The 4% Rule and Inflation: How do you account for this in withdrawals over time?

[Joseph Lambert]

Aloha!

I really enjoyed the BP Money Podcast with the Golden Ratio Risk Parity Formula back in July- already listened to it twice and took copious notes!  :-)

  But there is one element of the 4% Rule (or even 5% Safe Withdrawal Rate dicussed on the Podcast): How or when do you account for inflation in your withdrawal amounts?  Yes, I understand that if I want $100k / year, you need $2.5M, and then you can withdraw $100k per year.  But $100k 30 years from now is not $100k today as we all know!  :-)  Do the projections and studies account for that in the 30 year timelines at all?

So my question for the group is: How do you adjust for inflation over the decades if you want to use a percentage?  In the Podcast, @Mindy Jensen is withdrawing 5% annually (or 1/12 of 5% monthly) of the $10,000 portfolio, or $42 per month.  So it will be fun to watch her and @Scott Trench and listen to the podcast as they continue to do this.  

But at what point does that $42 monthly withdrawal increase to account for inflation?  As 10, or 20, or 30 years from now, that cost of living is higher, and that same dollar amount won't cover what it does today.

So when considering withdrawals, how do we in the FI community update the monthly or annual withdrawal amounts if we want to adhere to the 4% rule?  That element of the 4% Rule has always confounded me!  :-)

Mahalo!

-Joe