For those of you without cushy pensions, I'm sorry folks. The 4 percent rule is outdated. The rule was popularized in the 1990s. It is now unwise to follow the 4 percent rule as a proper safe withdrawal rate in retirement, especially if you are part of the FIRE movement.
Instead, I highly recommend lowering your safe withdrawal rate for the first year or two after you retire, especially if you retire early. Retirement life will likely be much different than you expect. You may be filled with uncertainty and doubt. As a result, the proper safe withdrawal rate should be more conservative.
The idea of having a low safe withdrawal rate once you retire is to train you to live off less. The first couple years is a big adjustment period. By lowering your safe withdrawal rate, you will also be encouraged to do things you enjoy that may generate supplemental retirement income. Psychologically, shifting from work to retirement can be hard for some.
My Retirement Background
I “fake retired” in 2012 at age 34 with about $80,000 in passive income investments. However, after a year of traveling and wondering whether this was all to life, I went back to work growing Financial Samurai. Early retirement life was not for me. I needed purpose.
Today, I still don't have a day job. But I am still writing on Financial Samurai. I'm paying $2,500/month for unsubsidized healthcare. Further, I have a couple young children to raise in San Francisco. In other words, I'm sharing with you firsthand experience of life after work, during retirement, and post retirement.
I'm not pontificating what retirement life is like as a gainfully employed employee. Instead, I'm living this reality every day as a practitioner.
The Proper Safe Withdrawal Rate
If there's one thing to remember from this article, it's this Financial Samurai Safe Withdrawal Rate (FSSWR) formula: 10-year bond yield X 80%. We can call this the Dynamic Safe Withdrawal Rate because as times change, so will your withdrawal rate.
For those of you who want to leave a legacy after you are gone, the FSSWR is the way to go. Conversely, for those of you looking to spend all your money before you die, feel free to increase your safe withdrawal rate closer to the traditional 4% or maybe even higher.
The right safe withdrawal rate in retirement will depend on your risk tolerance, any supplemental income you earn, your investment returns, and your life expectancy.
The Proper Safe Withdrawal Rate Is Dynamic
Due to a record amount of stimulus created in a record short amount of time, interest rates dropped faster than a cement block tied to a dead body thrown off a boat in the middle of Lake Tahoe by one of Capone's capos.
The 10-year bond yield (risk-free rate of return) fell to a low of 0.56% in 2020. Then stocks started to crash by 32% in March 2020. To follow a 4% safe withdrawal rate would have been foolish at the time. Instead, it was better to save or invest.
Although 2020 and 2021 ended up as great years in the stock market and real estate market, 2022 turned into a bear market, followed by a bull market in 2023. Hence, the proper safe withdrawal rate is dynamic. Change your safe withdrawal rate to change with the times. And the easiest economic figure to follow is the 10-year bond yield.
At a 4% risk-free rate of return, $1 million will only generate $40,000 a year in risk-free, pre-tax income. As a result, you need a lot more capital today to retire than you did in the 1990s when the 10-year bond yield was between 5% – 6%.
The Amount Of Retirement Capital Increases As Rates Decrease
Below is a chart that illustrates the sad drop in risk-free income from $1 million over the years. At least the 10-year bond yield has rebounded from a low of 0.51% in August 2020.
If you've got your home paid off, your health insurance covered, and your kids all grown up and independent, $17,000 + Social Security will provide for a very simple retirement lifestyle.
Even if you got the maximum Social Security monthly payment of about $2,900 a month or $34,800 a year, you've only got $51,800 a year in income. You're not popping Cristal off your yacht with only a $1 million net worth. You're living a comfortable life without debt. But you must watch your dollars.
Unfortunately, the average Social Security payment is closer to $1,850 a month instead. Therefore, we're really talking about an average annual Social Security benefit of $22,000. At least Social Security COLA keeps up with inflation, making traditional retirement more attractive.
Once you've reached financial independence or retirement, your risk profile goes way down. This is why using a safe withdrawal rate closer to a risk-free rate of return makes sense.
Assets Returns Are Intertwined With The 10-Year Yield
Returns in the stock market, bond market, and real estate market are all relative to the risk-free rate of return. If the risk-free rate of return declines, so do overall returns for risk assets ceteris paribus.
Please also be aware that if interest rates stay too low for too long, asset bubbles may form and explode. Therefore, in our current low interest rate environment, investors should take extra precaution as well.
No matter how you want to construct your retirement portfolio (60/40, 50/50, 30/70, etc), returns are likely going to be structurally lower going forward. If you don't believe me, you can check out Vanguard's return assumptions for stocks and bonds over the next 10 years. J.P. Morgan is forecasting lower returns as well for stocks, closer to 7.8% per annum versus 10% historically.
Let me share some examples of how asset returns are connected to the risk free rate:
Example #1: A company looking to raise money to fund operations isn't going to issue a corporate bond that pays 8%, unless it's in dire straits. Instead, a company will probably discover that adding a 2% – 3% interest rate premium to the 10-year bond yield will garner enough demand. A company's goal is to raise capital as inexpensively as possible.
Example #2: A company has historically paid a 60% dividend payout ratio. During the ups and downs, the company's dividend yield has range between 3% – 4%. The company has always wanted its shareholders to earn at least a 1% premium to the 10-year bond yield. With the 10-year bond yield down below 1%, the company can now cut its dividend payout ratio and provide closer to a 2% yield. The company can then keep more retained earnings for growth and operations.
Example #3: Let's say you want to take advantage of potential distressed asset opportunities in commercial real estate. One common way commercial real estate professionals measure is the spread between cap rates versus the 10-year bond yield. The wider the spread compared to the historical average, the more profit potential there is.
Plan Financially Beyond Yourself
Using the 10-year bond yield as a barometer for retirement income generation is conservative. However, I also believe the ideal withdrawal rate in retirement doesn't touch principal so long as your estate is below the estate tax threshold.
One of the big reasons why Americans are in so much financial trouble is because most only plan for themselves. When you start planning for your children, you are forced to at least put on your oxygen mask before helping others. The FSSWR is mainly for those if you who are planning beyond your short lifetime.
