Ask the Readers: Would you take 5%?

Last week, I asked if you were creative. Before I get into the readers’ answers, I have a confession:

You’re wasting your time reading this blog.

Screen Shot 2016-05-29 at 7.32.51 AM

It’s true. The reason is that everything that needs to be said has already been said. You wont learn anything new here. Jim Collins already covered investing. MMM and Jeremy from Go Curry Cracker have discussed the 4% Rule. All of the information is already out there. What can I possibly bring to the table? I try for two things:

  1. Share my journey: This was the reason I started blogging in the first place. I wanted to share my story and hold myself publicly accountable. I thought a blog would be a good way to do this. It turns out that it’s been loads of fun sharing my story. Almost everyone I have come across through my writing has been spectacular. I’ve also become a better writer and learned loads about personal finance.
  2. Present information in a way that resonates with someone: Just because thousands have already written about the 4% Rule and 401(k)s didn’t stop me from writing about them. Perhaps my style gets through to someone. When I wrote about the 4% Rule, I mentioned spousal infidelity, venereal diseases, KISS and Komodo Dragons. I’m 99.999999% sure on one has ever done that before. I hope someone got a laugh out of my writing and more than that, learned something about the 4% Rule.
Th $% Rule is a good idea. This is not.

Th 4% Rule is a good idea. This is not.

Maybe the most important skill needed to write a personal finance blog is creativity. If you can mesh personal finance with fun stories and good ideas, you’ll be successful.

Here is the most uncreative job in the entire world.

Here is the most uncreative job in the entire world.

Here is what you had to say about creativity.

Mr CF from Cheesy Finance thinks creativity (or lack of it) is hard wired. I tend to agree:

My brain is wired to work with rules, which is the one thing you don’t want when you are trying to be “art” creative.

Cora from The Mini Millionaire reminds us that creativity can take many forms:

Just the same that you might find creativity finds a solution to a life-long problem – I mean it’s creativity / thinking about things differently that surely solves 90% of worldwide problems whether it be providing clean, safe, running water to Africa or creating smart roads to help ease the flow of traffic during peak times in the US.

Mr. SSC from Slowly Sipping Coffee is a one man bluegrass band. He can also locate oil. Those are some mad skills:

I think I’m creative. I play several musical instruments (banjo, guitar, dulcimer, sort of resonator guitar), I blog (that counts right?), and I work as a geologist, so most of my day is coming up with a new way to look at old fields and try to find new oil.

The Jolly Ledger reminds us that in some cases, creativity is suppressed:

I had a creative childhood but the practice is discouraged (wrongly) by my line of work as a scientist.

Finally, Mr. Tako reminds us that it’s OK to be a cook:

It’s OK to be a cook sometimes. I freely admit that when I see a better “recipe” than I’m able to come up with, I’ll cook it. I also try to *master* it.

Creation is one thing. Masterful execution is another.

Would you take 5% for life?

Do you read Financial Samurai? I don’t have time to read many blogs, but Sam writes some interesting material and I usually learn something too. Recently, he wrote about Yale’s endowment fund. In the post, Sam mentioned that the fund is “shooting for a 5% annual return.” Sam went on to say this:

If I could get a steady 5% overall net worth return every year, I’d probably take it.

So, how about you Reader? If you could get a guaranteed 5% for life, would you? You’re allowed to add as much as you want to your savings, but it will always earn 5%.

I know my answer, but I’ll save it for next week.

Join the 10s who have signed up already!

Subscribing will improve your life in incredible ways*.

*Only if your life is pretty bad to begin with.

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45 Responses to Ask the Readers: Would you take 5%?

  1. I assume it’s a tricky question, but I wouldn’t go with 5% when I can get 10% average.
    Using 5% it’s like giving your money to a state planner that would scared to death to invest money properly, read ‘use risk’. I’d rather go with my current planning and investing and would get my 10%-12%
    The Russian Guy recently posted…IntroductionMy Profile

  2. Lee says:

    Are we talkin before or after inflation? If post, then yes, I’d take it.

