Bolingbrook IL · Member since 2018 · 57 posts · 13 votes
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.
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.
Because they were given everything in life and never had to worry about the future, never taught how to be independent, never given the opportunity to fail, and never experienced what it feels like to accomplish something on their own. And then the unprepared get bombarded with instant gratification consumption opportunities all day every day without the skills and habits to make the right decisions.
Specialist · Atlanta · Member since 2019 · 88 posts · 53 votes
6y
the answer depends on different factors such as what age do you want to retire, how much do you need to live comfortably, how long it will take you to save the 1 million dollars, etc..
Rental Property Investor · Member since 2020 · 13 posts · 5 votes
6y
This is a little intense, but by far the best resource on the issue and he has some non-math posts in there (read his guide to the series here since it is otherwise 70+ posts and going): https://earlyretirementnow.com/safe-withdrawal-rate-series/
The guy is a math/stats/finance background and re-does most of the analysis that drove the original 4% rule of thumb with even more thorough and clever approaches.
He also provides a free Google Sheet to run the simulations with your own costs/assets over time to show you if you have chance of failure.
Summary: 4% isn't enough, but you should probably have a variable method (he tests many of them against every bad recession + monte carlo simulations) with a change in asset type allocation over time. If you do want to just use a standard % of assets every year, the 3.2-3.4 range works. The variable methods allow some very good years and some modest, but not super low years (i.e. just a few % off your target income).