If your estate is above $13.99 million per person (2025 estate tax threshold limit), feel free to increase your withdrawal rate to whatever you want. Paying a 40% death tax rate on every dollar above the estate tax threshold is a crying shame. With Joe Biden as president, he will likely try to cut the estate tax threshold in half.
Why The 4 Percent Rule Is Outdated
The 4 percent rule was first published in the Journal Of Financial Planning in 1994 by William P Bengen. It was subsequently made popular by three Trinity University professors in 1998 called the Trinity Study. Inflation and interest rates were much higher and pensions were common. The 4 percent rule is the most common safe retirement withdrawal rate cited.
Some like to naively claim that they are financially independent once they achieve a net worth equal to 25X their annual expenses. But if you think logically, there's a big problem with the 4 percent rule.
Let's look at where the 10-year bond yield was back when the Trinity Study was published in 1998.
In 1998, the 10-year bond yield was between 4.41% to 5.6%. Let's say the average 10-year yield rate was 5% in 1998.
Therefore, of course you'd likely never run out of money in retirement following the 4 percent rule. Back then, you could earn 1 percent more on average risk-free! And if you looked at the 10-year bond yield in 1994, it was even higher.
The 1990s Was A Different Time Period
If you had a classic 60/40 stock/bond portfolio, the historical return was about 8%. You were golden. Going forward, I'm not so sure with both bonds and stocks at all-time highs. Valuations for both asset classes are expensive.
See the historical chart of the 10-year bond yield below.
I really hope people who blindly follow the 4 percent rule or the 25X annual expenses rule realize this very important point. Everything is relative when it comes to finance. To use a rule today that was created when the 10-year bond yield was much higher is irresponsible.
Instead, it is much better to use a dynamic safe withdrawal rate like the FS Safe Withdrawal Rate Formula to guide you in retirement. If you are dynamic, you rationally change with the times.
20X Gross Income Net Worth Target
If you want to follow a more reasonable net worth target goal, then try to amass a net worth equal to 20X gross income. Only then, do I believe you might be able to declare yourself financially independent.
With my 20X gross income rule, you can't cheat by simply lowering your annual expense budget. The 20X gross income rule forces you to accumulate more wealth as your income grows. It also makes you better decide whether you want to continue your way of life.
That said, even the 20X gross income rule may still not be high enough if you want to ensure that you don't run out of money in retirement.
At the minimum, you should achieve the minimum investment threshold amount before deciding to retire. During good times, you’ll make more from your investments than from your day job.
The New Safe Withdrawal Rate To Follow
If you provide a similar 9% to 28% discount to the 10-year bond yield to come up with a safe withdrawal rate back in 1998, then the safe withdrawal rate in today is equal to 10-year bond yield X 72% – 90%.
In other words, the new safe withdrawal rate in today is even lower than just withdrawing based on the 10-year bond yield rate. And you thought my withdrawal rate was too conservative.
When the 10-year bond yield was at ~0.7%, a safe withdrawal rate was actually closer to 0.5% – 0.63%. When the 10-year bond yield was at its low of 0.51%, the safe withdrawal rate was equivalent to 0.36% – 0.46%.
To make things simple, the new safe withdrawal rate equals the 10-year bond yield X 80%.
The Financial Samurai Safe Withdrawal Rate (FSSWR)
Let's call this the Financial Samurai Safe Withdrawal Rate (FSSWR) or Dynamic Safe Withdrawal Rate (DSWR). This is my proprietary methodology of estimating a proper safe withdrawal rate.
We'll use an average 20% discount to the 10-year bond yield to come up with the safe withdrawal rate. The 20% can be viewed as a buffer in case of financial emergencies. Sometimes there are bear markets every 10-15 years. Other times, we have poor spending habits. You just never know.
Thanks to a steady decline in interest rates, the 4 percent rule from the 1990s has declined by over 85%. In other words, we should change the name of the 4 percent rule to FSSWR.
As a rational believer in the new safe withdrawal rate percent rule, you have a desire to not run out of money in retirement. You also want t leave some of your wealth to your kids and various charitable institutions.
If you’re OK with spending all your money and leaving nothing, then the 20X gross income rule as a net worth target before retiring is probably good enough. If not, carry on reading.
Proper Safe Withdrawal Rates
To make things easy, I've put together the proper safe withdrawal rates in retirement. Given the 4 percent rule was popularized when the 10-year bond yield averaged 5 percent in 1998, we can multiply various 10-year bond yield rates by 80% to come up with an appropriate safe withdrawal rate.
Realistically, we are likely never going to see a 10-year bond yield above 5% in our lifetimes.
The New Safe Withdrawal Rate Rule Is The Reality
Although the new safe withdrawal rate rule may sound extreme, it is based on financial reality today. 2025+ is a very different time than 1998. Inflation is lower and risk asset returns may likely be structurally lower for a while as well.
Further, you've got to account for a potential bear market after such tremendous growth. Believe it or not, stocks do go down or nowhere for years e.g. the 1970s and 2000s. Have we all already forgotten what happened in March 2020?
We can certainly take more risk by investing in riskier assets with higher potential yields. However, once again, if you are close to financially independent or financially independent, you should invest more conservatively. Going financially backwards is terrible because time is so precious.
Thankfully, none of us are zombies. We don't aimlessly follow a safe withdrawal rate rule until we die. Instead, we adjust based on economic conditions.
If we feel more risk-averse, we will lower our withdrawal rate. We will also save more money or figure out ways to make more money. If we feel like sticking our heads in the sand and ignoring logic, we can stick to a 4 percent withdrawal rate. We can also choose to work for life.
There is not a better chart that shows we can change if we want to change than the chart below. All it took was a global pandemic for the typical American to finally save over 30%! We are adaptable.
The New Safe Withdrawal Rate Rule Provides A Net Worth Stretch Target
With the 4 percent rule, you multiply your annual expenses by 25 to get a target net worth. With the new safe withdrawal rate rule, you adjust.
