The FIRE (Financial Independence, Retire Early) movement has been gaining popularity in recent years as more and more people seek to achieve financial independence at a younger age. The movement espouses the idea of saving and investing a large portion of one’s income in order to reach financial independence and retire early. However, there is a big problem with the movement’s reliance on the 4% rule.
The 4% rule, also known as the safe withdrawal rate, is a rule of thumb used by many in the FIRE community to determine how much money they can withdraw from their investment portfolio each year in retirement without running out of money. The rule states that you can withdraw 4% of your portfolio’s value in the first year of retirement, and then adjust that amount for inflation each subsequent year. The theory is that by sticking to this rule, your money will last for a 30-year retirement.
While the 4% rule has been widely accepted and used by financial planners for years, there are some flaws in relying on it for early retirement. One of the main issues is that the rule is based on historical market returns, which may not be sustainable in the future. Market conditions can change drastically, and relying on past performance to determine future outcomes is risky.
Another problem with the 4% rule is that it doesn’t take into account the potential for unexpected expenses or emergencies in retirement. Medical bills, home repairs, or even a downturn in the market can all impact your ability to stick to the 4% rule without running out of money.
Additionally, the 4% rule assumes a static withdrawal rate, which may not be realistic for everyone. Some retirees may want to spend more in the early years of retirement on travel or other activities, which could deplete their portfolio faster than anticipated.
So, what can those in the FIRE movement do to address these issues with the 4% rule? One solution is to be flexible with your withdrawal rate and adjust it as needed based on market conditions and your own financial situation. Having a contingency plan in place for unexpected expenses can also help mitigate the risk of running out of money in retirement.
Ultimately, while the FIRE movement has helped many people achieve financial independence and early retirement, it’s important to recognize the limitations of the 4% rule and be prepared to adapt your strategy as needed. By being proactive and staying informed about your financial situation, you can increase your chances of a successful and sustainable early retirement.
LEARN MORE ABOUT: Retirement Pension Plans
REVEALED: Best Investment During Inflation
HOW TO INVEST IN GOLD: Gold IRA Investing
HOW TO INVEST IN SILVER: Silver IRA Investing
4% rule is over 30 years outdated now. We have so many various higher yielding options from stocks, ETFs, split funds all the way to private credit and lending now. Diversification is always key but IMO you can get a lot farther with a higher yield strategy.
Or you try to fully understand the 4% rule, what it's based on, and the various outcomes and probabilities. In general it's only the very edge cases that would result in ending a 30 year period with $0, and most times there is more than you started with. But that's also using bonds, which just haven't done well most of the last 30 years. If you modify your process to use just the S&P, it's also 4% but with slightly more volatility. But if you have any sort of flexibility in your spending (fewer people travel during a bad recession, and travel options were limited during Covid), you can also adjust to taking out a little less during a downturn. And really the failure points, if planning is otherwise decent, is if you retire right into a bad recession and take out your first few years of expenses while the market is down.
Understanding these failure cases, instead of just glossing over that a set 4% rule might not cover all cases if living off investments for 60 years, can make a huge difference.
Take the withdrawal rate to .5% and live in a cardboard box. No guarantee that you’ll live 50 years more. Don’t listen to these fear mongers.
If you drop the withdrawal rate to 3%, the odds massively swing in your favor. Lastly, you can just about guarantee success if you drop your withdrawal rate even further in downturn years by working an extra six months and building a cash cushion.
Wrong .. you increase your YIELD and keep the same 4% withdrawal rate
Bad advice sp500 yields 10% , 4% withdrawal and your nest egg will continue to grow.