I am trying to wrap my head around the proper way to do this. I would like to simulate the portfolio value adjusted for inflation with a fixed withdrawal rate.
To simulate withdrawal rate, I will need to adjust my portfolio nominal return series to real return using CPI. After getting real return series, assume that my fixed withdrawal amount is 5% of initial equity. If my initial equity is, say, $1, then my withdrawal rate is 0.05. Since my simulation is real return based, do I need to adjust my fixed withdrawal rate for inflation or do I just keep it fixed at 0.05 and withdrawal this amount each period?
If I do adjust it, I am using the following equation: if inflation is 1% then current withdrawal rate = 0.05 + (0.05 * 0.01) = 0.0505
Which is correct?