Let's say the 10-year bond yield is at 0.65%. Then the new safe withdrawal rate is 0.5%. You would then multiply your annual expenses by 200 to get a target net worth. This is a task not possible for most people to achieve. However, it is likely only a temporary target as the 10-year bond yield returns. Use it simply as a guide to ratchet down saving and ratchet up investing. It should serve as a WARNING sign to all to build up their financial buffers.
Following the new safe withdrawal rate rule to obtain financial independence is difficult. For example, I've challenged myself to generate $300,000 a year in passive income. The goal of $300,000 has been carefully calculated to pay for ~$240,000 a year in after-tax expenses.
Therefore, in order to proclaim true financial independence using 0.5 percent as a safe withdrawal rate, I would need to amass a net worth of between $30 – $40 million ($150,000 – $200,000 in annual expenses X 200).
As two unemployed parents, amassing a $30 – $40 million net worth appears next to mission impossible. We've only got Financial Samurai to help us generate active income at the moment. However, at least I have a stretch net worth target to shoot for.
Net Worth Target Is Also Dynamic
Of course, as rates increase, your net worth target decreases. You can then take a step back and rethink your life. With higher inflation and a stronger economy, as signified by a higher 10-year bond yield, you can afford to spend more money.
Back when interest rates were so low, we had to figure out whether it's worth both of us trying to find day jobs again and forsake our kids all day for more wealth. It might be worthwhile given there should be more work from home opportunities. But it's hard to go back to the salt mines after being away from work since 2012.
I suggest calculating your financial independence number using the FS Safe Withdrawal Rate as well. Divide your annual expenses by 80% X 10-year bond yield to come up with your net worth stretch goal.
Now that you have your net worth stretch goal, you will be more proactive in figuring out ways to accumulate more wealth. Below is a another chart that highlights how much more capital you need as interest rates decline.
The #1 Way Around The New Safe Withdrawal Rate Rule: Supplementary Retirement Income
If you find the FS Safe Withdrawal Rate to be unreasonable, then all you've got to do is earn supplemental retirement income. Your supplemental retirement income fills in your income shortfall. This is what I plan to do after blowing up my passive income after buying a forever home.
For example, let's say you want to live off $100,000 a year in retirement income. This would equate to having a $5 million net worth if the FSSWR was 2%. Unfortunately, you've been blindly following the 4 percent safe withdrawal rule. Therefore, you thought accumulating $2.5 million was enough.
You now realize the 4 percent rule was developed in the 1990s when the 10-year bond yield averaged 5%+. After cursing out the Federal Reserve and the Central Government, you calm down and figure out the gap.
Your $2.5 million can only safely generate $12,500 a year in passive income using the FSSWR. Therefore, your retirement income shortfall is $87,500 ($100,000 desired retirement income – $12,500 your true retirement income).
Since you don't think you'll ever get to a $5 million net worth, you need to find a way to make $87,500 a year in supplemental retirement income. Thankfully, there are multiple ways to make money from home nowadays.
Even William Bengen, the man who first published about the 4 Percent Rule has admitted in the comments section below that he is earning supplemental income as a writer and consultant post-retirement.
Depending on how much supplemental income you’re earning, your withdrawal rate could increase by a tremendous amount and your nest egg would still be fine.
Another Way To Use The New Safe Withdrawal Rate Rule
A less onerous way to calculate your retirement net worth goal is to add up how much retirement income you already have and subtract it from your desired retirement income. Just know there is always a risk your existing retirement income may decline.
For example, my current retirement income is about $250,000 a year. My goal is to have retirement income of $300,000 a year. Therefore, I'm $50,000 short.
Using a two percent safe withdrawal rate, I would need to amass another $2.5 million in net worth to generate $50,000 at 2%.
Or, I can simply find a way to make an additional $50,000 a year in active income to live the life that I want. Ideally, you want to create active income after your career in an enjoyable way.
Loved Earning In Different Ways
If it wasn't for Financial Samurai, I would try to make at least $50,000 a year teaching tennis. If for some reason I couldn't teach tennis, I'd self-publish another book or try and get a book deal with a traditional publisher. Tennis and writing are my two favorite hobbies.
Thanks to the dramatic decline in interest rates, the days of retiring and doing nothing all day are over. And this is not a bad thing. It's great to stay active in retirement.
Your goal is to try and make income from things you enjoy doing. One of the key reasons why I've consistently published three new articles a week since 2009 is because it's fun to help people see what's financially possible.
Find something you'd be willing to do for free to have a wonderful post-career life. If not, you run the risk of running out of money and feeling empty.
Reach Your Target Net Worth, Then Choose Whatever Withdrawal Rate You Like
Let's say you still think my new safe withdrawal rate rule of 80% X 10-year bond yield is absolutely unreasonable. You have the right to do nothing in retirement! Not only do you want to spend all your money before you die, you don't want to leave any money to your children or to charity.
Therefore, don't use my new safe withdrawal rate rule as a withdrawal rate. Use the rule only as a net worth target. Once you've reached your net worth target based on the new safe withdrawal rate rule, then you can change your safe withdrawal rate as you see fit.
For example, let's say you are happy living off $50,000 a year in retirement. You don’t have a pension or any passive income. You're also not including Social Security in your calculations. A 2 percent withdrawal rate says that you will need to amass a $2.5 million net worth. Let's say you succeed in getting to $2.5 million by age 70 and expect to live until age 90.
With an expected 20 years left to live, you could divide your $2.5 million by 20 and safely withdraw $125,000 a year. Withdrawing $125,000 a year is equivalent to a 5 percent withdrawal rate. If there is a bear market or big unexpected expense during this time, you can adjust your withdrawal rate accordingly.
You Could Take More Risk And Reach For Higher Yields
What lower interest rates have done is “force” investors to reach for yield. Since it's too hard for most retirees to live only off my new safe withdrawal rate rule, most retirees don't. To be able to sustain a higher withdrawal rate, the retirement portfolio must either generate higher yields, higher returns, or both.
