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Did FIRE Just Get Much Easier?

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Did FIRE Just Got Much Easier_350aHey everyone, we have good news. FIRE just got a lot easier. Bill Bengen, the creator of the 4% rule, said 5% is a good withdrawal rate in the current environment (2020). That’s great news for the FIRE crowd. Many of us use the 4% safe withdrawal rate as a guideline. We save and invest until our net worth is 25 times our annual expenses. That’s one definition of financial independence. Once you achieve that goal, you can retire early, change jobs, become a stay-at-home parent, or live a nomadic lifestyle for a while. FIRE gives you a lot of options. If we change the safe withdrawal rate to 5%, we only need to save 20x instead of 25x. That’s a huge difference.

Safe Withdrawal Rate (SWR)

First, let’s quickly go over the 4% safe withdrawal rate. This is what Mr. Bengen came up with, in 1994.

  • At the time of retirement, set the withdrawal rate to 4% of your portfolio. So if you retire with $5 million dollars, then you can safely spend $200,000 the first year.
  • Adjust for inflation every year. If inflation is 2%, then you can withdraw $204,000 next year.
  • The timeline of the study is 30 years. I retired from my engineering career when I was 38 and hope to live to a ripe old age. My timeline was closer to 50 years so I saved up 30x to be safe.
  • The 4% rule is the worst-case scenario. Most retirees would end up with plenty of money after 30 years. Only a few would exhaust their entire retirement portfolio after that time period.

What made Bengen change the withdrawal rate from 4% to 5%? The key is this: 5% is a good withdrawal rate “in the current environment”. The 4% SWR was the worst-case scenario and it’s proven to be too conservative for most retirees. Retirees can safely withdraw more than 4% if the stock market is undervalued and/or the inflation is very low. Take a look at Bengen’s article in Financial Advisor magazine – Choosing The Highest Withdrawal Rate at Retirement. It is very good. We’ll summarize it here, but the article is worth a read. I’ll use some images from there.

Stock Market Valuation

The stock market valuation is a big factor for figuring out SWR. It makes sense. If the stock market is inflated when you retire, then your portfolio would be inflated as well. Here is a chart from Bengen. It’s based on Michael Kitces’ idea to incorporate the Shiller CAPE into the calculation.

SAFEMAX withdrawal rate
  • The Shiller CAPE tells us the stock market’s value. If the stock market is overvalued, your portfolio will be bigger. The risk of crashing is higher and the Sequence of Returns Risk could be a problem.
  • The SAFEMAX is Bengen’s update to the SWR. It shows how much you can withdraw and still succeed in retirement. We can see that the worst-case scenario over the last 100 years is higher than 4.5%. So 4% SWR is very conservative.
  • This chart only goes up to 1990 because the study period is 30 years. The Shiller CAPE was very high over the last 25 years so I expect the SAFEMAX will drop closer to 4% as the study progresses. Shiller CAPE is 31.69 in 2020. You can check the Shiller CAPE here.

Inflation

Another critical factor in the SWR calculation is inflation. High inflation can erode the retirement portfolio. The US has controlled inflation very well over the last 100 years so it isn’t a big problem for us. Recently, the Federal Reserve Board (the Fed) is pushing inflation down even further by cutting the interest rate. This low inflation environment is very good for soon-to-be retirees. If inflation stays low to moderate, retirees should be able to set a higher SWR.

Here are Bengen’s tables.

safemax inflation

When you’re ready to retire, check this table and see what your SWR should be. Currently, we have low-inflation and high Shiller CAPE. Hence, Mr. Bengen is recommending 5% SWR for soon to be retirees.

FIRE with 20x?

Alright! I find this research fascinating. I knew inflation can erode our savings, but I didn’t know it was this important. This is good news for the FIRE crowd. The Fed is planning to keep inflation low for a long time and we’ll all benefit from this policy.