  3. I think I would take the 5%. I avoid loss and I have predictability. I can easily run calculations to see the growth. Why do I feel like I missing something.
    Brian @DebtDiscipline recently posted…How We Saved $2100 on our Summer VacationMy Profile

  4. Jason says:

    I am not sure I would just take the 5%, particularly considering that we have long periods of inflation and the like and that it is historically below average. The answer seems too easy though.
    Jason recently posted…A Lesson on Renewing Student Loan PaymentsMy Profile

  5. Mrs. PIE says:

    Is the 5% inflation adjusted?! ?
    I’d be pretty happy to take it. I think this comes down to accepting ‘good enough’ rather than trying to continuously optimize for the best possible returns. ‘Good enough’ for us means not sweating the smaller details and being happy with having enough to cover expenses. Low stress all round!
    Mrs. PIE recently posted…Our Investment Portfolio Update (Q1, 2016)My Profile

  6. ZJ Thorne says:

    A guarantee makes planning life easier. It may not be the wisest choice, but I would take it. And sleep better for it
    ZJ Thorne recently posted…Financial Freedom Sneaks Into Every ConversationMy Profile

  7. 5% only looks good in today’s environment.

    If you could go back in time to the 1970’s and ask this same question, they’d laugh in your face. Of course they wouldn’t take it! With long term bonds returning 10-15%, 5% looks like a terrible joke. That was the 1970’s.

    Today is a little different, but 5% for life? I’ve got at least another 30 years left, and a lot can change in 30 years.

    One thing to remember about investing — Like the ocean, the investment environment is always changing. Somedays the tide is in, some days the tide is out. Some days the waves are small, some days the waves are big.

    Never “lock-in” your investment until you’re certain the waves won’t be over your head.
    Mr. Tako @ Mr. Tako Escapes recently posted…How To Get Rich With: Fancy Sushi DinnersMy Profile

  8. Mortimer says:

    I’ve read one of David Swensen’s books, and if they are only shooting for 5% they are absolutely crushing it, getting mid- to high teens returns in many if not most years. Of course they also don’t have to pay taxes as a non-profit…

    To answer your question, I think it depends on the time scale you have. At this stage in my life, I’d reject it because I have so much time to let a volatile market and dollar cost averaging work in my favor.

    But if I’d already set up a sizable portfolio and was just looking to milk it for the foreseeable future, I’d probably take it because I would know that I could use the 4% rule and be guaranteed that my money would still grow and never run out, letting me leave a tidy charitable contribution on my death. (Sorry, kids.)
    Mortimer recently posted…How to Build a Snowball in Hell: The Debt Freedom CalculatorMy Profile

  9. Team CF says:

    I would have to agree that it would make life pretty simple to know you are always getting 5%, very easy to calculate and live by!

    But as noted above a couple of times, return on investment will fluctuate and it is likely that in the long run 5% ROI is low and you miss out.

    A trick question indeed 😉
    Team CF recently posted…Savings Rate May 2016My Profile

  10. Believe Fire says:

    If we were offered the 5% guaranteed return in 30-40 years, we might be on board.

    I think we’ll have to decline at this time though. We would be missing out on too much upside by passing on market returns for the rest of our lives. However, it would be nice to avoid those pesky downturns, especially for those comfortably retired. If you’re still growing your net worth, then the downturns can act like rocket fuel as you dollar cost average in to the market.
    Believe Fire recently posted…Algarve Portugal – Our ExpensesMy Profile

  11. Stop wasting my time, Mr. 1500. Like you and the Barenaked Ladies said, “It’s all been done before.” Ahhh, but not from your perspective. Or mine. I guess that’s why we keep coming back.

    I would take 5% guaranteed with the 25x expenses that makes me FI, knowing I could live with a 5% withdrawal rate indefinitely without drawing down from principal.

    With any overage, I’ll roll the dice, and likely come out ahead.

    Cheers!
    -PoF
    PhysicianOnFIRE recently posted…Pros and Cons of Locum Tenens WorkMy Profile

  12. I would consider putting some amount of my money in it since its guaranteed, but that would be significantly under performing the market. So I wouldn’t want to accept that right now when I’m trying to build wealth with market returns in order to retire early. I would totally consider putting all my money in it upon retirement though in order to take risk off the table. It would provide a guaranteed stable retirement at that point.
    The Green Swan recently posted…Managing the Cost of ChildrenMy Profile

  13. Mr. PIE says:

    With the following additional assumptions ( and of course everyone is different) :