Investors have been fortunate to make solid returns in the stock market, bond market, and real estate market since 2009. Will we be as lucky going forward? I have my doubts. Energy prices are surging. Inflation is elevated. There’s a war in Ukraine,
Ideally, if you don’t make supplemental retirement income, you want to have a portfolio that yields your desired withdrawal rate or higher.
Therefore, reaching for yield may consist of:
- Investing in a REIT ETF like VNQ, which has a yield of ~3%
- Investing in individual REITs like O, which has a yield of ~4.5%
- Investing in private eREITs (what I’ve been investing in recently) that have historically provided a ~9% return, even when the stock market is down
- Investing in individual dividend-paying stocks like AT&T with a forward yield of ~6.95%
- Investing in a dividend ETF like VYM with a ~3.75% yield
- Buying rental property
- Lending out hard money
- Buying an annuity
More Risk Means Greater Potential For Loss
However, when you reach for yield, your risk of losing money increases. If you were born in 1980 or later, please try not to confuse brains with a bull market or artificial support from the Fed. Risk assets do go down sometimes, which is what many opponents of the 0.5 Percent Rule seem to forget.
And to be clear, my new safe withdrawal rate rule encapsulates owning risk assets like stocks and real estate, and not just treasury bonds. It includes various retirement portfolio permutations such as a 60/40 or 50/50 stock/bond portfolio.
Remember, the 10-year bond yield is intertwined with all assets. It is the opportunity cost used to calculate the required premium necessary to own other assets. Only you can decide how much more risk you would like to take.
Retirement Life Will Be Different Than What You Imagine
As someone who left his day job in 2012 at 34, I'm providing you some firsthand retirement perspective. It is very easy to pontificate about the proper safe withdrawal rate in retirement while working.
But I assure you, only when you and your partner no longer have a steady paycheck will you genuinely experience all the emotions that comes with being unemployed. There's a lot of attention on the positives. However, there are also some negatives as well.
Until this day, I have yet to meet an early retiree who isn't generating some sort of supplemental income. Some will end up generating a massive amount of supplemental retirement income. While some may just earn an extra few bucks here and there.
Going from aggressively saving and investing for years to suddenly withdrawing is an anathema. Therefore, the tendency is to not do so. There is a reason why William P Bengen admitted in my comments section, “I'm on my 4th career as a novelist/4% researcher.” Not even the creator of the 4% Rule is following his own rule.
Listen to anyone espousing the 4 percent rule with a grain of salt. Ask them these questions: Are they making a significant amount of supplemental retirement income? Are they telling you the truth about how much they are actually spending a year? Ask are they actually withdrawing 4 percent a year?
0 Percent Withdrawal Rate
Once I left work, I challenged myself to not withdraw any money from my retirement accounts. In other words, I enacted a 0 percent withdrawal rate. Instead, my goal was to allow my retirement accounts to compound as much as possible during a bull market. To survive, I would live off my severance package and supplemental active income.
I wasn't comfortable withdrawing principal when I was already giving up a healthy salary. Many retirees feel the same way. Old habits die hard.
Today, I'm trying to consumption smooth and spend more money on a better life. I'd like to supplement my passive retirement income with consulting income once my daughter goes to school full-time starting September 2024.
With 40 hours a week of free time again, there will be a void to fill after being a stay at home dad for over seven years. Doing part-time consulting is a good solution.
It is easy to come up with financial models to govern your future retirement. However, as an emotional human being, I promise you that your actions in retirement will be different from what you imagined.
Use The New Safe Withdrawal Rate Rule As A Guide
Don't be mad at my new safe withdrawal rate rule. Be dynamic and change with the times. Here's a great case study of the dynamic safe withdrawal rate in action from 2020 to 2024. I use my own example of how I followed my new safe withdrawal rate formula to navigate retirement during a most uncertain time.
The Financial Samurai Safe Withdrawal Rate is mainly a safe withdrawal rate guide. It is not a practical net worth target guide to shoot for before retiring. In retirement, you should have active supplemental retirement income, Social Security, or maybe even a pension.
The new safe withdrawal rate rule (80% X the 10-year bond yield) is just a net worth and safe withdrawal rate guide in this ever-changing interest rate environment. Depending on how much of your wealth you want to pass on and how much risk you want to take, my new safe withdrawal rate formula may be too aggressive or too conservative. Only you can decide.
The best way I've found to follow my new safe withdrawal rate formula is to build enough passive income. As soon as you can build enough passive income to cover your desired living expenses, you won't even need to touch principal if you don't want to.
Think Logically And Differently
At the minimum, I hope most of you will at least agree that the 4 percent rule is obsolete.
Coming up with the 4 percent rule when you could earn 4.4% – 7.8% risk-free from 1994-1998 is as profound as saying the sun is hotter than the moon. It is as risky as saying Elon Musk's children won't starve to death. It is as deep as saying all organization charts look alike.
We don't live in the 1990s any more. Lower your safe withdrawal rate percentage or shoot for a higher net worth target before retiring or declaring yourself financially independent. Alternatively, learn to live happily on less or find ways to make supplemental retirement income.
Finally, if you don't believe me that returns could be lower in the future, Vanguard came out with its future 10-year expectations forecasts for U.S. stocks, bonds, and inflation.
If you have a blended retirement portfolio consisting of 70% stocks, 30% bonds, your annual return would be about 3.19%. Therefore, withdrawing at 4% would be too aggressive.
At the very least, I would conservatively follow the Financial Samurai Safe Withdrawal Rate formula for the first couple of years in retirement. After that, adjust accordingly.
Don't be like retirement researchers from Vanguard, J.P. Morgan, and elsewhere who believe returns over the next 10-20 years will come down, while raising their recommended save withdrawal rate! It makes no sense, especially during the start of a multi-year interest rate cut cycle by the Federal Reserve.
My Conversation With Bill Bengen, Creator Of The 4% Rule
Recommendations To Build Wealth
1) Track your net worth. If you now plan to boost your net worth further using the 0.5 percent rule, then I suggest tracking your finances for free with Empower's award-winning financial app. The more you can stay on top of your finances, the more you can optimize your wealth.
