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:
1871
- 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:
2015
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:
89%!
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.
Do it.
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.
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.
Actually, the 89% success rate is a bit misleading. That’s over ALL equity valuation regimes. When equities are expensive as they are today, as measured by the CAPE ratio, the failure rate is more like 30%. See part 3 of the series.
I personally wouldn’t accept even an 11% failure rate, certainly not 30%. Ask yourself if you – on average – miss 11% of your flights. I don’t. I go to the airport early enough to essentially never miss my flight, even though missing a flight is a much smaller inconvenience than running out of money at age 75.
But anyway, thanks for the mention and I’m glad you liked the series!
Regarding CAPE, I’d be curious to know what your thoughts are on this guys material: https://www.philosophicaleconomics.com/2014/08/capehigh/
“I personally wouldn’t accept even an 11% failure rate, certainly not 30%. Ask yourself if you – on average – miss 11% of your flights.”
The opportunity cost to prevent missing a flight is leaving 30 minutes earlier to go to the airport. The opportunity cost of increasing my chances of success 5 percentage points in retirement would be multiple, missed years with my children.
And 30-60 years out, I just don’t think any of it matters. In the past, there were always other jobs to move to when disruption happened. For example, in 1900, most worked on farms. Now, not so much. However, the next step is different because while the jobs may remain the same (someone has to drive trucks), humans no longer are needed to do them. Big, big changes.
I like the opportunity cost angle. If, and that’s a 11-30% IF, you are 75 years old and had to go back to work, you’ll feel good about it. 1) it give you purpose. I know many retirees that work for the fun of it. It gives them a sense of value, social needs and some income. 2. While your the hanging out at your low stress retirement job, you can reflect on all the cool things you did with your kids in your 40’s. I 100% guarantee you won’t have regrets.
Re the CAPE: I always point out that because of the technical issues such as the ones raises in that article we have to take today’s CAPE with a grain of salt. But nobody, not even the writer of that article, would argue that today’s CAPE is normal or even low. It’s still extremely elevated, just not quite as elevated as the headline number might suggest. Remember, the dreaded 1960s with some of the worst SWR experiences came when the CAPE was only at around 24 to 25.
Re the flight analogy: both risks is real life SWR calculations are bigger. The opportunity cost and the risk of running out of money at age 70. Most people, when facing an asymmetric risk profile will opt for safety. And well-known bloggers with online income who don’t even have to withdraw anything yet have the luxury of the opposite asymmetry, so I don’t blame you for pulling the plug early. But not everyone has that luxury.
Re AI: time will tell, but I doubt that AI is in any way more significant than all of the technical revolutions we saw before. But just out of curiosity, if between 1871 and 2018 the average real stock return was 6.6%, what’s your estimate of the impact of AI on projected stock returns? Do we add 1%, 2%, 5% to that long-term average?
Oh yeah, it’s much easier to pull the plug when you have a little income coming in. I would have done it regardless, but I also acknowledge that I probably would have found some atypical income streams without the blog. However, I was still comfortable with the numbers and my ability to find some income sources should the shit have hit the fan.
Just curious: Have you ever talked about the years where you could have drawn more than 4%?
“Re AI: time will tell, but I doubt that AI is in any way more significant than all of the technical revolutions we saw before. But just out of curiosity, if between 1871 and 2018 the average real stock return was 6.6%, what’s your estimate of the impact of AI on projected stock returns? Do we add 1%, 2%, 5% to that long-term average?”
We’ll have to agree to disagree here. Please have a look at Tim Urban’s piece on AI (I linked to both parts of it in the other comment reply).
And I have no clue how AI will effect returns. It could be terrible (all of the jobs are gone causing a massive depression) or it could be that we tax the robots to make up for lost wages, everyone gets a universal basic income and we live in a post-work paradise where the stock market doesn’t even matter.
Not only do you have website income but you also have income from your real estate investments, which hopefully will fill the 11% to 30% gap. I have enough income from my real estate investments to cover my expenses so all my investments in the stock market are a bonus. If you retire when your real estate income is enough to cover your expenses then you don’t have to worry about saving 25x your annual spend, nor do you care if the 4% rule holds true beyond 30 years.
Re Supplemental income: Nice! I think we’re on the same page! Like you, I also like real estate, which is a little bit more stable income and less susceptible to Sequence Risk!
Re SWR>4%:
1: I’ve pretty consistently recommended SWRs greater than 4% for folks with substantial supplemental income in the future (SSA, pensions). That’s usually retirees in their mid to late 40s with a 2-stage withdrawal problem, 20-25 years initially and then the rest with pension/SSA.
2: At the bottom of a bear market when equity valuations are very attractive again you certainly want to go way above 4%, too. A withdrawal rule based on the Shiller CAPE (SWR Series Part 18) would do that.
