how long will $600K last, assuming it earns 6% a year with a withdrawl of 4% annually and inflation rate of 2%
To determine how long $600K will last under these assumptions, we need to consider the annual withdrawal rate, the rate of return, and the inflation rate. Here's how you can calculate it:
1. Calculate the annual withdrawal amount: Multiply the $600K by the withdrawal rate of 4% to get the annual withdrawal amount. In this case, it would be $600,000 x 0.04 = $24,000.
2. Adjust for inflation: Since the inflation rate is 2%, we need to adjust the withdrawal amount annually to maintain its purchasing power. We can do this by subtracting the inflation rate from the withdrawal rate. In this case, the adjusted withdrawal rate would be 4% - 2% = 2% or 0.02 in decimal form.
3. Calculate the real rate of return: The real rate of return takes into account both the nominal rate of return (in this case, 6%) and the inflation rate. You can calculate it using the formula: Real Rate of Return = (1 + Nominal Rate of Return) / (1 + Inflation Rate) - 1.
Real Rate of Return = (1 + 6%) / (1 + 2%) - 1
= 1.06 / 1.02 - 1
≈ 0.0392 or 3.92% (rounded to two decimal places)
4. Determine the number of years: To find out how many years the $600K will last, you divide the initial amount by the adjusted withdrawal amount each year until the funds are depleted.
Number of Years = $600,000 / $24,000 = 25 years
So, based on these assumptions, if you withdraw 4% annually (adjusted for inflation) and assume an annual return of 6% with an inflation rate of 2%, the $600K is expected to last approximately 25 years.