I've used Empower's free app since 2012 and have seen my net worth skyrocket since. The more you can track your finances, the better you can optimize your finances.
2) Invest in real estate for more retirement income. Real estate is my favorite asset class to build wealth. It generates higher-than-average income, provides shelter, and is less volatile. Real estate currently generates roughly half of my estimated $300,000 annual passive retirement income.
I recommend checking out Fundrise, my favorite real estate investment platform. The company manages around $3 billion and invests predominantly in residential and industrial properties in the Sunbelt. The Sunbelt has cheaper homes and higher cap rates. Investing in a private real estate fund is an easier way to earn 100% passive real estate income.
Financial Samurai is an investor in Fundrise funds and Fundrise is a long-time sponsor of Financial Samurai.
Related Posts About Retirement And Safe Withdrawal Rates
How To Feel Rich If You Can't Get Rich (a follow to address and help folks who are upset about the new FS SWR)
The New Three-Legged Stool In Retirement
No Need To Win A Financial Argument, Just Win By Getting Rich Instead
The Best Reason To Retire Early: Greater Happiness For Longer!
Readers, do you think the 4 percent rule is outdated? What do you think about my FSSWR formula? What do you think is the proper safe withdrawal rate in retirement? Why do we accept a safe withdrawal rate from working professors in the past who have never retired? Why do some get so angry that I suggest people be more conservative?
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Wrote about the ridiculousness of the 4% Rule on my own free blog, here (Shameless plug):
wrighty626.substack.com/p/how-my-investing-philosophy-evolved
But to surmise:
So, 4% of $1,000,000 is $40k; or I’ll be generous, 4% of $1.5 mil is $60 (annually).
I don’t know about you, but the idea of sacrificing my 20s, 30s & potentially 40s to live off 60 grand is an insanely bad deal. $60k annually in your 40s! You must be joking! Especially if you live in a ‘Western’ country.
However the main with the 4% rule is inflation – Inflation is running WAY hotter than any governments would have you believe (check out ShadowStats.com to see how much the government are cooking the books on this, they don’t even measure inflation the same way as they did in the 70s, so the data is basically nonsense).
The most pertinent point on inflation is again the governments and central banks of the world convincing you that inflation is going away/coming down over the next decade. Maths was never my strong suit but you can NOT increase the money supply to the extent that they did during COVID and expect inflation to come down.
Most of the people I respect and follow in the finance space continually point to the historical precedence of inflation, and how it usually always comes in three large waves. IMO, we have only seen the first of these waves.
You need to ability in the future to increase your cashflow, substantially – and you want to be at least double the RR of inflation. Relying on passive dividends does not give you much/any control over this.
So, if the primary point of FIRE is living off passive dividends, why not search out a much better ROI than 4% once you have spent 20+ years of your life amassing over 1 million dollars!
I feel these FIRE people are so blinkered into this 4% passive narrative. To me it actually seems super risky not to put a huge lump sum of capital to work (or at least a portion of it!) on a higher ROI.
Curious, but do you think your view would change if you had more money? Imagine you have about AU$500,000. What if you had AU$5 million?
Love a hypothetical Enjoy your blog too, I’m not trying to shitpost
Point is there is so much better ROI out there than a measly 6% return! But I guess I enjoy investing, and fully accept most should probably be in passive.
Investing in profitable websites (domain names) as one example, typically have price multiple of 30/35 months (for a good deal), so in just three years, you have your investment paid off (if it just stayed the same, you would obviously try to grow traffic and revenue); or investing in (just one example) coal mining companies (a whole nuanced topic); which have a massive moat around them as demand for coal globally soars, but investment capital is artificially restricted, so all they can do is pump out huge double-digit dividends.
I am caught up in my own rant – to answer your question, if I had $5mil, I’d certainly consider putting 500k/$1mil into a basket of passive, but I truly believe even that would be eroded by inflation over a 10 year period
Perhaps over time, your desire for risk-taking may wane due to higher expenses, family responsibilities, and more wealth. The thing is, if you have $5 million, earning 4%, or $200,000 risk-free is probably enough for most. But yes, not all $5 million would be invested so conservatively.
People really only know their true risk tolerance when they lose A LOT of money, e.g. during the 2008-2009 Global Financial Crisis.
Do you have a family to support?
Agreed, absolutely true – for most people!
Personally I could not consciously have $5 million of networth, and not want to try and turn it into $10 million within a 5 to 10 year time horizon.
$200k annually is only $16k per month, which (especially if you are paying taxes) is not that much, and as you say, once you have a few kids, $16 grand is somewhat mediocre (IMO).
Another thing, this idea (as I know you well know) that your passive portfolio returns ~7% annually is nonsense, this is an average over many decades, with some decades have poor to negative returns. How would this effect ones psychology?
This is why, for me at least, consistent monthly cashflow if MUCH more important, be it from high dividend commodity stocks or your own online business (mixture of both ideally).
As I said, much better ROI on $5 million than just sticking it all in some fund that Larry Fink essentially controls.
But yes, risk tolerance certainly declines with age.
I do not have a nuclear family in the sense, but do have a somewhat expensive girlfriend and two retired parents I am looking after
I think you’ll enjoy this post, it’s about households with $20 million in net worth.
Hi everyone, thanks for all your criticism regarding my dynamic safe withdrawal rate proposal. After four years, here is my case study on how it worked out between 2020 to 2024.
https://www.financialsamurai.com/dynamic-safe-withdrawal-rate-case-study-in-retirement/
Thank you so much for the rules of thumb! I always thought the arbitrary 4% rule was crazy and I think it’s obvious that flexibility is key. I’m trying for zero drawdown on principal and basically using the principal as a giant “omg who could have seen that one coming” emergency fund. Not as a normal, year to year, “I need a new hybrid battery” emergency fund of course.
Hey Sam, been listening/following for a while and I like the FSSWR. Only thing I may have missed or don’t see it explained is, since the 10 year yeild % moves up and down often throughout any given year how does one withdrawal following the 80% rule?