Re AI:
Not sure what I want to hope for. If AI is too disruptive and we’re dealing with 150m unemployed people, that can’t be too beneficial for the economy. That’s why I hope AI will gradually replace workers, just like all the other technical revolutions have done before.
If you like stable income, you may like the argument to live off dividends in retirement. Dividend income is more stable than capital gains/share prices. It is easier to project and forecast, and it is easy to see how much income your portfolio is generating to pay for your lifestyles.
Dividend Growth Investor recently posted…Lowe’s (LOW) Dividend Stock Analysis
One other idea. Would you take this bet?:
Within 40 years, most of the jobs as we now know them will have been taken over by technology. This will cause major disruption in the stock market rendering current research on safe withdrawal rates including yours moot.
We could refine the terms and throw it up on Long Bets. What do you think?
That’s a good bet.
I don’t think robots will make that much of a difference. They will take over some jobs, but we’ll invent other jobs to replace those. Human is exceedingly good at making up BS jobs. Managers still want direct reports and they’re the one that makes the rules.
My bet is on human. The stock market will still be there.
We’ll have to agree to disagree here! My bet is on AI. Come back in 40 years and we’ll see who was right! 🙂
It’s a strawman argument. I never doubted that jobs with be replaced/changed over the next 40 years. Over the last 40 years most jobs (i.e., 51%+) have either been replaced or radically changed by technology. I have no doubt that this trend will continue, so there’s no one to take the other side of that bet.
Technology has always been changing. Mostly reflected in productivity gains in GDP. Those same productivity gains will again boost GDP growth and stock market gains over the next few decades. We’ve gone from an agrarian economy to manufacturing to services. And now we’ll go to the next stage, I presume a service economy assisted by AI. I thinks it’s preposterous to assume that all jobs will become obsolete. Will your wife’s job be replaced by AI? Will your computer AI start writing its own independent and creative and funny blog posts?
The warning that technological change will make workers obsolete is as old as technological progress itself. At every prior technological revolution people warned about it and it’s always been totally debunked. Evidenced by 140+ million jobs today. It will be debunked again.
“It’s a strawman argument. I never doubted that jobs with be replaced/changed over the next 40 years. Over the last 40 years most jobs (i.e., 51%+) have either been replaced or radically changed by technology. I have no doubt that this trend will continue, so there’s no one to take the other side of that bet.”
I agree. This part of the bet was poorly written.
“I think it’s preposterous to assume that all jobs will become obsolete. Will your wife’s job be replaced by AI? Will your computer AI start writing its own independent and creative and funny blog posts?”
Ahhh,so this is where we’re different! I don’t think it’s preposterous at all.
It’s long, so I’m asking you to do a lot here, but I’d love to hear your thoughts on Tim Urban’s piece about AI:
Part 1: https://waitbutwhy.com/2015/01/artificial-intelligence-revolution-1.html
Part 2: https://waitbutwhy.com/2015/01/artificial-intelligence-revolution-2.html
“The warning that technological change will make workers obsolete is as old as technological progress itself. At every prior technological revolution people warned about it and it’s always been totally debunked. Evidenced by 140+ million jobs today. It will be debunked again.”
I think it’s different this time. And this is where we’ll have to agree to disagree.
Rewriting the long term bet:
Within 40 years, most jobs
as we now know themwill have been taken over by technology. This will cause major disruption in the stock market rendering current research on safe withdrawal rates including yours moot.Mr. 1500 Days recently posted…Why I Think The 4% Rule Sucks (The Most Case Scenario)
Thanks for the links. Fascinating stuff! So, maybe we have to alter the bet as follows:
U.S. Payroll Employment (currently about 151 million, according to FRED: https://fred.stlouisfed.org/series/PAYEMS) will drop by 50% or more. I’d definitely be willing to take the opposite side of that bet! Let’s discuss the details over a beer or two at FinCon in September. 🙂
All the best, Carl!!!
Isn’t the entire analysis built around a consistent withdrawal rate regardless of market conditions which no FIRE individual is going to do. If things look dire, spending is going to go down to reduce how much of the portfolio needs to be withdrawn. That’s going to increase the chances of success, I’m not exactly sure how you would model it mathematically, but it would need to be considered.
“Isn’t the entire analysis built around a consistent withdrawal rate regardless of market conditions which no FIRE individual is going to do. If things look dire, spending is going to go down to reduce how much of the portfolio needs to be withdrawn. That’s going to increase the chances of success.”
Yep. We’re all flexible. In my case, if my health hits the fan, I’ll move to a country with better health care. If something else goes wrong, I’ll move to a cheaper corner of the world.
i always hated anything called a “rule.” sure, it’s a nice guideline. i suppose it might be sorta useful for somebody trying to quit work at 31 and never work another paid day on 24k/year withdrawals. i know we won’t be that close to the vest. some of our dough will be what i call “discretionary.” if crap goes down we don’t really NEED that big wine budget item or that devo hat. you said it (i’ll paraphrase) as if you got this far relax and go ahead with the optimistic view that you’ll figure it out.
meanwhile, chill out with a nice cream soda and take ‘er easy.
freddy smidlap recently posted…I Lost 20 Pounds of Ugly Fat – I Cut Off my Head!