    1. Control your own personal rate of inflation. This is an important distinction from “inflation”
    2. You are managing your own portfolio hence no significant advisor fees, commissions, costs etc for an actively managed portfolio.
    3. Your expenses allows for 3% withdrawal rate

    Then you bet, I will take this. A lock like that can’t fail, can it ? Knowing your “enough” is very important to understand. Beyond that is simply greed, unless you are diverting the excess to charitable causes.
    And never need to look at Personal Capital again. Only the sunrise, sunset and all in between.
    Mr. PIE recently posted…Our Investment Portfolio Update (Q1, 2016)My Profile

  14. We would absolutely take a steady 5% annually on part of our portfolio, provided it was a safe and guaranteed return. With the rest of our portfolio, we would seek the lumpier returns we typically experience. A 5% nominal return exceeds the typical rate of inflation over the last 100 years, so it would allow your purchasing power to grow. You’d feel like an idiot in the 1970s and early 1980s…..but a rock star at many other times

    I got a chuckle out of the sign man in your picture above. Did you notice the coffee cup holder on his sign? There’s some creativity, not to mention efficiency! Hope you guys are having a great week
    -Bryan
    Income Surfer recently posted…Our $500 ClubMy Profile

  15. Jeff says:

    This 5% for me would all depend on my age/place in life.
    20’s – Nope
    30’s – Nope
    40’s – Nope
    50’s – Maybe (only if financial independence was a year or two away to avoid a major crash for security/planning purposes)
    60’s – Yep (in retirement, would rather worry about what I am going to do tomorrow than watch my bank account and stressing over annual returns)

    Simple answer is yes, would take the 5% when FI is achieved and my time becomes more valuable to me than worrying over investment returns.

  16. Mr. SSC says:

    Thanks for the mention! At this stage of the game, when Mrs. SSC noted we only need a 3% return to hit our FI number in mid-2018, I would shy towards, yes, yes I’d take 5% return. One, we’d hit our FI number a little sooner, yeah! Two, we could then use the ol’ 4% rule to keep on keeping on provided inflation and all that is there too. Three, being this close to the end game for FI, if it would be gauranteed, I’d take guaranteed 5%, especially since we kind of would be needing it pretty soon.

    However, if this was us even 5 years ago, no way. We’d be adding about 5-10 more years on hitting our FI number. That would be the drawback is you lose the potential upside, but with us needing the money more in the short term versus 20-25 years from now, and being so close to hitting our number with less than 5% returns, I’d lean towards taking 5% and breathing a sigh of relief. 🙂
    Mr. SSC recently posted…May 2016: Our money went where? It went Bye Bye!My Profile

  17. zut says:

    I remember getting 5% at my credit union not to long ago…oh wait ***does math*** ok it was 23 years ago and I was in college. I remember thinking that 5% was a good way to invest some cash.

    But no way 5% is below average especially since the early 90’s stock market run.

    Thanks for making me feel old today!!!

  18. No I wouldn’t unless I was much older. I’m too young, dumb, and greedy I guess. Why settle for 5%? 🙂
    Fervent Finance recently posted…The MoveMy Profile

  19. I am with some of the other commenters. If the 5% is inflation-adjusted, I would happily take it. One of my goals with FI is to live on little, to simplify my life. With 5%, I would have enough and then some. I have no use for more.
    The Jolly Ledger recently posted…The Ledger – May 2016 Expense ReportMy Profile

  20. Kyle says:

    I liked Mr. Tako’s reply. Most of us have to trudge through the cook stage before we start experimenting at the chef level unless we grasp a deep understanding right away.
    You TOTALLY GOT ME ADDICTED TO THAT BLOG waitbuywhy. I read through the Musk series plus a couple other posts in a couple days. I don’t completely agree with every conclusion he comes up with but I love the questions that are asked, thoroughness of research and the hypothesis he comes up with. My blog started going down a similar path on more of philosophical and less finance. I think I’m shielding people I know from getting jealous. I’ll be passing my 2016 goal of $50k in investments pretty soon already. And there’s some chance I’ll get a huge raise in the next couple months and my savings will really skyrocket.

    5%, If it was guaranteed I would allocate some small percent of money to that fund, “shooting for” doesn’t really excite me. Great sales pitch though lol, “We’re hoping we’ll get 15% return!” brain say’s “then they’ll get close obviously right??? TAKE MY MONEY!!!”
    Kyle recently posted…Slave to the SystemMy Profile

  21. Money Beagle says:

    I think I would take it at this point. Remember it would count on savings and cash which right now earns zero for most people, and probably less than 1% if you’re on the high end.

