Timeline enables financial planners to model a number of withdrawal strategies.
Inflation adjustments are rule-based approaches on how withdrawals are adjusted for inflation each year during the retirement period.
- Constant inflation adjustment: this is the original withdrawal strategy created by William Bengen, in his seminal paper in the Journal of Financial Planning in 1994. This works on the basis that withdrawals are adjusted (up or down) for inflation every year through the entire retirement period.
- Fixed withdrawal – no inflation adjustment: this approach works on the basis that withdrawals are not adjusted for inflation at all during the entire retirement period. The implication is that income withdrawals decline in real terms over time.
- Guyton inflation adjustment: this approach is one of the withdrawal rules originally proposed by US financial planner Jonathan Guyton. Under this rule, withdrawals are adjusted for inflation annually,except in years following a negative portfolio return. In other words, withdrawals are frozen in years following a negative portfolio return.
- Cap and collar inflation adjustment: this approach places an upper limit (cap) and a lower limit (collar) on how withdrawals are adjusted for inflation annually during the retirement period. The result is that income increases over the retirement period, but at a slower pace than inflation. Timeline app defaults to a cap of 5% and a collar of 0% - but planners can set their cap and collar.
- Inflation minus X% adjustment: under this strategy, withdrawal is increased in line with CPI minus X%, where X% ranges from 1% to 5% as determined by the user. For instance, for CPI minus 1%, withdrawals are increased by CPI less 1%.