Inflation-adjusted spending is the classic 4% rule implementation: withdraw a fixed real (inflation-adjusted) dollar amount each year regardless of portfolio performance. It provides predictable income but ignores market conditions entirely — making it riskier than dynamic strategies that adapt to downturns.
Inflation-adjusted spending is a retirement withdrawal strategy where the initial withdrawal amount increases each year by the rate of inflation, maintaining constant purchasing power throughout retirement. This is the classic implementation of the 4% rule — you set your spending level once, and it never changes in real terms.
How It Works
- Year 1: Choose an initial withdrawal amount (e.g., 4% of your starting portfolio)
- Each subsequent year: Increase the withdrawal by the actual inflation rate
- Ignore portfolio performance: Whether markets are up 30% or down 30%, your withdrawal stays on the same inflation-adjusted track
Example with $1,000,000 portfolio at 4% initial rate:
| Year | Inflation | Withdrawal | In Today's Dollars |
|---|---|---|---|
| 1 | — | $40,000 | $40,000 |
| 2 | 3.0% | $41,200 | $40,000 |
| 3 | 2.5% | $42,230 | $40,000 |
| 5 | 2.0% avg | $44,590 | $40,000 |
| 10 | 2.5% avg | $50,500 | $40,000 |
The real spending power stays flat at $40,000 (in today's money) for the entire retirement.
Why It Matters for Retirement Planning
Inflation-adjusted spending has a unique combination of strengths and weaknesses:
Strengths:
- Predictable income: you always know exactly what you can spend, adjusted for cost of living
- Simple to implement: no calculations, no monitoring, no decisions
- Proven track record: historically survived most 30-year periods with a 4% starting rate
Weaknesses:
- Ignores portfolio performance: withdrawing the same amount during a market crash accelerates depletion — this is the core of sequence-of-returns risk
- No upside participation: even if your portfolio doubles, your spending stays flat
- Vulnerable to high inflation: a spike in inflation increases withdrawals precisely when markets are often performing poorly
This rigidity is why the strategy has a lower success rate than dynamic alternatives like Guyton-Klinger or floor & ceiling in Monte Carlo simulations.
Inflation-Adjusted Spending in Retirement Lab
Retirement Lab implements inflation-adjusted spending as the default free-tier strategy — it requires no configuration beyond the initial withdrawal rate. In the simulator, inflation is applied to the withdrawal amount each month, and the strategy makes no adjustments based on portfolio value.
This makes it an ideal baseline for comparison: run a simulation with inflation-adjusted spending first, then switch to a dynamic strategy to see how much the success rate improves when spending adapts to market conditions.
Frequently Asked Questions
- What is the difference between inflation-adjusted spending and the 4% rule?
- They are essentially the same thing. The 4% rule IS an inflation-adjusted spending strategy — you withdraw 4% of your initial portfolio in year one, then increase that dollar amount by inflation each year. The term 'inflation-adjusted spending' describes the mechanism; '4% rule' describes the specific withdrawal rate.
- What happens if inflation is higher than expected?
- With inflation-adjusted spending, your withdrawals increase with actual inflation regardless of portfolio performance. If inflation spikes (like the 8-9% seen in 2022), your withdrawals rise sharply while your portfolio may be flat or declining. This combination accelerates portfolio depletion and is one of the strategy's key risks.
- Should I use inflation-adjusted spending or a dynamic strategy?
- Inflation-adjusted spending provides stable, predictable income but is riskier for the portfolio. Dynamic strategies like Guyton-Klinger trade income stability for dramatically better portfolio survival rates. If you have flexible expenses and can tolerate income variability, a dynamic strategy is generally superior.