There are two different retirement philosophies that will determine your safe withdrawal rate. It is up to you to decide which retirement philosophy is best for you. There is no right or wrong retirement philosophy.
The first retirement philosophy is to spend all your money before you die. In other words, you wish to accomplish complete portfolio depletion or very close to it upon your death. Your money, which you earned, is mainly there for you to spend. Since you can't take your money with you, you might as well spend it all while alive.
Let's call this the YOLO retirement philosophy.
The second retirement philosophy is to leave a legacy with your estate which will survive long after you are gone. Your legacy may involve providing a perpetual giving machine to charities you care about. It may also include an ongoing donation to your college alma matter or steps to ensure your family business continues to run for years into the future.
Let's call this the Legacy retirement philosophy.
The Retirement Spectrum
Most people are likely somewhere in between. However, the people who closely adopt the first retirement philosophy of spending everything they have before they die seem to be the main critics of the Financial Samurai Safe Withdrawal Rate formula (10-year bond yield X 80%).
Forget about not believing the risk-free rate is intertwined with the returns for all-risk assets. Forget about my formula including a diversification of investments in retirement beyond bonds. Let’s also ignore how my formula is to try and encourage early retirees to earn supplemental retirement income through something meaningful.
For the critics, it is unfathomable to comprehend the idea of creating a perpetual giving machine after death due to different philosophies. We should accept different retirement philosophies given we all have different beliefs. Let's dig deeper.
Understanding Two Retirement Philosophies
At my high school graduation ceremony, James Carville, a political strategist came to speak to us. He concluded his speech by saying, “Leave each place better than you found it.”
While running up and down the public steps for exercise, stop and pick up some litter along the way. There is litter and dog poop on our sidewalks because some people simply don't care.
Instead of giving your two-weeks notice and quitting, give a much longer notice so you can train your replacement. If you find a better replacement, you vastly increase your chances of getting a severance.
This view of “leaving a place better than you found it” has been with me since 1995. However, from 1995 – 2012 I failed to live up to this way of life. Instead, I was focused on accumulating my financial nut as fast as possible so I could get out of Dodge during a Nor'easter.
Although I was paying plenty of taxes to help support this great country, for my 13 years in finance, I don't think I did anything that meaningful with my life. Helping institutional funds get richer was not very rewarding, even if it was to invest people's retirement savings. So I got out.
A Legacy With Financial Samurai
Once I started Financial Samurai in 2009, I finally felt like I was providing some value to society. People started sharing their stories during the financial crisis. Years later, long-time readers have sent words of thanks for helping them improve their finances.
Given the consistent positive feedback, it has made writing for free in the initial years easier. Few people would keep publishing 3X a week if there wasn't positive reinforcement and an innate desire to help others. They would either quit or hire a bunch of staff writers.
Thankfully, years after starting, this site now generates decent income to give me some added motivation once my 10-year anniversary passed. With children, having a small business is like providing career insurance just in case they can't find jobs.
What I Want My Children To Appreciate
Every so often, I think about my mortality. Concern about dying by 60 was one of the reasons why I wanted to get out of the workforce sooner. With Financial Samurai, I realize the words I write today will live long after I'm gone. As a result, I subscribe to the second retirement philosophy of building a legacy.
My hope is that someone I love or trust will continue Financial Samurai after I'm gone. Maybe they can write a few words to help a new generation slice through money's mysteries. At the very least, I'd appreciate having someone updating the archives every so often. There are over 2,500 articles.
In addition, I've been producing more podcast episodes on Apple and Spotify so that my children have a wealth of episodes to listen to should I prematurely pass away. If the FS podcast grows large enough, it could also start regularly generating some income.
Once you feel financially confident, life gets better. Just the fact you know you're on the right financial path feels wonderful. Therefore, I'm pumped Financial Samurai will live on forever so long as the hosting bill is paid!
Building A Legacy For Your Children
Parents want their children to be proud of them. Parents would give anything in the world to help their children be safe, happy, and loved.
Therefore, it is only natural for parents to also subscribe to the second retirement philosophy of leaving a legacy. One of a parent's biggest fears is dying before their children become independent adults.
My neighbors have three children. Their middle child, a daughter, has cerebral palsy and is non-verbal. She is also a paraplegic and confined to a wheelchair. My neighbors have decided to accumulate as much wealth as possible to generate as much income as possible to take care of their daughter for the rest of her life. Bless their souls.
As parents, we fear what will become of our children after we are gone. Hopefully, we will pass after our children are mature enough to understand the ways of the world.
If you have young children, as we do, having a large enough estate to provide until they become adults is vital. Hence, the importance of having a low retirement withdrawal rate.
The desire to keep building supplemental retirement income is strong when your children are young. So is having a healthy amount of life insurance.
Once your children become independent adults, then you should naturally feel more comfortable about raising your safe withdrawal rate. You may even start thinking about depleting your estate to zero. However, there will always be more people you can help after you're done taking care of your kids.
Leaving A Legacy For Charitable Organizations
Where there is life, there is suffering. Charities exist to help alleviate such suffering for the many unfortunate people who are in their situation through no fault of their own. Roughly 15% of the world's population has some type of disability. That's about 1 billion people.
One charitable organization I support is the Pomeroy Recreational & Rehabilitation Center in San Francisco. The center is where we took our son for swim class. It has a wonderful heated pool.
What I didn't realize until I after I got there was that The Center provides recreational, vocational, and educational opportunities for people with disabilities. Its programs and services “encourage self-expression, promote personal achievement, and lead to greater independence.”
When you see the people who are helping and the people who are being helped, you just want to do what you can to help as well.
Life is unfair. Some are born with good looks and completely healthy bodies. Some are born with Down's Syndrome and a visual impairment through no fault of their own.