    Personally, I also think that the stock markets are going to be flat or at a smaller yield than normal over the coming decades. As all the baby boomers finish retiring, they won’t be spending as much and will put more pressure on the economy as well. That’s going to decrease the robust growth that we’ve gotten used to. 5% would probably look pretty good.
    Money Beagle recently posted…So The Item You Need Is Out Of Stock…Or Is It?My Profile

  22. Steven says:

    I’d pass. I think major reason being if today someone gave me the option to have an add-on CD at a fixed rate of 5% I would add it to my portfolio but not make it my entire portfolio. I prefer the risk of the stock market and the historical return it provides. The difference in 5% and 8% a year compounded annually has a vast difference especially as you get to year 30 and 40.
    Steven recently posted…The Road to Financial Wellness 2.0My Profile

  23. Danny says:

    A little bit of background before I answer: My folks currently make about 5% returns annually in retirement, give or take the last six years. We live in an higher taxed state than most, and given they are in tax exempt investments, it has actually worked out really well for them. Their retirement is working out great, and they’re the happiest people I know.

    That said, for me personally, I’m not settling for 5%. Maybe because I don’t want to stay in the state we’re currently in forever, or maybe it’s because of learning the basic investment ideas I’ve read about through the FI community (such as Mr. & Mrs. 1500 🙂 ). I’m just not so sure yet, but I think we can do better than 5%.

  24. Like some of the other commenters’ answers, mine would hinge on whether we’re talking 5% real or 5% nominal returns.

    5% nominal — Absolutely not! We could live through decades of hyper-inflation someday, in which a 5% return would be net-negative. In that case, I’d rather experience the ups and downs of market returns, which would theoretically hedge against this risk.

    5% real — I think I would take it. After all, my financial plan is built on spending 4% or less of my original portfolio value each year. This would provide 5% plus inflation with zero beta — no risk of variability year to year. 5% + inflation may be less than the expected value of the stock market, but that’s a long-term return I’d happily give up to eliminate sequence of returns risk. The ability to project annual spending ability with absolute certainty? Count me in!
    Matt @ The Resume Gap recently posted…Why I Quit My Most Lucrative Side HustleMy Profile

  25. Cool! Thanks for highlighting the 5% point. Just got back from a business trip and am just catching up.

    The thing people have to realize is that inflation and interest rates will likely be low for decades to come. Information, technology, experience, productivity, and international monetary coordination are the reasons.

    5% a year is 3% above the current risk free rate of return. If you can earn 5% with little to no risk, that is HUGE on a decent financial nut.

    Then, I suggest turning around and NEVER touching principal once you are retired and withdraw at whatever your income distribution percentage rate is.

    Best,

    Sam
    Financial Samurai recently posted…Vacation Money Is Crazy Money: Staying Financially Disciplined While TravelingMy Profile

  26. Tawcan says:

    Is the 5% before or after inflation? If after I’ll take it any time, that’ll cut the unpredictability of stock market out. Even if it’s before inflation, given the low inflation rates nowadays that might still be an OK return to take.

    I’m with Sam’s comment above, never touch the principal and only withdraw the income distribution percentage rate is. The principal can then be passed down to your kids and such. 🙂
    Tawcan recently posted…20 Signs You’re Financially Stable (and 20 Signs You’re Not!)My Profile

  27. The other aspect of the question is whether this is an all or none scenario, if the 5% for life could be a guaranteed base, and as the article touches on creativity, assuming I would still be able to continue exploring these other creative avenues to further these efforts for FI then why not take it and allow it to grow with time.
    Dr.J @ MedSchool Financial recently posted…Looking Ahead, Strategies For Goal CompletionMy Profile

  28. Kim says:

    My cash balance retirement account through work is either the Fed mid-term rate plus 1.5% or 5%, whichever is greater. So for my entire career (7 years), it’s only been 5%. Back in the early 2000’s it was making between 5-6% every year. In my AA, I treat it like a bond rather than cash. There is minimal risk associated with my retirement account since it is cash balance. I’m very happy with it.

