Is 4% rule safe for early retirement?
Bolingbrook IL · Member since 2018 · 57 posts · 13 votes
Is 4% rule safe for early retirement?
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y@Rahul Handa part of the problem is people on Youtube or on podcasts are spewing out the same thing they heard someone else say, without using their own critical thinking to validate if it is true. There is also misinformation around the caveats that go with this advice.
The general 4% rule is for people retiring at 65 with expected 25-30 years remaining before death. The other assumption is that people are receiving social security and medicare benefits. Also most people by age 65 have much lower expenses and usually own their home outright.
I have seen the early retirement crowd latch on to the 4% rule, but it ignores a different reality of their stage of life. Someone retiring at age 30 has 60-70 years remaining before death. They will not receive social security or medicare for 35 more years and since they quit working young, their social security benefit will be on the low side. The more important factor is that people in their 30's and 40's have much higher spending rate then people in their 60's and 70's. (Grandma has had the same couch for 40 years, right?) One of the biggest expenses is kids, not just feeding and clothing, but all the other stuff. Like living in a good neighborhood for schools or extra activities and college. Even if you don't have kids, there is health care, which can be one of the biggest challenges for early retirement.
Also keep in mind that the bloggers who retired early make more money now telling their story, then they made while they were working. So they are not really living on 4% withdrawal, but rather live from the post retirement income. Arguably they are not even retired, because most are still working, just in their own business.
More importantly if you had $1M, it would better to invest it in real estate. It is fairly easy to get a 10% annual cash flow return on your investment. So you can invest $1M and get $100K per year cash flow. Plus you have appreciating cash flow over time to account for inflation.
29 Replies
- 7yBridget Y.Pro MemberReal Estate Agent · Mankato, MN · Member since 2019 · 99 posts · 52 votes
It probably depends on how much your return on investment is. If you invest in a fund that returns 8% per year and you take out 4% every year, your money is still growing at 4% per year. That's faster than inflation, which is about 2% per year. That's my understanding of it. The middle class has been tough to work for money, and the rich have learned how to make money work for them (Learned this from the book Rich Dad, Poor Dad).
- Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes7y
@Rahul Handa
Why isn’t everyone just saving $1 million and then living off that savings? Because, they spend all their money. Btw: that’s only $40k a year, before taxes. But yes, traditionally speaking, the 4% rule does work. Just hope you didn’t start retirement in 2018, when you would have lost money in the markets. Or 2008 when it was much worse.
- Bolingbrook IL · Member since 2018 · 57 posts · 13 votes7y
Originally posted by @Anthony Wick:
@Rahul Handa
Why isn’t everyone just saving $1 million and then living off that savings? Because, they spend all their money. Btw: that’s only $40k a year, before taxes. But yes, traditionally speaking, the 4% rule does work. Just hope you didn’t start retirement in 2018, when you would have lost money in the markets. Or 2008 when it was much worse.
Taxes on the 40k? Thats even worse.
- Member since 2019 · 8 posts · 5 votes7y
@Rahul Handa
Yes, the 4% rule is probabilistically determined to make your portfolio last for a 30 year retirement. In the vast majority of cases, your portfolio will last longer than that, or even increase over time. You spend down 4% in year one and then increase each year for inflation.
In real life, nobody draws down their portfolio this way. If you spend conservatively during a bear market, your portfolio will likely last longer. The best way to determine likely success is to retire when 10 year PE is on the average/low side. PE right now is kind of high, so you'd want to lower the SWR if you were retiring today.
All that said, the rule hasn't been tested for retirements longer than 30 to 40 years, so if you're planning on retiring earlier, you may want to consider a lower safe withdrawal rate.
designed to allow you to spend down your portfolio for a3
- 7yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
With regards to taxes, that depends on how your money is invested. I don't know the US equivalent, but in Canada we have RRSP (registered retirement savings plan) which is money we put aside and defer paying taxes on until we withdraw it during retirement when we are in a lower tax bracket. We also have regular investments (no tax deferral at the time of investing) where we are taxed every year only on the interest and a newer option of TFSA (tax free savings accounts) where we are not taxed on any of the interest.
- Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes7y
4% is a rule of thumb. It does not apply universally to every individual and unique set of circumstances. Investopedia, Morningstar and others are challenging this rule which was based on research done during a 50-year period from 1926 to 1976. In the book about Warren Buffett called "The Snowball," Alice Schroeder shares an intriguing story Buffett discussed at a workshop when he explained the Dow Jones was at 874.12 in 1964. 17 years later, in 1981, it was at 875.00 - although the economy grew fivefold. There are simply to many variables to base retirement withdraws on the 4% rule. Interest rates, market downturns or slow periods (as Buffett pointed out), portfolio structure (high risk investment vehicles vs conservative), etc. comprise those variables. Conclusion, its just a rule of thumb; "The English phrase rule of thumb refers to a principle with broad application that is not intended to be strictly accurate or reliable for every situation."
- Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes7y
@Theresa Harris When I mentioned taxes, I'm absolutely assuming your money was placed into a 401k type investment, which is a tax deferred account. The other option is the Roth IRA, which is money placed post tax. But, Roth IRA's are capped at $6k a year, with another $1k after age 50. Pretty hard to get to $1 mil on those contributions, even if a couple each contributes those amounts. It would take a couple 30 years of maxing out at a gain of 7% each year to get there.
- Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes7y
Another interesting point is; since we are all on BP website, I'm assuming we aren't all just saving into a 401k to get that 4% withdrawal rate at age 65. For me, I have; 401k max out, Roth IRA max out, rental properties/passive income, a Vanguard Brokerage account, and Soc Sec at age 62. Oh, and I have a pension coming when I retire, which most people do not. The point is, to be most successful you can't just hope to withdraw all those eggs from one basket at retirement. And don't get me started on debating the word "retirement", because that has a whole bunch of different definitions for people.
- Investor · Fairport, NY · Member since 2015 · 124 posts · 74 votes7y
@Rahul Handa if you want to get some great information on index funds, and the 4% rule, I highly recommend The Simple Path to Wealth by JL Collins.
The book is an easy read with strait forward information, good luck.
- Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes7yRahul Handa Focusing on passive or semi-passive income to cover your monthly expenses, which are paid for by after-tax dollars, is the much safer approach. This concept doesn’t necessarily mean invest only in real estate. The timing of your early years of retirement will define your later years of retirement, which may be dependent on the markets and overall economy. Whether or not the 4% rule will actually work is largely dependent on a concept called Sequence of Returns. Simply put, this is the difference between actual returns and average returns over the course of time. If down (loss) years strike early, than your nest egg takes a hit that may be unrecoverable. Here’s a Down Market Analysis: If you lose 5% you must gain back 5% to break even. If you lose 25% you must gain back 33% to break even. If you lose 50% you must gain back 100% to break even. If you lose 75% you must gain back 300% to break even. You can be the judge on whether the stock market can ‘gain back’ these percentages during your time horizon for retirement.
- Investor · Raleigh, NC · Member since 2013 · 1k+ posts · 708 votes7y
Originally posted by @Rahul Handa:
I fell like there is more to it than just this. I have watched lots of videos on people claming that if you invest $1m dollar into index funds and only take out 4% every year then you will never run out of money. Is this really true? If its true then why isn’t everyone doing it.
Actually, this rule was established with the assumption of an average retirement of 25-30 years (Say, you retire at 65 and die at 90-95). It also assumes that you have the money invested at about a 50/50 mix of stocks and bonds. So, if by “early retirement” you mean age 30, then no, a 4% SWR will not necessarily carry you to age 90. A 3% SWR probably will. Since this is a real estate site, the next question is: in the long term, does real estate income behave more like stocks or bonds?