This is only for $ in the stock market/ mutual funds.. Do I go to my nest egg once a month and withdrawal 80% of the 10 year yield %?
Thanks and Happy New Year!
Hi Max,
I wrote this post addressing your question: Your DYNAMIC Safe Withdrawal Rate Can Now Go Up!
Cheers and HNY!
Sam
Bill Bengen is 70% in cash and continues to make money as a consultant.
For those of you who follow the 4% rule, do you feel like suckers yet?
A deferred fixed annuity is looking very attractive to me these days for a good chunk of income to supplement my SS and in a way that I”m guaranteed not to outlive. I’m 63 and retired and living off of savings until 70 when I will get about 50K per year in SS. If I put 500k in a deferred fixed annuity soon and take that income also at 70 I think I could have a pretty decent income to live off of assuming I own my residence. I just don’t feel comfortable that rates will ever get very high again for fixed income even though they are currently going to get raised and everything else is in an asset bubble. So I guess my summary is the vanguard 10 year outlook makes a lifetime annuity look pretty good relatively speaking for peace of mind. I’ve thought of also taking a lower rate on the annuity so it could have a 3% cola lifetime and then both my SS and annuity are inflation protected even though I know most people don’t do the cola protected annuities just the fixed ones. Thoughts?
Once again, your advice is spot on. People don’t know how they will feel in retirement until they actually retire. All these people from the peanut gallery who still have day jobs talking about how much they think they need and how much they should withdraw and will withdraw, simply have no idea.
Are you guys really going to withdraw at a 4% rate when your stocks are taking a 20% beating or more? Are you really going to retire early with only 25 times your annual expenses when your net worth has just taken a 10% hit.
Wake up people. The world is fraught with danger and uncertainty.
I may have read through the comments too quickly, but I would add another option to the toolkit of helping stretch out retirement income assets. If (a big “IF’) your passive income is not tied up in local rental real estate (or you can hire a reputable property management company), family ties are not strong or a lot of relatives don’t live near you, simply moving from a high cost region (like the SF Bay Area) to a lower cost one can positively impact the budget in significant ways.
Hi Sam, Recent new follower of your blog and podcasts. I am working my way through older posts and episodes and I appreciate your angle that is on the other side of the spectrum from lean fire.
I’ve now read countless posts and articles about SWR and 4% rule etc. I find it very perplexing that very few of these articles actually addresses the underlying portfolio allocation. Maybe I am missing it and everyone is automatically assuming the 60/40 in index funds allocation. I am not convinced that is the case, but can’t be sure because the focus usually seems to be The Net Worth Number and the withdrawal rate, without discussing the actual investments.
Which brings me to my question about SWR and specifically your FSSWR. My understanding is that your portfolio is complex, including real estate etc. So, for the point of 10-year bond rate x 80% – are you suggesting the entire portfolio could/should be in 10 yr bonds? Because in that case why not? You won’t need to take any risk if you withdraw below those returns. (And presumably that % stays consistent with the fluctuation of rates, unlike the fixed 4% of starting portfolio).
Sorry if this has been answered somewhere already. I’ve not found it.
Hi Johanna,
No, I’m not suggesting a retiree puts their entire portfolio into bonds. I recommend following one of my asset allocation models by age.
My FSSWR is a recommendation for the first couple years post work. It is conservative because a lot of people go into a sort of shock after spending their whole lives working. It is a time of rediscovery, which may include some supplemental retirement income or various spending desires.
Please check out: The Negatives of early retirement nobody likes talking about.
Welcome to Financial Samurai! It’s always nice to have new readers. Sign up for my free newsletter too.
Sam
So, let me get this straight, last year I needed a trillion dollars to retire, this year I only need half a trillion. Okay that may be a bit hyperbolic but at 1% SWR I need ten million dollars. In other words, I have to be in the top 1% of net worth to be able to retire. I don’t have multiple streams of passive income. I will tell my children, “Hey Kids, your poor dad had to work until he was 95 years of age because he didn’t want to touch his sacrosanct principal just so he could give it all to you.”
I am 67 years, net worth 5.5 million, a million is the house which means I am only in the top 4 percentile in the United States, not enough to retire according to this post and that FED wants me to work forever.
While this post did cause me to pause and think I will take a halfway approach. You say SWR 1% don’t touch principal. Wade Pfau says 3% (fixed spending no growth) with a conservative portfolio (30% stocks /70% bonds allocation) which is where I am. I don’t need to account for inflation because I figure when I take social security at age 70 that will take care of that.
Wade states I have a 95% chance of not falling below 20% of my initial level by age 35 with that approach. This is good enough for me.
So, I will take your 1% and Wade’s 3%, and take the average, so 2%, and I can live on that.
Sounds good to me. And remember, Wade is gainfully employed and will likely retire with a huge pension. He can withdraw at a much, much higher rate if he wishes.
Use my formula for the initial years of retirement when you’re figuring out the new stage of life. It may be more jolting than you think.
It’s important to choose your fighter, and then act according to the lifestyle you desire.
Btw, a year after this post, Vanguard slashed its stock and bond assumptions by over 60%. https://www.financialsamurai.com/50-year-retirement-with-vanguards-return-assumptions/
Hi Folks,
If you aren’t aware, Vanguard came out with its 10-year forecast for stocks, bonds, and inflation in August 2021, a year after I originally published this post.
Their forecasts call for about 60% lower returns than historical average. Therefore, this is another reason why you may want to stay conservative on your withdrawal rate or accumulate more capital before retiring.
Here’s my analysis: https://www.financialsamurai.com/50-year-retirement-with-vanguards-return-assumptions/
Sam
Thought provoking article for sure. Thanks Sam. As we approach retirement, my wife and I are targeting 2% as a safer number. We expect to be at 3 – 3.5 mil in 3 years. (Note: this is Canadian Monopoly money). We have other sources of about 55k so that puts us at 140k a year, similar to our current income. What I failed to follow was tying my withdrawal rate to the bond rate when I am invested in real estate instead. We got in early and thanks to leveraging, have made over 25% some years. No intention of selling those. This should leave a legacy for sure. My hope is to elevate the family where every grandkid goes to good schools without burden.