I was always happy with a 71% in college (C’s get degrees!). 89% sounds pretty good to me. The charts are very interesting to look at though.
FYI- Simple sentences from you like “you crapped in a hole in your yard” is what keeps me coming back to your site. for being a so called introvert you sure are gods at making me laugh in each post. Keep up the good work.
DJ
Thanks for the kind comment DJ! The blog is the purest expression of my goofy personality. It doesn’t come out in public unless beer is involved.
I believe it was Donald Rumsfeld – not Dick Cheney – who gave us the unknown unknowns quote.
I like Michael Kitces’ writing on the 4% rule. His work lead me to start thinking of it more as a worst-case scenario. Here’s an interesting quote from him: ” In fact, by applying the 4% rule, over 2/3rds of the time the retiree finishes with more than double their wealth at the beginning of retirement, on top of a lifetime of (4% rule) spending! Half the time, wealth is nearly tripled by the end retirement, as retirees fail to spend their upside!” From this article: https://www.kitces.com/blog/the-ratcheting-safe-withdrawal-rate-a-more-dominant-version-of-the-4-rule/
Yep. People forget that the 4% Rule is kindof a worst case scenario. Most times, you could spend more.
Such a great article Mr. 1500. Your “most case scenario” sums up your article perfectly.
Also, I’m in complete agreement with Brian @ The Graying Saver (and with Michael Kitces). It’s highly likely that our portfolios will continue to grow out of control, even when withdrawing the full 4%.
Finally, I’d like to add some research done by Ed Rempel (aka the Canadian Wealthy Accountant): https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/:
“The success of the “4% Rule” depends on how you invest: Equity investors (70+% equities) can safely withdraw 4%; Balanced investors (60/40 to 40/60) should reduce it to a “3.8% Rule”; Conservative investors (more than 60% bonds or GICs) should limit it to a “3% Rule”; Bond or GIC investors (no equities) should limit it to a “2.5% Rule”.
Many of us in the FIRE community are 100% equities. Plus, we’re adept at adjusting our spending as-needed. I agree with you Mr. 1500—the 4% rule is the worst case scenario, and the most case scenario is that we’ll end up with way more money than we need.
Yep, allocation means a lot! I’m 100% equities and don’t see that changing any time soon.
But the really interesting question: How did you twin sister end up taller than you? 🙂
I”m 89% with you Carl! Just kidding… 100%. I’m as big a fan of airplane analogies as anyone. But, you were exactly right to shred this one to bits.
The 4% rule airplane analogy assumes 11% catastrophic failure vs 89% complete success, with no room for course corrections along the way. If you’re at 89%, you’re friggin’ Sully Sullenberger flying your plane. At worst, you hit some black swans and end up belly-landing softly in the Hudson with all 155 on-board souls still alive and kicking.
Adam @ Crispy Cabbage recently posted…The Outback backtrack: That time 0% financing finally made sense
This is the best: “If you’re at 89%, you’re friggin’ Sully Sullenberger flying your plane.”
I’ll be out in your neck of the woods in July. Hope to see you then!
Here’s an approach to the 4% withdraw rate that I know some established trusts follow with a goal of capital preservation. I think it could be a useful approach because it takes into considerations market fluctuations. Here’s the logic:
Strategy: Each new year around January, you calculate a weighted average of the market value of your portfolio on December 31st for the previous 3 years. The resulting number is what you use to calculate your 4% distribution for the current year.
Rob recently posted…Healthcare in America is Simply Extortion
I don’t know, sure your kids are only young once but your job isn’t raising kids, it is raising them to be good adults. As someone with three grown millennial kids I can tell you that I had a lot of fun living with them but I have forgotten most of the details of that phase of my life and like any parent my thoughts on them are preoccupied with their current status. Fortunately it is pretty good for my three but no amount of fun at age 4 or 9 or 17(ha ha, not much fun at 17!) will offset an adult kid that isn’t adulting very well or who comes home to live in your basement. And if you are doing it right a good deal of the time you spend with your kids when they are young will not be fun at all, it will involve setting and maintaining standards, enforcing chores and observing moody and angst ridden teens. You can’t be their best friend past their pre-adolescent years, you have to be the parent, and that is very different and often no fun at all. I worked well past the 2% cutoff and in fact have been at 0% for my entire retirement, so far, because my hobby side gigs make plenty for us to live on. And I enjoyed my job. I’m not discounting spending time with your kids when they are young, but even working full time I got to spend plenty of time with them and doing that all day every day would not have been nearly as fun for me as having a meaningful and enjoyable career was.
I mentioned kids because they are the most important reason for me, but only at this time. In less than 10 years, they’ll both be gone.