Debates on all of this are endless. I recommend you take a look at www.early-retirement.org or www.bogleheads.org
To answer your question directly: everyone doesn't do this, because a.) everyone doesn't have a million in investable net worth and b.) everyone can't or doesn't want to live on $40'000 a year (pre-tax, unless it comes from a Roth IRA).
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
@Rahul Handa part of the problem is people on Youtube or on podcasts are spewing out the same thing they heard someone else say, without using their own critical thinking to validate if it is true. There is also misinformation around the caveats that go with this advice.
The general 4% rule is for people retiring at 65 with expected 25-30 years remaining before death. The other assumption is that people are receiving social security and medicare benefits. Also most people by age 65 have much lower expenses and usually own their home outright.
I have seen the early retirement crowd latch on to the 4% rule, but it ignores a different reality of their stage of life. Someone retiring at age 30 has 60-70 years remaining before death. They will not receive social security or medicare for 35 more years and since they quit working young, their social security benefit will be on the low side. The more important factor is that people in their 30's and 40's have much higher spending rate then people in their 60's and 70's. (Grandma has had the same couch for 40 years, right?) One of the biggest expenses is kids, not just feeding and clothing, but all the other stuff. Like living in a good neighborhood for schools or extra activities and college. Even if you don't have kids, there is health care, which can be one of the biggest challenges for early retirement.
Also keep in mind that the bloggers who retired early make more money now telling their story, then they made while they were working. So they are not really living on 4% withdrawal, but rather live from the post retirement income. Arguably they are not even retired, because most are still working, just in their own business.
More importantly if you had $1M, it would better to invest it in real estate. It is fairly easy to get a 10% annual cash flow return on your investment. So you can invest $1M and get $100K per year cash flow. Plus you have appreciating cash flow over time to account for inflation.
- Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes7y
Originally posted by @Joe Splitrock:
@Rahul Handa part of the problem is people on Youtube or on podcasts are spewing out the same thing they heard someone else say, without using their own critical thinking to validate if it is true. There is also misinformation around the caveats that go with this advice.
The general 4% rule is for people retiring at 65 with expected 25-30 years remaining before death. The other assumption is that people are receiving social security and medicare benefits. Also most people by age 65 have much lower expenses and usually own their home outright.
I have seen the early retirement crowd latch on to the 4% rule, but it ignores a different reality of their stage of life. Someone retiring at age 30 has 60-70 years remaining before death. They will not receive social security or medicare for 35 more years and since they quit working young, their social security benefit will be on the low side. The more important factor is that people in their 30's and 40's have much higher spending rate then people in their 60's and 70's. (Grandma has had the same couch for 40 years, right?) One of the biggest expenses is kids, not just feeding and clothing, but all the other stuff. Like living in a good neighborhood for schools or extra activities and college. Even if you don't have kids, there is health care, which can be one of the biggest challenges for early retirement.
Also keep in mind that the bloggers who retired early make more money now telling their story, then they made while they were working. So they are not really living on 4% withdrawal, but rather live from the post retirement income. Arguably they are not even retired, because most are still working, just in their own business.
More importantly if you had $1M, it would better to invest it in real estate. It is fairly easy to get a 10% annual cash flow return on your investment. So you can invest $1M and get $100K per year cash flow. Plus you have appreciating cash flow over time to account for inflation.
HECK YES!! THIS GUY GETS IT!!! Mr. Money Mustache, Jacob of ERE, most of these guys make hundreds of thousands a year in endorsements and advertising from their blogs. The people who don't and try to retire off say 300K with a SWR of 1K a month at 30 years old are DELIRIOUS! For EXACTLY the reasons Joe just pointed out! YES!!
- Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes7y
Originally posted by @Sam Shueh:
Talk to an investment advisor. 75% Americans do not use their service. Those 17% who use them(free) learned about what they can do and what is illusion. Rest have no savings.
Huh?
- Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes7y
@Joe Splitrock Wellllllll......... I'd say a lot of what you said is as much hyperbole as those "retiring" at age 30. No, people are not retiring at 30 and need money to 100. Average life span is about 78 years. And, if you have $1 million at age 30, it is extremely doubtful you're sitting on your grandmas davenport the rest of your life just spending money and not earning any. Now, I know you know a lot of this, but I just wanted to have fun pointing out your exaggerations as much as the "anti FIRE" crowd points out the "impossible".
Now, back to our programming. The average return on the stock market from 1950-2009 was exactly 7%. And 2009 to 2018? Wow! Huge. If you retired in 2008, then you'd be in trouble taking a huge hit right away. But, on average, the 4% rule absolutely holds true for much longer than a 30 year retirement. As I just said, you'd actually have much more than $1 mil when you died if you adhered to the 4% rule. It's the adhering to the 4% that could be a problem. The 4% is more supplemental, not all the money you'd every have. But again, if you saved $1 mil by age 30 or 40, I'd say you have the wherewithal to make and save more over the remaining course of your life. Health insurance and expenses could be an issue of course.
I'm "retiring early". Age 54. Not super early, but early. But what is retiring? I'll be working and searching to expand my portfolio, and maybe a hobby job to boot. Hard to tell quite yet. But I will have retired from my main career.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes7y
I think a lot of the problem is in the translation. If you think of retirement as no more working, traveling around and living a life of leisure, that's going to be a lot harder to do, statistically speaking, if you left the workforce at 30 with 1 million than if you left at 50 with 1 million. Why? Because you are statistically much closer to death at 50 than at 30, and thus don't need to rely on the investment outperforming your expenses for as long - if you had a down year, with no investment income, and had to eat into principle, it's not as crucial if you have 15 years left to live as if you have 30.
Now, if you think of retirement as "leaving the corporate workforce", and consider it likely that you'll work for yourself, get a job you really like that maybe doesn't pay well/pay as well, or have some other way of earning income, it becomes a lot more likely you can do so whatever your age. I suspect most "FIRE" people more or less fall into this category, even if they first think they're going to travel around and just be unfettered. I've read/listened to plenty of blogs & podcasts of people who thought they would be that guy/gal, and found a year or two into it they lacked purpose and ended up back in a paying "job", even if it was working for themselves. Most of these bloggers & podcasters, that's exactly what they are doing. More or less the only one that's not really making anything off his site is the Mad Fientist, who really doesn't appear to have much money maker stuff there other than his links to travel cards. Everyone else sells advertising or has affiliate marketing. That's their new job. Maybe it's their passion, so in that sense they are doing it the way they wanted. Others find they've just traded jobs.
I think we need a new term. I'm going to coin it. "Opportirement". The opportunity to retire, or do something else, based on your financial condition.
You heard it here first. ©JD Martin 2019 😉
Skyline Properties - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
Originally posted by @Anthony Wick:
@Joe Splitrock Wellllllll......... I'd say a lot of what you said is as much hyperbole as those "retiring" at age 30. No, people are not retiring at 30 and need money to 100. Average life span is about 78 years. And, if you have $1 million at age 30, it is extremely doubtful you're sitting on your grandmas davenport the rest of your life just spending money and not earning any. Now, I know you know a lot of this, but I just wanted to have fun pointing out your exaggerations as much as the "anti FIRE" crowd points out the "impossible".
Now, back to our programming. The average return on the stock market from 1950-2009 was exactly 7%. And 2009 to 2018? Wow! Huge. If you retired in 2008, then you'd be in trouble taking a huge hit right away. But, on average, the 4% rule absolutely holds true for much longer than a 30 year retirement. As I just said, you'd actually have much more than $1 mil when you died if you adhered to the 4% rule. It's the adhering to the 4% that could be a problem. The 4% is more supplemental, not all the money you'd every have. But again, if you saved $1 mil by age 30 or 40, I'd say you have the wherewithal to make and save more over the remaining course of your life. Health insurance and expenses could be an issue of course.
