My buddy and excellent human Doc G. asked me if I wanted to be on his podcast earlier this year. He mentioned that the topic would be risk. I’d be on the show along with Karsten (Early Retirement Now), Todd Tressider (Financial Mentor), and Steve Adcock (Think Save Retire). The podcast would take the form of a debate with Steve and I on one side:
“Screw it, retire already and stop worrying!”
Karsten and Todd would be on the other side:
“Be careful or you’ll run out of money!”
Appearing on this podcast made me queasy and uneasy for two reasons:
- I know both Karsten and Todd and like them. I met Karsten at a conference last year and I had served Todd breakfast in my kitchen just a couple of weeks before we recorded the podcast. They’re both thoughtful humans who I’m happy to know. And if that didn’t make it hard enough, they’re both super smart. Why the hell am I signing on to debate them? I’M SCREWED!!!!
- I hate confrontation. This is a weakness because any smart human needs to know how to deal with others effectively when disagreements arise.
But, I agreed to do it anyway. What could possibly go wrong?!??
Why I Now Officially Hate The 4% Rule
I did some research for the podcast beforehand. After all, if I was going to debate Karsten and Todd, I should probably read some of their material!
The first thing I did was dig into Karsten’s famous series on Safe Withdrawal Rates. While I eventually read through most of it, I got hung up on this table in the very first post:
And I was intrigued by this column and row which echo my situation:
After doing a lot of thinking, I’ve come to the conclusion that I pretty much hate the 4% Rule. These thoughts had been bouncing around in my head for a long time, but the research I did for this podcast cemented my feelings.
Reason #1: Robots Will Rule The World
The 4% Rule is based on historical data. Specifically, Karsten derived his research from data gathered from 1871 through 2015, two very different times:
- Indoor plumbing, nope! You crapped in a hole in your yard.
- At birth, you had a slim chance of living to 50.
- You worried about cholera and smallpox.
- Smartphones weren’t invented yet (Did people just stare at their palms all day?!??). You had to listen to Guns N’ Roses on something that looked like this:
I don’t need to go into detail here, but life is a lot better now. For those who build romanticized visions in their mind’s eye of the good ole’ days, read about what death from smallpox or the bubonic plague was like.
And It’s Going To Accelerate
As different as 1871 and 2015 are, the changes coming over the next 60 years will most likely be much greater. Twenty years from now, we’ll be flying around in electric autonomous aircraft just like in the Jetsons. Forty years from now, immortality may be a thing. Sixty years from now? I don’t know and I”m not sure if I want to know.
I believe that there are two ways it will go for us humans:
Scenario 1: Humanity will have wiped itself from the face of the earth with technology gone very bad. Maybe AI will doom us or some malicious organization will engineer a supervirus. Cockroaches will rule the roost.
Scenario 2: Humanity will have been set free by technology. We’ll live in a utopia where robots do all of the heavy lifting, freeing us to drink perfect beer (created by the robots) and pursue creative interests. Nanomachines will repair our DNA and preserve our telomeres, making us immortal.
And then there is the stock market, the tool we all depend on for our 4% Rule dreams to come true:
If you believe Scenario 1 will happen, we’re all screwed and the 4% Rule doesn’t matter. Have fun and stop worrying.
If you believe Scenario 2 will happen, the 4% Rule will become the 50% Rule. Hell, the stock market may no longer be a thing. (Do corporations matter when robots do everything?) The world will be so different, it’s not even possible to comprehend what life will be like. In this outcome, this quote comes to mind, especially the last line:
There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know.-Donald Rumsfeld
Conclusion #1: The world 30-60 years from now is incomprehensible from the one we currently live in. Relying on data gathered between 1871 and 2015 to try to predict how the markets will behave in 2060 is a futile exercise. I have no idea what returns will look like over the next 6 decades, but I’d be surprised if they were anything close to what they are now.
Reason #2: Wait. 89 Percent?
Forget all of robot and doom and talk for a moment. For the purposes of this next part, let’s assume that not much will change in the next 6 decades with regard to stock market returns…
Before this podcast, I had never read Karsten’s material. However, I had heard great things about it from a lot of smart people. Based on what others had said, I suspected that Karsten’s slant on the rule would be negative, especially for long time periods. And then I saw his table (putting it in again here so you don’t have to scroll up) and was shocked by what I saw:
89% Success? No Way!