And even though I discuss the children often, most of my newly found free time isn’t spent with them (just got back from a solo, leg-burning bike ride into the mountains!). Most of the year, they’re at school. I won’t be going back to work once kids are no longer in the picture. I also would have done this if I had no kids.
“I worked well past the 2% cutoff and in fact have been at 0% for my entire retirement, so far, because my hobby side gigs make plenty for us to live on. And I enjoyed my job.”
My litmus test is this: Would you stay at your job if you suddenly came into $50,000,000? If so, that’s absolutely wonderful. You’ve found something that very few have found, a job you’re truly passionate about. It sounds like you may have been this way.
I fall more in line with Karsten’s approach (we aim for 3.5%) but I’d like to think we’re not suffering on the way to FI or anything. The extra money to go from 4% to 3.5% is significant but it also happens to be earned when our nest egg is at it’s largest: the final push goes faster than our initial push.
That said, I’m totally on board with the idea that we should live our lives with the knowledge that it’s definitely going to come to an end. We can’t waste the little time we have.
Done by Forty recently posted…Tariffs are Just Regressive Taxes
With the market rise since I stopped, we’re way below 3%. Easy to say when the wife still works and the blog throws off some coin. Note of it matters though. The world will be drastically different in 30-60 years.
The world will definitely be different, no doubt.
My personal take is that those who hit FI earlier in the market cycle are more optimistic because they’ve enjoyed a good sequence of returns. Those who are about to pull the trigger are (probably rightly) more cautious because they’re more likely to see a poor sequence of returns. (I was particularly moved by Karsten’s post about how the 4% rule fails for people who tried to FIRE in 2000).
I’m really interested in seeing how this fairly new thing of FIRE progresses as we go through more economic cycles of people living in the “RE” part of FIRE.
Done by Forty recently posted…Tariffs are Just Regressive Taxes
“I’m really interested in seeing how this fairly new thing of FIRE progresses as we go through more economic cycles of people living in the “RE” part of FIRE.”
Me too. We’ve all just lived through one of the greatest eras for market returns. What happens when the next downturn sets in. As Warren Buffett has said, we’ll see who is wearing shorts when the tide goes out.
Yup, I’ve been beating this drum about the 4% rule for years. The conditions that created the rule *in the past* no longer exist. We know for a fact that population growth (a large driver of the economy over time) is slowing, as is productivity growth. Both numbers are now *half* of what they were during that mythical period that created the 4% rule.
Conditions always change. Smart people understand this and make adjustments. Obviously I’m not going to bank my retirement based upon some out-of-date rule from history.
Mr. Tako recently posted…Single Parent Tango
YES! YES!! YES!!
I think I’m somewhere between you can Big ERN on this one – mostly dependent on how much fat there is in your budget. If you have a ton of fat in your budget (in our case that’s 50% of our spending!) then that’s a lot of flexibility to lower it in leaner years. Couple that with a portfolio that leans more towards bonds when the Cape index is high and then rebuys stocks when it’s lower and I’m not too worried about a 4% WR – even without making additional money. Sounds like that’d be somewhere between the 70%-90% success rate with a full 4% withdrawn, but even higher if you lower spending occasionally and manage to not increase spending with inflation (which I think is a realistic possibility).
For the SS side though, I think that cancels out with healthcare uncertainties. The worst case would be SS goes away AND medical costs skyrocket though, which is a scarier possibility. :/
“The worst case would be SS goes away AND medical costs skyrocket though, which is a scarier possibility. :/”
It won’t. Old folks LOVE to vote. Social security and Medicare will be diminished, but no politician would kill these sacred cows. And if the worst happens, just move to Southeast Asia or Portugal.
I like playing with the simulator at Engaging-Data.com ( https://engaging-data.com/will-money-last-retire-early/ ).
Adding spending flexibility of just 10% (spend 3.6-4.0%) increases success to 98%. 15% flexibility boosts success to 100%.
The future is going to be different than the past, but it will be similar. One thing that won’t change is the 100% likelihood of death. Toggling that “Death Wedge” really brings it into perspective, especially for males.
Plan for the future, but live to enjoy today. I feel like that’s what FI should be.
“The future is going to be different than the past, but it will be similar.”
I don’t think so. Artificial, superintelligence is going to change everything.
https://waitbutwhy.com/2015/01/artificial-intelligence-revolution-1.html
Lots of opinions but I’m pretty sure I’m going to nail it on what this all really means. Another beer in the lineup – Sour about 4%.
PS – Sour beers should not qualify as “beer”
FinanciallyFitMom recently posted…Am I pushing too hard?
OMG!!!!! PURE GOLD!!!!!
We’re also working on the assumption that 60 more years is our expected lifespan. And that no catastrophic things happen to us. That being said, carl, you also have other investments besides your stocks and bonds. Not only that, the chart is based on withdrawal of initial funds. Your portfolio may grow more or less….and including dividends of say 2%, the amount of gains and principal you withdraw is even less. Also, all hail our robot overlords. I hope they turn out like Bender.
