Ooooh, I’ve never written a title all in caps before! You know it’s gonna get real.
Nothing in the financial independence community drives me crazier than the endless debate over the 4% Rule. Brace yourselves.
My Most Vulnerable Money Moment
First, I’ll tell you about my most vulnerable moment. It may be surprisingly similar to yours. Let’s take a trip down memory lane.
Let’s go back to 1998. I had just finished my computer studies and was interviewing for my first job. My financial picture wasn’t good:
- Debt: $60,000 (!) in university and credit card debt
- Emergency fund: LOL!
- Savings/investments: More LOL!
And then there was all of the work stuff:
- Experience: None!
- Network: None! (I had just graduated, so knew no one who could help me get a job.)
- Community: Almost none. (I had friends from college and high school, but not much going on otherwise.)
Despite my situation, I wasn’t worried at all. On the contrary; I was full of optimism. Interviewing was thrilling. My first job paid me the worst salary I’d ever have in my career. But I was still making far more money than I ever did before ($37,000/year!). I liked my work and it felt good to no longer struggle. I could actually buy real food.
Why am I telling you all of this? Stay tuned Patient Reader…
STOP FOCUSING ON THE 4% RULE!
There is no shortage of pundits eager to tell you why you’ll end up eating cat food in XX years should you follow the 4% Rule. Or folks who tell you that the 4% Rule should be the 3.25% Rule.
The 4% Rule is great as a very general starting point. But please don’t focus on it after that. Below I lay out my reasons for why I think the 4% Rule mostly sucks.
1. It’s All Based On Historical Data
Have you ever hear this?
Past performance is no guarantee of future results.
The 4% projections came from past performance of the stock market.
No one on earth knows what the stock is going to do tomorrow morning, much less the next 5 decades.
I happen to think that it could be much better. Stock market expansion is mainly fueled by productivity gains. Artificial intelligence will go a very long way to increasing productivity. Your job may not be safe, but your portfolio may do very well. Or it may not. The only thing that I’m completely certain about is that future returns are uncertain.
2. Sequence Of Returns Risk Is Overrated
Sequence or returns risk:
A hit to your investment portfolio in early years of retirement leads to poor returns over the long haul because there is less money to compound. You most vulnerable years are those right after you retire.
Example:
You quit work on 1/1/2025 and the stock market drops 40% on 6/1/2026. Now, there is a lot less money for compounding to work its magic on, resulting in lower long-term returns.
The key word in the definition of above is early. If a stock market anomaly happens shortly after you quit work, that’s the best time to go back to work! You still have your skills, your network, and if you retired early, youth.
3. It Doesn’t Have To Be All-Or-Nothing
When I quit, I wanted to get to my FI number as fast as possible and then leave forever. That’s how it worked out, but that’s not how I’d do if I could hit replay.
It doesn’t have to be an all or nothing situation. For example, your kids will only be at home with you for a narrow slice of time. Consider taking time off when they’re young and going back to work when they go to school.
Another solution is to take a sabbatical or go part-time.
Let money serve you wherever you are in life.
4. Retirement Is A Stupid Word Because Most Don’t Retire
I can’t think of anyone who has quit their job and never earned money again. The Internet Retirement Police (IRP) call these folks out often:
They’re still earning money! They’re not really retired!
The IRP have a point. Maybe.
If you can figure out how to retire early, you’re probably driven. Of course you’re not going to sit around. Watching TV all days sounds like hell.
We like to do stuff. And when you do stuff you really like, you’re probably going to do a pretty good job and make some money.
If your plan was to retire on an initial withdrawal rate of $40,000/ year, making just $5,000 from your fart fetish channel on Only Fans brings your withdrawal rate down to 3.5%.
5. If Disaster Happens, You Still Have A Lot Of Money
Let’s say that this happens to you:
You retire with $1,000,000 and 3 months later, The Very Big, No Good, Bad Black Swan Thing happens and your portfolio gets kicked down to $500,000.
That would suck, but you’d still have $500,000! That money buys a lot of time to figure it out. Imagine having $10,000 saved and getting fired from your job.