2% is a solid withdrawal rate. And I bet once you do retire, there’s an 80% chance you will withdraw even less because withdrawing will feel so foreign.
I like the article, but you are operating on the fallacious assumption that the govt’s “debt” must be paid back in taxes or reduced spending. Neither of these things is true.
Raising taxes is a great way for a politician to lose his job. Neither party will support tax hikes on working people, under any circumstances. You can tax the rich, but even with that money, you’ll still come up short.
Austerity is likewise unwise. It will result in mass riots by all the welfare leeches. Then the govt will be forced to turn the welfare back on or mass arrest people.
What will actually happen is they will print more money, so we will pay for the “debt” in inflation. We pay every day that we buy something.
The secret, and the reason I put debt in quotes, is that the federal reserve is actually part of the govt. So they print money and lend it to the treasury, so really the govt is lending the money to themselves. The $27 trillion is not actually debt, but really just represents how much money we have printed. One arm of the govt. “owes” the money to another, so it’s really just an accounting gimmick. The govt. does this, and allows the public to think that the fed is private, in order to keep public wrath focused on the big banks and corporations.
See, raising taxes gets people mad at the govt. Cutting welfare gets people mad at the govt. Printing money to fund “free stuff” causes prices to rise, but 95% of the public doesn’t understand how this works behind the scenes so they simply believe that the “evil corporations are raising prices out of greed”.
It’s important to remember that the “4% rule” is based on total return (equity and fixed income) of the portfolio, not bond return alone.
It also allows complete portfolio depletion…so if you die with $0 it’s a “success”…though if you want to leave a legacy there are plenty of retirement calculators that allow you to specify a minimum (in real terms) remaining portfolio balance.
As Bengen himself remarks, those who retired before periods of high inflation (e.g. late 1960s) suffered the most.
E.g. consider a widow who had invested only in “safe” bonds paying 6-8% before being hit with the double-digit inflation of the 1970s…that’s why any retirement portfolio also must include equities.
Indeed, and I would think it is hard to make such returns and such a low interest-rate environment where a valuations are also really high.
Bengen is on his fourth career And making a lot of money as a consultant and author. Therefore, he can choose to withdraw at a low rate or he can choose to withdraw at a high rate. When you’re still working, it doesn’t really matter.
The 4% rule doesn’t depend on whether or not one keeps working, though, again, it allows for complete portfolio depletion.
And except for a relative handful of starting years it’s really more like 5%.
Equity valuations have been high before & the above still worked…again, high inflation (historically, double-digit) in the first few years after retirement has been the biggest risk for failure.
The thing I realized where I have perhaps a cultural difference is on the complete portfolio depletion.
Nobody I know, including myself, plans to deplete their portfolio by death. Instead, we all want to leave a perpetual giving machine for our children and charities. We want to make our legacy last for as long as possible.
Perhaps I should elaborate in a post as this is a big realization.
Just wrote this post that targets people who think the same way: 10 Million Dollars: The Ideal Amount Of Wealth To Retire?
I have no intention to leave my children a big pile of money. I view it as a failure of me bringing them up if they expect a big inheritance from me. They need to work hard to make it on their own.
-Frank
Indeed. But what about a perpetual giving machine to charities?
See: https://www.financialsamurai.com/two-retirement-philosophies-will-determine-your-safe-withdrawal-rate/
I am comfortable donating my standard 10% of what I “earn”.
Based on the author’s replies, it just feels like there should be a huge disclaimer to state that first and foremost that this article’s suggestions were all based on his own perspective and his perceived way of living. I was very confused reading it, then it turns out so many standards and benchmarks used in the article were not on the same level of the studies published – basing just on bonds, or basing the fact that we should not deplete the savings to 0 and must leave a legacy etc. These were not even in considered in the study! It’s honestly quite misleading.
You’ll enjoy this post: Two Retirement Philosophies Will Help Determine Your SWR
One thing you need to realize is that all these retirement researchers are all gainfully employed. It is very different when you actually exit the workplace.
And someone without a job since 2012, who also has a wife who hasn’t worked since 2015, and two children, I have just as much right to talk about retirement life than anyone.
I don’t understand many of the points in your article. Once retired people are not “obligated” to withdrawing the same amount of money. If the market is down, you stretch your dollars, when it is up, you relax. Also, what is the deal with 60/40 distribution? The longest dip in the stock market took 3 years. To me, if I have cash for 2-2.5 years, I can afford to have the rest in high risk/high yield stocks. It is not a percentage, it is the breadth of how long you can hold without touching your risky investments.
The average return of Dow Jones for the last 10 years is 15% and for last 20 somewhere near 7%. Not to mention Nasdaq. The .7 makes no sense.
According to your calculation people will retire in their graves.
What has your withdrawal rate been in retirement these past several years? Everybody has their own paths to take.
The way the Fed has cut rates, working for longer is a key message in this article. Thx
I think this is crazy. Look at your portfolio return over the last 10 years. Have you ever made on .5 percent?
It’s crazy to say don’t use principal.
It’s crazy to say your net worth needs to be X. You can’t live off your home.
Example: I‘m 55. I live off my assets. $13MM equities and bonds. $7MM real estate. Portfolio generates $500k annually from interest, divided, capital gains and rent. .5% is only $100k a year. That is ridiculous for this portfolio. In this example if I spent $500k a year (2.5%), I’m still super conservative. Heck I could go 26 years with no return.
I don’t agree that you should never touch Principal. I think claiming.5% is ridiculously low. At 55 I can weather some ups and down. I do not need to move all my money in to long term government bonds. I can follow the market.
4% might still work, but I think it’s better to be more conservative and use 3% as a rule. As stated in down turns people tighten there belt.
Some far all these examples fit the 1%. Most people don’t have $10MM dollars. Most people aren’t avoiding estate tax. Most people can’t afford to not touch principal. Most children want there parents to spend their money and enjoy life instead of living it to their children.