Cathleen cooks stuff recently posted…Frugal packing
Yep, in a crazy twist, the $130,000 I put into the coworking space that I now own could end up paying all of my bills for the next decade. The other $1,600,000 is all fluff.
It’s so true that we focus on the negative to the exclusion of all positives. I’m very guilty of that.
My experience over the past twelve years has been a long series of worst case scenarios, linked up like the world’s worst train but it’s also included a lot of good things and building blocks to great things. And yet the lesson I took away from that wasn’t that things can and will work out (assuming you’re doing your best with what you have) but rather that you always have to plan for the worst case scenario because that’s the only logical thing to do.
I’m working on this most case scenario idea though!
I’m really sorry to hear about your worst case scenarios rearing their ugly heads. I’m fortunate that except for a sometimes traumatic childhood (good, but alcoholic dad), life has gone pretty well for me.
If I can ever do anything for you, please don’t hesitate to reach out.
That’s very kind of you to offer. This post was a helpful reminder to keep working on my mindset because I know that it will hold me back when it’s time to make the decision on when to retire early.
I don’t know if you’ve addressed it in earlier posts that I might have missed but what are your tentative plans for college and the girls? Are you planning to try to cover some or all of it?
Revanche @ A Gai Shan Life recently posted…My kid and notes from Year 4.2
College! While we’ll probably have enough to pay for our kids’ education, I want them to still have some skin in the game. While I haven’t quite figured it out yet, one idea may be to have them get loans and then I sweep in at the end and pay them off as a graduation present. (I hope that they don’t read this blog and discover my secret plan)
Carl, thanks for this post. Exactly what I needed to read today. Being recently evacuated from Sri Lanka where i was working the last six month, now holed up in Singapore for the last three weeks has me thinking about RE hourly. I am thankful that I have the FI side of the equation figured out at the 4% level.+ I have gone through Big Ern’s analyses and it caused me to second guess my situation. Seeing your point of view is quite helpful. Not sure what is next for us but I am thankful for folks like yourself and your content.
Thank you patrickmc9 for the kind words and best of luck in your journey!
Real estate rentals, baby! I’m hoping that by splitting our pittance into halvsies – real estate holdings and index funds (stocks 100%) that’ll we’ll be served pills by R2D2 in our assisted living orbiter, many decades from now.
One can dream!
Seriously – Excellent food for thought here. Never a bad idea to keep a side gig or two, or just simply work less, to keep the cash flow a flowin’.
Thanks for the kind words Cubert and see you soon!
Don’t focus on worst case scenarios. Instead, focus on most case scenarios.
This is really good. You can’t focus on the worst case scenario. You’ll be paralyzed by fear.
I don’t like the 4% rule either. But for the other reason. I don’t think that’s enough when you’re young.
Use the 4% rule as a guideline and react accordingly. Work part time or do something to make a little money.
That’s the way to go.
“react accordingly” Yep.
Ha! This is timely. I just got done re-reading The Black Swan: The Impact of the Highly Improbable by Nassim Taleb. No offense to Karsten – that dude is really freaking smart and has done some impressive analysis (and I used his analysis to refine my own approach). But my biggest takeaway is that any rules we make are ultimately arbitrary since we don’t know what we don’t know and the things we don’t know are not even imaginable. If you saved enough to follow the 4%, 3%, 2%, .005% rule, good for you. Since we don’t know what we don’t know, something so crazy could happen that could alter our lives as we know it and for goodness sakes, if that happens, I don’t think it would matter if I worked my butt off for another 1 or 10-20 years. I think the plane crash argument is a false equivalency – a plane crashes and I will likely die. If the markets go sideways for an extended period of time, I can make an infinite number of choices to influence the outcome. And, I agree with you, in the scheme of things, those kiddos are only in our lives for such a short time that I want to be present and available and not distracted by work in that short window of time where mine is a such a huge and daily part of my life. Finally, I feel like the entire argument of “how much is enough?” is kind of silly sometimes. Think about it – if you have $1 million or $2 million, you are soooooo rich. You have so little to worry about. This is a “I’m a rich person who lives in a 1st world country” rhetorical argument and just another example of how we have been indoctrinated to think that no amount of money will ever be enough. Oh ya, right on with that badass bike ride!
Shit, so much wisdom here!
“But my biggest takeaway is that any rules we make are ultimately arbitrary since we don’t know what we don’t know and the things we don’t know are not even imaginable.”
Yep. In retrospect, what happened in 2008 was obvious. However, how obvious was it to most of us in 2007?
* crickets *
“Think about it – if you have $1 million or $2 million, you are soooooo rich. You have so little to worry about.”
Yep. I fully admit that sometimes I tear up when I’m walking around town pondering how good my life turned out. I’m so thankful for it all.
