Summary
This rule ensures withdrawals are adjusted yearly based on inflation throughout the simulation.
It provides a mechanism to maintain purchasing power over time.
Description
The constant inflation adjustment strategy, first introduced by William Bengen in 1994, works by adjusting the withdrawals (either upwards or downwards) based on the annual inflation rate throughout the simulation. The rationale behind this approach is to ensure that the withdrawals' real value or purchasing power remains constant over the years, accounting for the changes in the cost of living due to inflation.
Example
Let's say you start with a yearly withdrawal of £20,000. If the inflation rate for the following year is 2%, the withdrawal for that year would be increased to £20,400 (£20,000 * 1.02). This process would continue each year, adjusting the withdrawal amount based on the inflation rate.