You want to be wealthy- live within your means.
You want to know how much you can spend in retirement- run the numbers. If it only works by stretching the numbers (estimate returns of 12%).
Bottom line .5% is just a crazy way to look at healthy financial planning.
How did you get .05%? What formula did you use? Say I have $2.5 million to retire with. My son, the financial analyst says $2.5mill/$12,500 = 200 years. Then there’s principal appreciation even if dividends go down.
Something is wrong here.
Vanguard’s high div fund VYM yields 3.55% TTM. That will undoubtedly decrease. But in any case it affords you more that .05% a year.
Retirement is (sort of) a myth. You either amass wealth and slowly ease into an independent, entrepreneurial or investor style of living, or you work until you can’t.
That’s the mindset and truth you need.
Even people who are “retired” are still either managing money/investments or doing some sort of work… Just not the same they did before. Those who do nothing, die early.
Sam,
If this is true, wouldn’t it be advantageous for people to look at buying an annuity to support their lifestyle like a fixed pension? Those would be undervalued by the companies as well and therefore a GREAT deal. I was trying to estimate my pending military retirement pay using these and if the numbers are to be believed you could get something to support a lifestyle for 1/5 of the savings you are advocating. Though you would give up a level of control some may not be comfortable with, but fidelity (or similar) is likely to big to fail because of the original premise which is the fed will continue to prop them up with taxes.
Yes, an annuity is definitely one solution to boost retirement income and ensure retirees not run out of money. I do mention annuities as one solution towards the end of the post.
Just have to run the numbers and expected life expectancy.
This is an excellent analysis and overview. This is the first time EVER I’ve seen someone point out that the risk free rate was 1% HIGHER than the proposed 4% withdrawal rate.
Further, it is kind of funny that even Bill Bengen is on his fourth career and still making lots of money in retirement and not following his own rule.
Well done thinking differently.
Thanks. Yes, when the person who helped popularize the 4% rule is not following his rul and still making money, I hope people realize this inconsistency.
Good article. For any of your readers who are lucky enough to have a defined benefit pension plan, this article should make complete sense!
If one assumes low interest rate environments for the foreseeable future, the value of pensions have increased dramatically!!! It takes a much larger amount of assets now to generate the equivalent income people are getting from their pensions.
These comments are fascinating. What do you think is the reason why people who are not retired or financially independent, think they know better than people who are financially independent and retired?
Are Americans really that ignorant, arrogant, and stupid? I’ve heard reports that Americans are not very financially savvy and most Americans don’t have passports or speak another language. This is so strange to me living in Germany.
But from many of these responses, I can see why average Americans are not doing well. Thanks for sharing your thoughts and logical analysis.
The saddest thing is, the people who follow a rule from the 1990s might end up being very worse off. But they won’t be able to rewind time once they’re in their 60s and 70s.
As the saying goes, “shoulda, coulda, woulda, but didn’t.”
I think it’s just human nature to think we know more than we really know. It happens at all stages. Therefore, we need to be vigilant and always check our attitude and our assumptions.
If the stock market tanks by 50%, I’m pretty sure many more people will be accepting of my 0.5% withdrawal rate proposal. The likelihood of a 50% drop is small, but it is not zero.
Finally, when you’re constantly trying to anticipate the future, people will find it uncomfortable. It’s why CNBC will bring on a bullish person when stocks are going up and a bearish person when stocks are going down.
Human nature. Bottom line: you’re either outperformer or not. That’s what matters for personal finance.
Just got around to reading this. at first I thought it was clickbate but now I see it’s actually well thought out…theoretically. The issue I have with the general premise is that it’s not practically helpful for 99.9% of people out there saving for a retirement. Nearly nobody will be able to “multiply your annual expenses by 200 to get a target net worth.” say I was making the average household income of $75k a year, I’d need to have a $15M net worth, under this premise. Thats utterly rediculous for someone in that income level. Literally nobody will be able to follow this advice making the entire article theoretical and practically pointless. Sorry brotha, love your stuff generally but this article was a miss.
No worries. Check out the other ways you can use the 0.5% rule provided at the end of the post.
And if none of the various ways to use the rule makes sense to you, feel free to do what you want to do. That’s the beauty of personal finance.
Hey FS,
What would happen if the estate tax threshold goes back to the level it was in the Obama years – around 5 million or so max (I think it was 5.28 million for single taxpayer and 10.56M for couples) before being charged the estate tax on anything over? I know that it has since doubled to 11.58 per taxpayer since Trump took office.
The fed can change this law anytime they want, so as you mentioned, would SWR change to be slightly higher than .5% if this law changed and reduced the threshold, since one would want to avoid paying an estate tax and giving needless money to the government if at all possible, so it’s probably better to spend it?
Thanks!
Yes, if the estate tax threshold declines in the future, it would be prudent for people to try and spend and giveaway more of their wealth while alive, for those who plan or have estates above the threshold.
It’s hard to see the $11.58M/person threshold go much higher. Forget about $5 million, it was only $1 million back in 2003!
4% includes a depletion of capital over the 30 years. I think your examples are on the assumption of no capital being spent?
A side income is fantastic, perhaps the FED does want everyone to work forever, it is definitely one way of resolving the coming pension crisis. Europe too.. can’t have everyone on pension for 30 years and taxes can’t go up forever.
One other area to reach for yield is to to acquire bonds from other countries. I’m in a developing market and our 10year bond yield is still 10%. The risk is default by our sovereign (a real risk), and currency depreciation of 6% per annum vs the USD (also a real risk, since beginning of 2020 we are 33% lower during a flight to safety of USD). However, I live here and spend in this currency, so am still able to acquire safe haven assets (USD and CHF) and then lend money to the government at 10% for my safe withdrawal rate of 3%. The rate and the devaluation of the currency is also due to capital flight, so there I’m one of the only buyers it seems…
I’ll spend the excess on taxes and inflation, but I still have a real yield that will get reinvested into diversified assets.
I can send you the country bond if you’re interested but there are some interesting dynamics at play in the world at the moment that have destabilized the markets significantly.