6. You’re Awesome (The MOST Important!!)
Remember how I started this post telling you how pathetic I was back in 1998? I’m on firmer ground now. I’ll bet you’re so much better off too. Consider the Financial Suit Of Armor that comes with a couple decades of life:
A good partner: Some of you have a solid partner. If that’s you, I have great news! You have redundancy built into your life. If the world goes to hell and you can’t get a job, maybe your partner can.
Experience: You’re not fresh out of school anymore. You have years of experience and skills. If I wanted to back to work, I’d have to brush up on my coding and take less pay, but I could do it.
A Network: You have a network of past coworkers you can lean on. I worked for 4 different entities and made many connections. There are lots of people I could call to get a job.
Community: I’ll bet that you have lots of friends and neighbors to support you.
Money: Ahhh, we’re back to where we started. I’ll bet you have more of it than you did when you started working. Probably a lot more.
So:
Believe in yourself!
Given how awesome you are, why do you spend all of your time worrying about how the stock market is going to perform. It’s completely out of your control!
Here’s what to do instead: Quit formal work with a withdrawal rate that allows you to sleep at night. Then, don’t think about it. If bad things happen, know that you’re a smart, resourceful person who will find a way. You’ve already figured how to retire early which is a pretty cool accomplishment.
Instead of thinking about VTSAX, focus on your strengths! Know that your partner, your skills, your network, and your community will be there to help you out if it all goes down the crapper. You’re in far better shape than you were when you were just out of school.
What Is The Point Of All Of This?
I see people postponing their dreams all the time for One More Year:
I just don’t trust the 4% Rule, so I’m going with 3.25%!
That’s great. Now, instead of having to save $1,000,000 to get to your $40,000 withdrawal rate, you have to come up with $1,230,000.
How many more years will that take?
When you get there, are you just going to move the goal posts again?
Instead of obsessing over withdrawal rates, use your precious brainpower and time to figure out how to live your best life. Never forget this:
You probably won’t run out of money, but you will run out of life.
So one more time:
STOP WORRYING!
More 1500 Days!!!
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Travis says
Enjoyed the rant, especially “You probably won’t run out of money, but you will run out of life.”
For those that would like a pretty visual of this sentence, the “Rich, Broke or Dead?” graph on Engaging Data is fantastic. If you’re close to your FI number already, the little red sliver (broke) isn’t nearly as scary as the big gray blob (dead) that gets us all:
https://engaging-data.com/will-money-last-retire-early/
Mr. 1500 Days says
Whoah, I hadn’t seen that graph before. That’s pretty cool! I love how it has the Spending Flex percentage. I’ve never met a person who can’t cut something out of their spending.
Kevin says
Cool graph
Lee says
I’m at 4.2% can I quit yet?? 🙂
In all seriousness, how do you get over the idea that you should keep working because you have the opportunity earn a lot of money that others don’t have? I make probably 2x what most people in my family or friend group make. I feel like kind of a jerk for thinking about quitting my job as others struggle just to get through life when I have the opportunity to make all this money.
Mr. 1500 Days says
Hey Lee! That’s an interesting question! If you love your job and would do it for free, I’d stay there. If you can’t stand it, I’d leave. In between (which is probably where you are) gets harder. Just be careful that you don’t put off something you really want to do for the sake of throwing more $$$ on the pile.
And maybe there’s an opportunity to do something in between. I have a lot of friends who quit salaried positions, but went back as part-time hourly contractors. You can free up a lot of time and still earn enough to not touch your investments.
And I’m not one to talk! I hit my number and then kept on working for over another year.
Lee says
I’m definitely somewhere in between. I don’t hate it, but don’t get any joy out of it.
My biggest problem lately has been trying to figure out what to do next after FI. I’d like to travel more, but other than that can’t figure out how I’d want to spend my time.
Bob says
I am the same way. I don’t love or hate my job. It’s pretty easy for the most part and pays quite a bit. I can work PT and that’s more than 4%. withdrawal. So bit of a dilemma even though I am FI.
I think there is no right or wrong answers. it’s about figuring out what works individually. I am going to do PT and take more vacations/do more activities, so I don’t have an empty schedule to fill. I can always adjust if necessary.
