Summary
The fixed withdrawal strategy does not consider inflation in the calculation.
Withdrawals stay the same throughout the retirement period, reducing their real value over time.
Description
The fixed withdrawal strategy functions on the premise that withdrawals are not adjusted for inflation throughout the plan. This essentially means that the withdrawal amount is fixed at the start of the simulation and remains the same throughout. The downside of this approach is that the real value of these withdrawals, i.e., the purchasing power, declines over time due to inflation.
Example
Let's say you have a fixed annual withdrawal of £30,000. In the first year, you can buy goods and services worth £30,000 with that money. However, with an average inflation rate of 2% per year, the same goods and services would cost about £32,600 after 10 years.
Yet, your withdrawal would remain the same at £30,000 each year under the Fixed Withdrawal strategy. This means that after 10 years, your fixed withdrawal would now be worth approximately £24,696. So, in real terms (i.e., considering the purchasing power), your fixed withdrawal decreases over time due to inflation.