Retirement Withdrawal Strategy

I'm a member of the Motley Fool (I post under the name "Investinginstuff"). Anyway, we were having a discussion about retirement withdrawal strategies. I have to admit that my initial response was wrong. I didn't realize it until I ran a spreadsheet and saw the numbers for myself.
Here's the case:

A guy retires with $2,500,000 in capital. He desires a $100,000 in income the first year. He has his portfolio invested 65% equities and 35% fixed income. We'll assume a 10% rate of return on the equities and a 3% rate of return on the fixed income. To figure out the expected return on the entire portfolio, you simply multiply the allocation percentages by their expected returns and add the numbers together. Like this:

.65 X .10 = .065
.35 X .03 = .0105
Total = .0755 or 7.55%

So, we will assume a portfolio rate of retun of 7.55%. We'll also assume that his income need will increase at the same rate as inflation, which is 3%.

My strategy is to put three years' worth of income needs in a cash account. Then each year, simply withdraw one more year's worth of income from the investment account and put it into the cash account. If he has a really bad year in the market, he could forgo withdrawing money that particular year, giving him flexibility.

Here is my method for looking at the numbers:

The first thing is to figure out his three years of income needs. Here's a look at how his income needs might grow assuming a 3% inflation rate:

YR Income
1  $100,000
2  $103,000
3  $106,090
4  $109,273
5  $112,551
6  $115,927
7  $119,405
8  $122,987
9  $126,677
10 $130,477
11 $134,392
12 $138,423
13 $142,576
14 $146,853
15 $151,259
16 $155,797
17 $160,471
18 $165,285
19 $170,243
20 $175,351

A quick summation tells us that he needs to withdraw $309,090 at the beginning of year one to fund his cash account. This is what his annual numbers would look like:

                 (minus)                    Ending
YR Investments Cash Needs  Balance   ROR    Balance
 1   2,500,000   $309,090 2,190,910 7.55% $2,356,324
 2  $2,356,324   $103,000 2,253,324 7.55% $2,423,450
 3  $2,423,450   $106,090 2,317,360 7.55% $2,492,320
 4  $2,492,320   $109,273 2,383,048 7.55% $2,562,968
 5  $2,562,968   $112,551 2,450,417 7.55% $2,635,423
 6  $2,635,423   $115,927 2,519,496 7.55% $2,709,718
 7  $2,709,718   $119,405 2,590,313 7.55% $2,785,881
 8  $2,785,881   $122,987 2,662,894 7.55% $2,863,942
 9  $2,863,942   $126,677 2,737,265 7.55% $2,943,929
10  $2,943,929   $130,477 2,813,451 7.55% $3,025,867
11  $3,025,867   $134,392 2,891,475 7.55% $3,109,782
12  $3,109,782   $138,423 2,971,358 7.55% $3,195,696
13  $3,195,696   $142,576 3,053,120 7.55% $3,283,630
14  $3,283,630   $146,853 3,136,777 7.55% $3,373,604
15  $3,373,604   $151,259 3,222,345 7.55% $3,465,632
16  $3,465,632   $155,797 3,309,835 7.55% $3,559,728
17  $3,559,728   $160,471 3,399,257 7.55% $3,655,901
18  $3,655,901   $165,285 3,490,616 7.55% $3,754,158
19  $3,754,158   $170,243 3,583,914 7.55% $3,854,500
20  $3,854,500   $175,351 3,679,149 7.55% $3,956,925
21  $3,956,925   $180,611 3,776,314 7.55% $4,061,426

So, as you can see, assuming the assumptions hold true, this guy's portfolio should continue to grow and give him a sizeable amount of income.

Now, it's time for the lovely DISCLAIMER: This is meant to be an example or model ONLY. Invest at your own risk.