The book talks about 2007/2008 financial crisis (this is the later edition book that basically has a whole additional book added to the end) and his thesis is that wasn’t a Black Swan event. 🙂 September 11th – that was a Black Swan event. If you said to anybody the day before that happened that we need to retrofit all the airplanes on the planet with security doors because terrorists are going to hijack planes and fly them into buildings, just about every person on the planet would tell you you were bat shit crazy. 1987 market crash – Black Swan too. There are also Black Swan events with positive outcomes. It’s a great read and it blew my mind the 1st time I read it a decade ago and blew my mind again the 2nd time. Quick side story – my roommates in 2001 were flight attendants (they still are FAs just not my roommates anymore) – they were home that morning. I saw the news of the 1st plane hitting, and then jumped in the shower for work (I was so upset and grateful at the same time since my friends were at home) and when I got done the 2nd plane had hit and I remember my roommate telling me that the other tower got hit and standing there shaking my head and thinking it was impossible that would happen and I even said out loud that there was no way that happened again. It just didn’t seem fathomable and even after watching the video, it seemed unbelievable. In reading the book, I kept coming back to that moment and it gave me a much more literal perspective on what he meant by a Black Swan event.
Love the post but really wanted to chime in about today marks my “1500 days to freedom” though I may exit sooner. The known unknown isn’t gonna keep me working past my expiration date! Thanks for sharing your expertise with me.
Go Karen go!
We have the same Freedom date
Hopefully the dividends cover everything so no selling and taking out anything except dividends and that is a win win lol
Doug recently posted…MAIN Dividend increase
I dislike the 4% for two reasons. The first has nothing to do with the point of this post (or your blog for that matter) but for most people it doesn’t matter. There is so much time and energy spent on running monte carlo analysis to prove it and defending it, but for most people it is completely irrelevant. It seems like most Americans just don’t have enough saved and thus 4% is irrelevant when they have a run rate of 10 or 12%.
More importantly, I don’t like to look at the withdrawal rate in terms of a spend down of principal. it has always been my goal (although I am not close yet) to build income streams that will provide regular income (dividend champions, bonds, whole life, rentals) rather than eating into principal.
Evan recently posted…I May Be Moving Again!
Building income streams has a lot of value. If the coworking space meets our goals, it will be earning about $3,000 a month for me. That will cover most of my expenses from an initial investment of $127,000. Lots of peace of mind there.
4% is probably an adequate guideline for most people similar to having 25x of expenses for retirement. Most people want easy round numbers to wrap their heads around. It is also based on the historical return of the stock market which has been averaging 10%. A few talking heads on Wall Street have cautioned investors that we might see an average return of 7% in the stock market over the next decade or two. That might hurt the 4% number (but I think the 4% number also doesn’t touch principal so there may be a buffer).
In my own personal planning, I don’t use the 4% withdrawal rule. I try to generate enough stable cash flow from assets to not have to worry about price movement which is very volatile. I like rental income from residential real estate in particular to provide for more stable cash flow to meet my expenses.
Sport of Money recently posted…Teaching Your Kid To Be A Millionaire
“A few talking heads on Wall Street have cautioned investors that we might see an average return of 7% in the stock market over the next decade or two.”
Given the runup that has led to higher valuations, I’d be surprised if it was that high.
Such an interesting post. It says an awful lot about how you approach life (in a very good way). I, and many others, often spend too much time looking at the downside without either realising the cost of doing nothing or that we are missing out on the potential upside.
I’m wrestling with the issue of whether/when/how to quit right now and I’m falling into exactly his trap. Lots to think about. Thank you.
Caveman recently posted…Why I would love to lose my job
“I’m wrestling with the issue of whether/when/how to quit right now and I’m falling into exactly his trap. Lots to think about. Thank you.”
Focus on what comes next instead of spending too much time chewing on numbers.!
Well put. I’m perfectly happy being at withdrawal rate OVER 4%.
Financial Velociraptor recently posted…Focus On Side Hustles # 11
Has anyone compiled a list of FI bloggers or podcasters genuinely living by the 4% rule? I don’t begrudge anyone making a profit off their blogs or other side hustles (you deserve it!) But you aren’t actually living with that 11% risk. I’m all for having other income streams while retired, but I also think FI bloggers who advocate for the 4% rule but don’t actually live by the 4% rule owe their readers transparency about that.
You’re totally right! I know of NO bloggers who aren’t making money. We definitely owe the transparency. I tried to do it here: https://www.1500days.com/passion-play-pay-what-you-can-and-cannot-learn-from-me/
Perfect, thanks!!
This is such a great post – thanks for writing it Mr 1500. It frames the What’s Up Next podcasts really well (both your risk episode and this week’s when to quit). I think Big Erns taking the academic approach – market returns are the variable and everything else is constant, optimise for the variable.