Stephen says
I had a lot of things I wanted to do after reaching financial independence. I started working on them, and giving myself a shot at accomplishing my dreams/reaching my goals. Now that I am nearly FI I’ve accomplished pretty much everything I had planned on doing after I reached that point. Also, a lot of my old goals have fallen away as my priorities have changed.
Sure, there are still some things I haven’t done in life that I could try but none of them would necessarily require FI. They also aren’t motivating enough to make me want to spend my entire life on them.
I’ve come to the conclusion that I will always have goals/things I want to do in life and that does not require complete cessation of work. Overall, I am shifting my priorities and gradually moving to less work. Like a gradual reduction in freeway speed to get onto the scenic highway. It sounds delightful, especially since it includes some form of income producing activity which will provide some variety in my life, and spur me to enjoy my off time and go after all the things I want to do.
LivingTheFIghLife says
I had a similar conundrum when I reached FIRE. I knew that I would need to eventually help support my aging parents financially (which wasn’t included in my FI number as part of my expenses) and I wanted to have the resources to help my kids have a secure launch and spend money to help my kids and other relatives come travel with us (we now travel the world full-time). So my wife and I padded the coffers so that we would have flexibility to spend a lot more on these unbudgeted items while not endangering our own financial future. Being at my highest earning potential when I hit FI, this didn’t take long. I had actually considered paying off my Mom’s mortgage before I pulled the plug at work, but with her low interest rate mortgage, the money was doing more for me invested. Cheers!
WIlDRyan says
Great post! After years of being fixated on FIRE, we just made the same decision to pivot as you mentioned – we decided to take a 6 month sabbatical with the family before it’s too late and the kids get serious with high school. My youngest even asked “Won’t this mess up your dream of FIRE?” I told him I have a new dream now and it’s better than the first one! I’ll happily work another couple years if it means getting to do this with them!
Mr. 1500 Days says
Oh wow, that’s so good! I wish that I would have thought more like that!
Joe says
My reason is dumb – I worry too much about what others think. When going back to work a lot of people judge what were you doing during your sabbatical/ work break and seem to judge people that work part time, especially if youre coming back in your 40s and 50s.
Also doesn’t help that unemployment rate is 40% here, so I think it’s linked to culture, as well as my former network being high income earners that are also high spenders.
Nice post, not worrying about things outside your control is a good idea, as is ensuring you continue to do work you like after FI is key. What’s your withdrawal rate effectively now, like <2%? It keeps growing.
freddy smidlap says
excellent rant! i’ve also been pounding the table on this for quite some time. i remember about 6 years ago writing “help! i’m pooping my pants over safe withdrawal rates!”
i prefer to look at our portfolio to serve 2 separate masters, our wants and our basic needs. the past couple of years (with not mortgage costs) our absolute needs only accounted for 40-45% of our spending. so we can keep ourselves fed and housed with heat, internet, and electricity for a modest sum. i even included the total cost of both cars as needs but clearly we could go down to one and save money.
also, our house has extra rooms we could probably rent for close to $1000/month each or over $100/night on airbnb. we don’t currently view this as an asset but it certainly could be in case the doo doo really hitting the fan. as you mention there are a lot of levers intelligent people can pull to weather a storm.
KK says
While I prefer to go the route of sitting-on-cupcakes fetish, your OF calculation was extremely helpful and accurate! Thanks for the encouragement to continue down this path of reduced worry.
steveark says
A lot of people plateau in their earnings in their mid fifties and that reduces the “one more year” temptation I would think. In my case my last three years I made about twice what I made in my previous compensation. That did make walking away harder because when your pay is increasing by $100K every year it is easy to get caught up in the rush of making so much more than you ever have. The 4% rule helped usher me out of the door of the office because once I truly grokked the fact that I had more than enough money to live a rich life and leave my kids a legacy, there was zero reason to pile up more money. In fact I already had way too much. So it can be useful as a spur to action. But points taken, its crazy to rely on something entirely based on past historical data that will probably never be repeated. And its crazy to think that once your retire you can no longer take action to adjust your personal economic situation. Great read!
Glincoln says
Gocurrycracker had a nice post on this back in the day
https://www.gocurrycracker.com/what-is-your-retirement-number-the-4-rule/