As long as we continue to procreate, there will be people born with some disabilities. The never-ending cycle of life therefore requires a never-ending amount of support.
Many people feel propelled to use their financial means to help others who are not as lucky. Therefore, if you want to create a perpetual giving machine to a charity after you die, it's better to have a lower withdrawal rate rather than a more aggressive one. This way, you further increase your chances of giving.
A Belief In The Afterlife
Many people also believe in karma, reincarnation, and/or the afterlife. Perhaps these beliefs about getting judged in the afterlife are why some people also want to leave money to help others after death.
Of course, you can always give away all your money to those in need while you're still alive as well. The people or organizations may be quite adept at making your contributions last for a long time. However, who is the most responsible at spending your money than you?
As we get older, we become more conscious of our mortality. We will naturally begin to wonder what we want to be remembered for. Contemplating our past and our future is all but a certainty.
There will also be a part of us that refuses to accept that our giving is limited to within our short lives. Helping others when we are gone is like getting a second chance for those who feel they focused too much of their wealth on themselves.
The differences in retirement philosophies may very well be determined by cultural backgrounds. So far, I have yet to come across anybody from an Eastern culture that objects to the Financial Samurai Safe Withdrawal Rate formula.
I spent 13 years growing up in Asia. Then I spent another 13 years working in Asian Equities. Therefore, I have an Eastern way of thinking about life, work, family, and death. I haven't properly conformed to the Western way of thinking. I'm not sure I ever will.
Correlation Between Wealth And Safe Withdrawal Rates
Finally, for those people who have a $5 million net worth or greater, the majority I know want to keep giving something after they are gone.
At the extreme, just look at the ultra-rich, like Bill & Melinda Gates, who have created a foundation to try and address serious issues in society. They know many of the things they care about won't be solved in their lifetime.
There seems to be a correlation with the level of wealth you have, the desire to create a legacy, and the safe withdrawal rate.
The more wealth you have to spare, the more you are willing to build a legacy of giving. The greater your wealth, the more comfortable you are with a lower safe withdrawal rate as well.
Examples Of How Wealth Affects Safe Withdrawal Rates
Let's say you have the ideal net worth of $10 million before retiring. You are happy living off $100,000 a year gross in retirement following the Financial Samurai Safe Withdrawal Rate (FSSWR) formula. Your $10 million actually produces $250,000 a year in gross income through a combination of dividend stocks, real estate, and bonds.
Therefore, you are OK living off a 1% safe withdrawal rate while creating a perpetual giving machine with the remaining 1.5% safe withdrawal rate. Once you pass, you've instructed your estate to increase the percentage giving rate to 2.5%.
Your estate will adjust its giving rate based on the FSSWR formula and the current state of the market. If your estate can only generate a 2% yield one year, then the giving percentage will also be adjusted down to 2%.
Conversely, let's say you retire with a net worth of $1 million. Your net worth produces $25,000 a year in income. However, you are happiest living off $70,000 a year. After working hard for so long, you want to live it up in retirement. YOLO.
Therefore, you withdraw at a 7% rate, potentially depleting your portfolio in 30 years. You may have the desire, but not the capacity to give to charities while you are retired. And when you pass, your estate will have nothing left to give.
Embrace Different Retirement Philosophies
Completely depleting my estate by the time I die is not something I want to do. It's too risky to cut things so close, especially due to the complexity of my net worth.
Further, I don't think leaving money to others is a waste at all. I'm already spending enough while living to enjoy my life, especially since I left my day job in 2012. My ultimate goal is to spend money on helping others while still alive and also after death.
For those of you who want to follow a higher withdrawal rate in retirement, despite a significant decline in interest rates, more power to you. Don't let me or others tell you otherwise.
If you don't have children, are still early in your financial journey, don't believe in karma, and can't afford to donate much to charity, then please feel free to spend more money on yourself.
My recommendation is to follow a dynamic safe withdrawal rate in retirement to change with the times. This way, you'll always be logical in your spending.
Spend Your Money As You Wish
Nobody is judging you for wanting to spend all your money before you die. The YOLO economy is likely going to stay for a while post pandemic. It is quite a logical decision to not die with millions. You should start the decumulation phase earlier and spend more money while you're young and healthy.
Therefore, try not to judge people who want to use their money to help others after they die. What difference does it make to you?
Further, if you are actively making money in retirement, ironically, you can either withdraw at a high rate or a low rate. It just depends on how you do the math.
Hopefully more people can realize there is no one set way to withdraw funds in retirement. We all have our different hopes and fears.
Therefore, let's keep an open mind whenever there are new financial concepts from people with different backgrounds in an ever-changing world. If we do, we just might grow our wealth far beyond what we can ever imagine!
Taking Care Of Our Children
Adopting the Legacy retirement philosophy has made me hyper-vigilant about ensuring our children are taken care of before they become responsible adults.
It felt great when my wife was able to double her life insurance coverage and match mine for less money. Having a mismatched life insurance coverage amount felt off since we are both equal caretakers. However, my 10-year term life insurance policy is running out in a year and a half.
If I were to renew the policy, the premiums would go way up due to health issues and my older age. I'm dilly dallying. Unfotunately, the longer I wait to renew, the higher the premiums go.
Not getting a 30-year term life insurance policy 8.5 years ago is one of my biggest mistakes. Don't make my same mistake.
Get more coverage than you think you need and then cancel or lower your coverage if you later realize you don't need as much. Going the other way is a suboptimal move. When you need life insurance coverage the most is often when it will cost the most.
To get an affordable life insurance quote, take a look at Policygenius. Policygenius is the free life insurance marketplace my wife used to double her coverage and lower her monthly premium. Unfortunately for me, I'm several years too late.
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