As you point out; life is the variable, whether is robots or health or government or earthquakes, expecting that market returns are the only thing that can change is naive. We can stay flexible and aware, like anything in life, there are no guarantees.
Our All Black coach (Shag) has a saying – “Worry is a wasted emotion”. It’s Rugby World Cup year; Winning the World Cup is a national obession in NZ; we could keep worrying about the stats, or do the work, prepare well and trust in our ability to stay flexible and respond.
Also, if Fi-Air goes down, I’m also pretty sure anyone on the plane from the FI community has been monitoring altitude, packed a parachute, scoped out the exits and is ready to go!
Thanks again Mr 1500, you’ve quite literally changed my life in the last 12 months through your blog posts and interviews. If you’re ever in New Zealand I definitely owe you a beer.
Your optimism is contagious! I certainly agree that we have no idea what the next 30 years will bring. In fact, I think people spend too much time thinking about what the markets or the economy will do moving forward since we have absolutely no control over it.
What we do have control over is our own lives. As several readers commented above, things don’t always go as planned. Not just in the markets, but in life. If you look at most people’s lives there is some stuff there, and it’s not the type of stuff you buy. Often it’s stuff like aging parents who definitely did not follow the 4% rule, children with long-term health issues, health insurance for a self-employed 57-year-old with a $6000 deductible that will be $3700 a month for a family of four next year. Real estate investments and partnerships that went bad or sort of bad. There is also a lot of great stuff like the retiring early and spend some time on the things that (really need my attention) other than working for someone else’s dream.
One reason I like the 4 percent rule is that it considers the worst-case scenario. It also has lots of people whose FIRE projections come in below it and above it which puts it pretty much in the near the middle. This is often where things end up.
Your post was a great way to look at this and something I really needed to read. For now, I’ll stick with 4% because I like to expect the best outcome but plan for all that ( life stuff) that doesn’t care about the markets. In 30 years if 4% ends up being my dead on max withdraw rate, hell yeah I’ll take it.
The Frug recently posted…The Allure of the Obscure.
“One reason I like the 4 percent rule is that it considers the worst-case scenario.”
Try telling others that! How many times have I heard something like this: “I know it’s 4%, but I’m going for 3.5%.”
If it was the 3% Rule, you’d hear people going to 2.5%. Negativity bias is a bastard!
Very true. It’s funny right after I finished typing my comment. Google ads served me up some “why the 4% rule will fail” ads on another site. It all comes down to what makes us comfortable. For some reason, FIRE folks just can’t get enough alternate views on this. That’s OK, It helps us reinforce that we picked the right strategy, even though no one knows for sure. Eventually, though you just pick one and run with it. Until of course, I find something better, then start questioning it all over again.
Given your opinion on the 4% rule I’m wondering if you could entertain a hypothetical question. Would you sleep better at night with your current net worth of $2.2M but no earned income (no working spouse and no profitable blog) or with a net worth of ($1.1M) plus your current earned income (spouse’s Bigger Pockets salary + 1500days profits)?
The reason I ask is that all of my favorite FIRE blogs (ERE, MMM, 1500days, rootofgood, madfientist) feature retirees who work part time and/or start profitable businesses and have spouses that continued to work some sort of job.
Maybe you dislike the 4% rule because “how much savings do I need so that it never runs out in 60 years?” is the wrong question. Maybe the right question, is how much savings do I need to give myself the confidence to quit my current job and pursue whatever job/business/profitable that allows me to have enough control over my life that I can pursue the best uses of my time.
Yep, the 4% Rule certainly doesn’t apply to me yet: https://www.1500days.com/passion-play-pay-what-you-can-and-cannot-learn-from-me/
I’d take the $2,200,000 in a second over the income. Most probably wouldn’t though, hence the popularity of dividend investing.
a lot of the talk about robots taking over all the jobs makes no sense to me. The world pre the industrial revolution had lots of people making clothing by hand, and yet clothing is cheaper now and more people, globally, work making clothes than in 1850. I could go on and on with other examples, but the fact is that machines can only do so much, and AI isn’t as good as people think it is. There is plenty to do, and there will be a for as long as humans can see. Sure folks in 1850 could not see that, but nevertheless the first rise of the machines has been a net positive for humanity. There is no evidence that the next will not be the same. Fear is not evidence.
Second, since I have memories longer than 30 years, I can say that much of the world today was predicted by science fiction of that era. How much technology from Star Trek the Next Generation and the TOS movies from that era is here now. I point to many of the medical sensors, clear aluminum, tablets, smart watches and hand held portable phones. Hell, we even have deployed military lasers. Northrup is talking about putting tactical lasers on USAF fighter jets in the mid 2020s. Sure we don’t have transporters or warp drive, but much of the mundane technology is here. Even Back to the future got a few things right. That being said, the world is still not that much different than what I grew up in, and even that of my parents. Change is increasing in speed, and sure we may be approaching the Singularity, but it’s really impossible to predict such things. For the most part, the world is the same as the one I was born into, even if 8 track, which was new in the 70s when I was born, is long gone, and it’s all digital now. Tools may change some, but most of it is the same.
