PP and income for living expenses

[Clive]

?

[longeyes]

The conclusion I'm drawing is that the better approach might be to just simply keep a separate pot of money - a rainy day tin - that perhaps is invested in safe inflation linked. And rather than taking a fixed amount each and every year from the main fund, instead in good times take a little more and deposit some of that in the rainy day tin, and in bad times take a little less and use the rainy day money to supplement that lower withdrawal.

A separate bucket marked "expenses" makes sense to me, but what do you advise for something "safe [and] inflation-linked?"

[LifestyleFreedom]

A separate bucket marked "expenses" makes sense to me, but what do you advise for something "safe [and] inflation-linked?"

If you project your personal inflation rate for the next year will be 5 percent (regardless of what the "official" rate of inflation is) and you want to keep a one-year bucket of expenses, keep 1.05x of your expenses in the bucket.  This approach might not work very well under conditions of hyperinflation or extremely high rates of inflation, but it works OK the rest of the time.

You can also "pad" your projected expenses by including one or more of your insurance deductible amounts.  That way, you are covered if you have an accident or other calamity while out of work or when your investments have tanked.

Use a government-insured bucket (e.g., FDIC-insured savings account in the United States) for safety.  High-yield savings accounts from reputable banks on the Internet have a "floating rate" that can be adjusted at any time (or use laddered CDs if you have a longer timeframe).  Presumably, these rates would be adjusted upwards as inflation increases.