow every year. Even if returns are decent, spending growth can outpace the portfolio — especially later in retirement. Inflation-adjustment is realistic, but it’s also the reason retirement planning is hard.

• What’s a “safe” withdrawal rate?

  “Safe” depends on horizon, asset mix, fees, flexibility, and worst-case sequences. Many people use 3%–5% as a rough range. Use this calculator to stress test: if 4% barely lasts, try 3.5% or cut spending early.

• Should I use nominal return or real return?

  If you enter both return and inflation, the calculator can show “today’s dollars” in the results — that’s effectively a real view. Most people enter nominal return (what portfolios are quoted in) and nominal inflation, then look at real outputs.

• Does this include taxes?

  Not directly. Taxes vary by account type (traditional, Roth, taxable), state, and withdrawal timing. If you want a quick hack: increase the withdrawal amount to represent “spend + taxes,” or reduce the return to represent drag.

• Why percent withdrawals feel safer but less comfortable?

  Because income adjusts with the market. If the portfolio drops, your withdrawal drops automatically. That protects the portfolio, but it can be psychologically difficult if spending is rigid.