how to not cook your goose when the nest egg hatches

[isthisused]

What is the best formula that balances principle preservation with income that keeps up with inflation? This would be necessary in the event of an early retirement or a widow trying to supplement her income with an insurance settlement that she is trying to preserve, Or you want to leave it to your kids or more likely grand kids.

Example: nest egg is $1000,000 1st year 4% =$40,000 2nd year with drawl is $41,200 3rd year is $42,436 this has with drawls increasing by 3% to keep up with inflation. Without this the standard of living must decline with inflation. Which is no big deal for the first few years but after 10 or 20 you will be eating cat food.

OR Example #2 : regardless of the size of principle, take 4% and hope that the fund grows enough that the 4% will also grow? I tried to do the math on this and it seams that if your fund gains 6% per year and you take 4% that your 4% will not keep up with inflation. But will grow the principle.
I could be doing the math wrong I bearly finnished high school.

It seams that example # 1 would provide a stable income that will lag a little behind inflation( I believe it has averaged 3.9%) but mostly keep up. But would eventually begin to erode the principle. Unless some of the principle was in stocks, then the growth might keep pace.

My thinking is to use example #1 with a conservative mix of stock and bond funds with the stipulation that the cost of living raise must be skipped if the principle begins to decline.

Of course if the egg is big enough to begin with you don’t have to worry about this stuff.

Question: What average annual gain would you need in order to preserve principle when using example #1?