This model assumes a single annual compounding period and annual withdrawal. The inputs to the calculation are the value of the nest egg, after tax return rate, inflation rate, age of the retiree, and withdrawal amount. Because there are so many inputs in this calculation, many will be fixed so that the calculation can be manipulated without confounding the effects. The initial value of the nest egg has a great effect on the amount that can be withdrawn each year and the length of time that it will last. After tax return rate is the interest rate that investments earn less the tax rate.
Tax rates vary from state to state.
It is important to understand that an increase in the tax rate would cause a decrease in the after tax return rate and that a decrease in the tax rate would cause an increase in the after tax return rate. In this calculation, however, adjustments to the after tax return rate are made by adjusting the interest rate. The annual yield of a bond is an example of an interest rate used in this model. The inflation rate is the rate at which the purchasing power of the annual withdrawal diminishes. Each dollar will purchase fewer goods or services next year than it does this year.