I thought the same as you before I read the Wait But Why post.
The problem with the 4% rule is one of perspective. It is a rule of accumulation and looks to predict the future. It is not a rule of spending down the nest egg. It is not to be believed since much of the response in this post is directed to alternate accumulation designed to hedge one’s bet. If you actually believed it then when you hit it you wouldn’t need hedged bets. An alternative is to create a spend down speadsheet that takes into account taxes, inflation and risk. You also need an accurate budget which takes about 2 years to complete. The 4% rule typically is built around some thin air number say 100K/yr it may be enough it may not but any way you slice it it’s a guess.
I tracked my expenses long enough to actually know my spend down. Next I calculated what a 20 year retirement would cost me at that spend down inflation adjusted and adjusted for taxes to arrive at the cost of my retirement which will cost me 2,672,711 over the 20 years. I then worked backward to determine how to fund that 2.6M My sources are SS Brokerage TIRA Roth. I’m Roth converting 1M of TIRA to Roth, while living on cash from the brokerage. Since I’m living on cash my Roth conversion produces entirely predictable tax consequence and cost of conversion. I did a lot of work to figure out how much to convert. My TIRA was 1.5M and if I leave 500K in the TIRA it will RMD a small amount again entirely predictable from the tax perspective and SS + RMD keeps me in the 12% bracket, which means I can pull out Brokerage money tax free. If I just RMD’s 1.5M I would loose the 12% advantage since my WR and tax load at some point becomes tied to the RMD for that year NOT 4% or 3% or any other %. The 1.5 M gets doled out at government convenience at what ever rate the RMD schedule dictates. I calculated total taxes and for the 2.6M retirement the 1.5M TIRA generates 338K while the smaller 500K TIRA generates 9f 94K a net tax saving of 244K over the 20 years. Comparing the retirements it’s the same 2.6M for either but one is more tax efficient. The 1M transfer to the Roth provides balast and self insurance tax free, and the brokerage also provides steady tax free income as long as I stay in the 12% bracket. When all is said and done with a 2M brokerage and a small TIRA my WR is and remains a predictable 2.35% and I can pull an additional/optional tax free amount from the Roth as I like. At those rates I can choose an AA of 50/50 and reduce my overall risk. and I can choose to run my TIRA at the Tangent portfolio which further increases stability.
The 4% rule means nothing to me, side gigs mean nothing to me. I have zero use for them or the hassle because I quantitatively mapped out from where my hamburgers will come come hell or high water, robots or no. My portfolio is risk adjusted and tax optimized.
The 4% rule is ok for planning but one always has to remember to adjust one’s spending downward when the market drops. It also helps to have a bucket of cash to draw upon when the market is sagging, so that you’re not selling shares at a depressed price.
I set up my “what if?” scenarios pretty conservatively, giving myself scenarios with only 3% or 4% average annual gains, 2.5% inflation, and factoring in collecting Social Security later on in retirement. I gave myself lousy COLAs for Social Security too, although given that nowadays pretty much all of the COLA gets diverted into a higher Medicare premium, I may have later changed the COLA to zero. When my certainty factor for having enough money to live on until age 93 went over 100%, then I figured it was safe to exit the workforce.
I plan on collecting SS at age 70 with an eye on having that money cover my recurring expenses, and my savings cover the frills. That way I can always cut back to the basic expenses in down market conditions.
This writing is pure gold!
I’ll have to work 1500 Days into my blog reading schedule — there’s so much good content out there to consume, and so little time.
I fully anticipate a more automated work force, and fully agree that the unprepared will be negatively impacted by this. A solution is a universal living wage, but without getting political, I think there’s little chance of this being adopted in the US. It’s just a bit too antithetical to the American way of doing things.
— TDD
Thanks TDD for th kind comments!
Universal living wage! Yep, I think it could be a good solution if done right. But as you inferred, it will take some brave, thoughtful, smart leadership that doesn’t currently exist in the states.
Hey, like we were emailing about, I think the most common type of person pursuing FI has great motivation and flexibility, which really takes up the slack in any level of risk behind the 4% rule.
One trend I’ve been seeing lately is “safety factor creep”, a term I just made up. People say “oh, well if 4% is a good number, I’d better make it 3% in case there is ever any trouble in the economy.” Of course, all that stuff is baked into 4% already. For example, in the Work Optional book, Tanja saved up 37.5x of their spending (2.7% withdrawal rate) even though they were desperate to move onto their next life in the mountains and had a blog and a book deal lined up. I feel bad for the reader who says “Oh, they saved 37.5x? I’ll add 10% and save 41x, just to be safe in case of a stock market dip.” Where does it end?
Mike recently posted…Engineering’s Unwritten Rules