Breakdown
How it works
Each month the pot earns a return and you withdraw an amount that rises with inflation each year. The pot lasts until the balance hits zero. A withdrawal equal to the real return (return minus inflation) can be sustained indefinitely.
Formula
Balance_{m+1} = balance_m × (1 + r/12) − withdrawal
Withdrawal grows by inflation each year
Perpetual withdrawal ≈ pot × (real return) ÷ 12
Worked example
300,000 drawing 2,000 a month, 4% return, 2.5% inflation: lasts about 14 years. A perpetual withdrawal would be about 365 a month.
Frequently asked questions
What return should I assume?
Cash 3–4%, balanced portfolio 5%, equities 6–7% long-run — but a pot being drawn down suffers from sequence risk, so use the lower end.
How does inflation change it?
Dramatically. 2,000 today needs to be 3,280 in 20 years at 2.5% inflation; ignoring it overstates longevity by several years.
What is a safe withdrawal rate?
About 3.5–4% of the starting pot per year, rising with inflation, for 30 years; lower for longer horizons.