What this calculator does
The calculator answers the question of how long existing wealth can sustain a monthly withdrawal. The remaining capital stays invested and keeps earning a return. The withdrawal rises with inflation every year, because otherwise your money would be worth less and less over the years. The result is either a number of years or a remaining capital figure, which shows that the portfolio is not used up during the whole period.
There is deliberately no field for the time period. Here the duration is the result, not the input.
The calculation for $300,000 in retirement also shows how a pension, part-time work and housing costs change the withdrawal you need. For a couple or higher spending, you will find the comparison at $750,000.
How I calculate it
I calculate monthly, not annually. An annual calculation moves every withdrawal to the end of the year on paper and flatters the result. As an example I take the calculator’s default values: $500,000 capital, a $2,000 monthly withdrawal, a 5% return and 2% inflation.
Step 1: Convert the annual return into a monthly figure. 5% a year is not 5 divided by 12. Twelve months at 0.4167% each add up to 5.12% a year because of compounding. So I convert geometrically. 5% a year becomes 0.4074% a month. Twelve such months give exactly 5% again.
Step 2: Withdraw at the start of the month. $2,000 comes out of $500,000. That leaves $498,000. This part is gone and no longer works for you that month. This is the cautious way to calculate, and it matches everyday life, because you need the money at the start of the month.
Step 3: Apply the return to the remaining capital. $498,000 grows by 0.4074%. That is $2,028.91 in returns. At the end of the first month you are at $500,028.91.
Step 4: Raise the withdrawal after twelve months. In the second year you no longer withdraw $2,000 but $2,040. In the eleventh year it is $2,437.99, in the twenty-first year $2,971.89. Purchasing power stays the same, the amount rises.
Step 5: Repeat the whole thing 720 times. That is all there is to it. The calculator simulates 60 years. Nobody needs to plan what happens after that.
For the example, the result is this: the capital lasts 32.4 years. A total of $1,077,766.78 is paid out over that time. So $500,000 turns into more than twice as much in payouts, because the part not yet withdrawn keeps working the whole time. The last monthly withdrawal is $3,769.08. That sounds like a lot, but it is not: $3,769.08 in year 33, after 32 years of 2% inflation, has exactly the purchasing power of $2,000 today.
Why the first years look harmless
In the example, the capital earns $24,354.84 in the first year. $24,000 is withdrawn. So the return covers the withdrawal completely, and at the end of the first year there is even $500,354.84 in the account. More than at the start.
This is exactly where almost everyone gets it wrong. From the second year on, the withdrawal rises by 2%, but the capital no longer grows at the same pace. The balance barely falls at first, then faster and faster:
After 10 years, $477,712.17 remain. After 20 years it is $367,664.54. That still looks comfortable. After 25 years it is $259,035.69, after 30 years only $98,516.09. A little over two years later nothing is left.
The first twenty years cost $132,335.46 of capital in total. The last five years and a bit cost $201,890.56. If you only look at the balance after ten or fifteen years, you will think the plan is safer than it is.
What is often overlooked
Inflation decides the whole plan. Without any adjustment, the same $2,000 would be paid out for 60 years and $625,467.39 would still be there at the end. With a 2% adjustment it ends after 32.4 years. Just one percentage point more, so 3% inflation, costs another 5.3 years and cuts the duration to 27.1 years. If you plan without inflation, your plan misses reality.
The return in the withdrawal phase is not the return of the saving phase. Two percentage points less, 3% instead of 5%, shorten the plan from 32.4 to 23.5 years. With 7%, on the other hand, the capital is not used up during the whole period. You should know this range before you commit to a figure. How strongly an assumption plays out over decades is also visible in the compound interest calculator.
The order of returns works against you in the withdrawal phase. In the saving phase, weak years are good because you buy more cheaply. When you withdraw, this reverses. If prices fall, you sell more units for the same $2,000, and those units are missing later. Two to three years of withdrawals in an instant access savings account are therefore not dead capital. They are the buffer that keeps you from having to sell at the worst moment.
Taxes and costs are not part of this calculation. The figures are before taxes. How withdrawals are taxed depends on the country you live in. Depending on the rules, tax may apply only to the gain portion of the units you sell, or may already be due while the money stays invested. Check the rules where you live, or ask a tax advisor. Custody fees and fund charges also act like a lower return. You will find figures on that in the ETF savings plan calculator.
A withdrawal plan is not a spending plan. A new car, dental work, a need for long-term care. Items like these are not part of the monthly payment. Either include them as a higher withdrawal or set money aside for them outside the plan.
How to use the calculator sensibly
Start with your actual gap, not a wish figure. Work out how much you are really short each month after pensions and rental income. That figure goes into the “Monthly withdrawal” field. If you have not yet stopped working, the guide Live off your investments places the withdrawal in the complete plan of expenses, taxes, health insurance and later income.
Then calculate three scenarios instead of one. A cautious one with a 3% return, a middle one with 5% and a friendly one with 7%. The range between 23.5 years and capital that is never used up shows you more honestly than any single figure what you are getting into.
Finally, check where the line between drawing down and preserving capital lies for your figures. In the example it is just under $1,477 a month. Above that, the capital is gone within the 60 years, at $1,500 after 57.6 years. Just below it something does remain, but real preserved capital only appears at much lower withdrawals. At $1,475 a month, $10,465.74 remain after 60 years, at $1,250, by contrast, $1,433,552.94. The common four percent rule corresponds to a withdrawal of $1,666.67 a month for $500,000 and gives 45.2 years in this model. It is useful as a rough guide, but it does not replace your own calculation.
And at the end, adjust the one lever that is truly yours. You cannot determine the return. Your withdrawal you can. $300 less a month, so $1,700 instead of $2,000, extends the plan in the example from 32.4 to 43.4 years. That is eleven years for an amount many people do not even think about.