I'm "retiring early". Age 54. Not super early, but early. But what is retiring? I'll be working and searching to expand my portfolio, and maybe a hobby job to boot. Hard to tell quite yet. But I will have retired from my main career.
I think it is very prudent to plan for 100 years of age if you are a young person in your 20's considering early retirement at 30 years of age. First of all, many people live past the average life expectancy. In fact half of all people (that is why they call it an average). The other thing to remember is that life expectancy changes over time. Look back 70 years ago and it was over ten years younger, so it is not a stretch to believe a 30 year old today will see average life expectancy of 90+ years of age. Also keep in mind that people are active well into their 80s. Bernie Sanders is turning 78 years old this year and he is running for President! Even if you are not active, people forget that you may need money for assistant care in your old age. Assistant living can cost $6000 per month TODAY, so what do you think that will cost in 70 years? Of course if you run out of money, you can go to a nursing home for free. That is after you liquidate everything you own. Having witnessed first hand what happens at nursing homes, it is not a place I ever want to be. I will use my wealth to buy a higher standard.
I don't think some young people are thinking through the true cost of living a life. If raising legitimate issues makes me "anti FIRE", that is crazy. I am in my mid-40's and I track expenses monthly. I know what it costs to live in this world, raise kids, deal with health concerns and old age. Most young people are starry eyed and have no world view. I sure didn't when I was 25. You think you are invincible.
As far as 4% lasting forever, there are plenty of models on the internet that show the rule did not hold up in the last 20 years depending on when you retired. I am not like Suzie Orman saying you need millions, but just think $1M and 4% withdrawal is too low. Just my opinion.
- Rental Property Investor · St Joseph, MO · Member since 2018 · 38 posts · 20 votes7y
@Rahul Handa the 4% rule of thumb is based on the Monte Carlo simulation and I think most “experts” are reducing the number down to 3%. If I were planning any sort of long term income strategy I would use 3% or less. I’d still be uncomfortable with that but I’m not a huge believer in the accumulation model or Wall Street in general.
- 7yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
If you withdraw 4 % of what you have saved do you want to live on that amount? Is it enough for how you want to live? does it cover your expenses on the date you "retire"? If you plan on living as long as your family history shows your family lives do the math if you invest conservatively, will you have enough? These are individual / personal calculations.
Also ask , if you really are retiring or just redirecting your life? will you have other income.?
In the end if you have some RE investments and they are not in a depressed area income should grow with inflation to generate some cushion but if you have RE investment often you are not truly retired in the traditional sense of the word.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes7y
Why isn't everyone doing it? Consumption - people buy everything from hope to happiness and have no savings. 4% of $0 = $0.
- Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes7y@Rahul Handa The reason everyone doesn’t do it is simple. The average net worth of a middle aged American is around 150k, not 1M. They are surviving and spending, not thinking about saving for retirement. 4% rule is great, some people don’t want to do real estate and only do things like index funds. That’s okay, real estate isn’t for everyone. I think a great way to utilize that principle would be to use the 4% rule, as well as house hack, and work one day a week on a job you enjoy. You get the best of it all.
- Investor · Honolulu, HI · Member since 2017 · 187 posts · 108 votes7y
@Rahul Handa I'm too paranoid to live by the 4% rule. I like 3% better. That makes me feel more confident. A little tighter on the belt but to each his own.
- Bolingbrook IL · Member since 2018 · 57 posts · 13 votes7y
Originally posted by @Chris LumLee:
@Rahul Handa I'm too paranoid to live by the 4% rule. I like 3% better. That makes me feel more confident. A little tighter on the belt but to each his own.
Ya im planning on doing both. 3% does seems to be more safe. Thank you
- Bolingbrook IL · Member since 2018 · 57 posts · 13 votes7y
Originally posted by @Mike Dymski:
Why isn't everyone doing it? Consumption - people buy everything from hope to happiness and have no savings. 4% of $0 = $0.
I don’t get it why people don’t think about their future. I mean i was worried at age 21 and was planning 30 years ahead.
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