I thought that Karsten would predict doom and gloom for my future: Living in a box under the interstate? Cat food? A van down by the river? And then I saw this:
Yippee! I have a 89% chance of success! Thisclose to 9/10! HUGE! #WINNING!
What is the problem exactly? If you can’t tell, I”m totally OK with 89%.
This number strikes fear in the hears of others though. While I can’t find it now, I believe Karsten recommends 3.25% rate of withdrawal which would get my percentage up to 99%. He likes to use an airplane analogy:
Would you get on a plane if it crashed 11 times out of 100?
No way! I wouldn’t get on one that crashed 1 time out of 100 either.
However, money is different. If my portfolio starts to take a dive, I have the power to do something about it. If the plane takes a dive, I’m broke, but not dead.
And 89% is just the starting point. It’s based on my current spending, but life gets a lot cheaper shortly.
- Less Spending: My spending has gone down since I left work. Less driving. Fewer flights, more road trips. Fewer hotels, more staying with friends. Less eating out with more time to cook. Spending will go down a little more once we don’t have kid-related expenses. It will go down a lot more once our home is paid off in 10 years.
- More Money: Fans of the 4% Rule know that it assumes no future income. My 89% success rate is buffered by my unexpected side hustle (you’re reading it) and social security. While the latter will experience difficult times in the future, seniors vote and no politician in the world would sacrifice this sacred cow.
Note: Karsten points out in his series that flexibility, side hustles, and social security may not save you when the 4% Rule fails, but since there is little chance of that happening in the first place, I’m not concerned. Also, see the part about robots above.
And now, I’m going to say something controversial:
I could have stayed at work and threw more money on the pile. I could have brought 4% down to 2%. However. I’d rather take some chances.
I’d rather live a great life now while my body is still close to peak form. I’m OK with the risk of going broke when I’m an old fart. The value of spending time with my children now is more important to me than building up enough money for a success rate above 99%. If my financial shit hits the fan when I’m 85, I’ll figure it out then. More to say on this in a moment…
But, that is me. If you’re in the 89% bucket and that 11% chance of failure will keep you up at night, perhaps you should stay at your job another year. However, I’d also argue that you’re not looking at the whole picture.
There are costs for staying at a job too, especially if it’s stressful and consumes your time. In my case, I neglected my health. At this point in my life, I’m almost 30 pounds lighter than I was at max weight. Because I now have time to exercise, I’ll have better quality of life for longer. While I’ll probably live longer as a result of my better health and that may be a concern if you’re worried about running out of money, I’ll also have less health care costs because the risks that come with poor cardiovascular fitness are diminished.
But much more than that: Your kids are only young once.
Where Does The 4% Rule Fit In Then?
When I said that I’d rather die broke and live my best life now, please know that I DO NOT advocate living recklessly or a life where you’re planning on having the government or someone else bail you out. I hate discussing anything even remotely related to politics, so I’m going to tread carefully, but here it goes.
I feel that one should plan and build a life around personal responsibility. Do the best to take care of yourself and structure your finances in a way where you won’t require a bailout ever.
In my life, if my finances starting to slip, I’ll go back to work or move to a cheaper corner of the world.
With all of that in mind, if you haven’t fallen asleep yet, please pay close attention to this next part. I’ve written over 600 posts and if you take one thing away from all of my material, it is the next two sentences. I’ve put them in huge-ass, bold letters for emphasis!
Don’t focus on worst case scenarios. Instead, focus on most case scenarios.
And this is where the 4% Rule fits in. Use it as a loose guide to know when to quit your job. When you hit your number, politely tell your boss that in two weeks, your cube will be vacant. Open the door and step outside. Look at the sunrise and then watch it set. In between, look at flowers and smell the air. Pay attention to all of the parts of life that you’ve neglected for the past decades of work.
Worst case scenario: If you find that after 6 months freedom isn’t agreeing with you, go back to work.
But if your life has turned out like mine:
Every day is a different adventure.
You have time to spend with your kids.
You have time to explore the world and work on yourself.
Human nature causes us to focus on negativity and worst case scenarios. But, they rarely happen. Most of the time, it all turns out ok. Sure, there will be struggles, but have the confidence to know that you’ll figure it out. You’re pretty smart if you got here in the first place.
If your life turns out anything like mine, and I hope it does, you’re never going to want to go back.
There is a small chance you’ll run out of money, but you will run out of life.
Don’t let it happen before you’ve had some fun.
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