  29. I need risk in my life dang it!! 🙂

    I would have to pass and keep trying to figure out ways to make higher returns. Gives me something to do at least.
    Alexander @ Cash Flow Diaries recently posted…May 2016 Net Worth UpdateMy Profile

  30. Hell yeah, I’d take a guaranteed 5% for life (even knowing that my investments will probably net me more). Why? Because if I desire more dollars in the future, I can add to that pot of money, and while the 5% remains the same, the number of dollars that I get out of it increases. Percentages rock.

    I don’t want to focus on money. To me, the challenge is living as creatively as possible with what I have – often, the LESS I have, the more fun that becomes!
    Steve @ Think Save Retire recently posted…The Friday Feast ~ the 3rd of JuneMy Profile

  31. Eric Bowlin says:

    Everything has already been written. But not every thing has the combination of information your looking for in a style I want to consume it in.

    Also, you’re humble unlike some of the financial bloggers out there. They think they are always right, when of course everyone is wrong sometimes. The internet is full of trolls so I guess everyone can find something that appeals…whatever.

    On to the question.

    If I had so much money that I didn’t have time to find a good place to invest it all, sure I’d consider taking 5% for some of my money

    Unfortunately, I am not so rich. I can invest all my money in high yield projects and every time I have some money, I can find a property to invest it in.

    I stashed about 25k away into an S&P 500 fund for my daughter over the last two years and I’ve been so disappointed with it. I’m probably going to move it into a trust and buy some property with it and easily get 3 or 4x the return. I think I’m done with stocks for good this time.
    Eric Bowlin recently posted…The Rich Mentality vs the Middle Class Way of ThinkingMy Profile

  32. I’m with Eric Bowlin’s comment above, never touch the principal and only withdraw the income distribution percentage rate is. The principal can then be passed down to your kids and such. 🙂

  33. Tifany says:

    Is the 5% before or after inflation? If after I’ll take it any time, that’ll cut the unpredictability of stock market out. Even if it’s before inflation, given the low inflation rates nowadays that might still be an OK return to take.

  34. That’s sort of a hard choice. Given I lost money in the market last year, it seems attractive. But last year was also my first year, and so far I’ve done pretty well since Jan 2016. I think I would pass because you could get a 5% return nearly all from dividends. My portfolio is between 4 and 5% dividends, so all I need is for my stocks to not go down in value and I’d make more.

    DB
    Dividend Beginner recently posted…I Bought Shares in my Childhood with Corus EntertainmentMy Profile

  35. I would take it, guarantees provide a lot of mental relief.

    I like that you write that everything has already been said, I have that feeling as well starting a website in this space. But it is enjoyable hearing many people’s points of view and seeing success stories like GCC. I wonder what 10 years will bring, will there be even more PF bloggers?

  36. Linda says:

    I would not take the 5% right now, as I can only hope the markets will return better than that. However, ask me this question in 10-15 years when I’m retired and I will take the 5%, no problem. I would love to not have to worry about the markets when I’m retired.
    Linda recently posted…GoodBye, Overnight ShiftMy Profile

  37. As I get to the final month of working for “the man”, I am continually paying extra in my mortgages. the latest one is at 5.375%, so you could say I am happy with getting that number.

    If inflation is only 2%, 5% with minimal risk is outstanding.

  38. If it’s 5% post inflation then I’d totally take it but if it’s pre inflation then I’d pass. I think there will be periods of higher inflation in the future and that would really kill a 5% guaranteed return in the long term.

  39. FI Champion says:

    I’d negotiate for 6%.

  40. Considering there are no guarantees with money I’d take 5% even though I’ve been getting a good 7-8% for a while. Especially if I was retired I’d take 5% and know that I can live off of my 5% pretty much forever, but that’s not going to happen so it’s just a waste of time like this blog. Thanks for nothing.
    Visionary Money recently posted…The Wealth of SimplicityMy Profile

  41. just a thought says:

    I would take 5% guaranteed on 600k of my NW, as that would give me a basic level of income that I can live on. Anything above that, I would seek to index against the markets and work more if I needed more money.

  42. Sabbaticalia says:

    I’d take it, no question. Right now, my own plan to pay for fulfilling FI life involves living off a 4.5% yield, not touching the principal. 5% would mean I can transition with 2 years 3 months’ expenses less in the nest egg, something like 3-4 years sooner.
    Sabbaticalia recently posted…Two FI/RE equationsMy Profile

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