Does this mean we can lower our FIRE goal to 20x instead of 25x? I think 20x would work for regular retirement, but not for FIRE. From what I understand, the higher SAFEMAX withdrawal means your portfolio will be close to zero after 30 years. My retirement will be closer to 50 years. Life won’t be so rosy if we run out of money when I’m 68. For early retirement, 25x is a safer goal. It’ll give us some margin.

Lastly, early retirement doesn’t mean you have to stop working completely. I plan to earn a bit of income via part-time work (10-15 hours/week) until I’m 65. This way we don’t have to draw down our retirement fund until much later. You can check out our withdrawal strategy here.

In summary, here is what I’d do.

  1. Accumulate 25x your annual expense.
  2. FIRE
  3. Earn a bit of income so you don’t have to draw down your portfolio.
  4. Wait until 65 to start withdrawal.

Actually, 20x should be fine for step 1 if you put off withdrawal until later. If you plan to withdraw in your 40s, then you probably need to use a smaller SWR.

What do you think of the revised SWR from Bill Bergen? 5% might not seem like a big difference from 4%, but it could mean 3-4 years of working. Personally, I think 20x is perfectly fine if you plan to retire after 60. For FIRE, we probably should save at least 25x or work part-time after early retirement to be safer.

SWR is fine and all, but you really should plan your retirement yourself. Every situation is different. You can’t depend on anyone to tell you how much you need. A great tool for individual investors is the Retirement Planner at Personal Capital. It is the best retirement calculator out there. It’s even flexible enough for early retirement. Sign up with Personal Capital and check it out.

You can read my review of the Retirement Planner here.

Image credit: Benjamin DeYoung

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 62 comments… add one }
  • Dividend Power November 5, 2020, 5:41 am

    I liked this article since it present a lot of useful data for retirees or those nearing retirement. Most people I know have much lower expenses in retirement than expected especially if they have paid off their house and have little other debt. To me this means that 4% is probably on the conservative side.

  • Jay Rigler November 5, 2020, 4:39 am

    Nice article, thanks for sharing. Moving from 4% to 5% (25x to 20x min investment for retirement) is an interesting theory, but really, either way, you should be able to manage it comfortably. If you start with 20x and you have a bad few years, you may have to cut back on spending. If you survived preparing for FIRE, you should be able to survive that. Haha!

    • retirebyforty November 5, 2020, 8:17 am

      20x seems risky, but I think it probably would work if you put off withdrawal. Work part-time and make just enough to live on. That amount should grow over time. 25x would feel a lot safer.

  • Mr. P2F October 27, 2020, 3:16 pm

    Well…if he’s right, I’ll still be in the same position! I’ll still coach those that listen to me to be more conservative and challenge themselves to get to 4% or slightly lower if possible. While still only young at the time, I remember the high inflation of the late ’70s and early ’80s. It would be tragic if that ever returned. Having a larger nest egg helps mitigate that risk.

  • Fred October 27, 2020, 3:53 am

    RB40, these suggestions are easy to dispose when you have a working spouse which brings in 100K/year.

    • retirebyforty October 27, 2020, 7:05 am

      She plans to retire in 2022. Stay tuned!
      https://retireby40.org/can-wife-early-retire-yet/

      • Sam @ Financial Samurai October 27, 2020, 3:51 pm

        Joe, I could’ve swore in 2018 or 2019 you said your wife would retire in 2020.

        When did you elongate the time horizon by another two years to 2022? That would be a full 10 years after you retired. Poor wife!

        Let’s shoot for 2021 at the latest! And then that’s when the fun will begin regarding whether you will follow a 4% safe withdrawal rate or not.

        Let’s do it!

        • retirebyforty October 27, 2020, 5:43 pm

          Yes, it was 2020. She isn’t ready to retire yet even with my encouragement. Working from home has been really great for her. She enjoys it a lot. 2022 is a better target. Our son will be done with elementary school and we can take a year off to travel.

          • Sam October 28, 2020, 5:14 pm

            Cool. That’s the other thing about retiring. It’s very hard to let go of work, even if you are financially ready. It’s the “one more year syndrome” that sometimes last for many many years. There needs to be some type of intervention if moving on is really desired.

        • Alan October 31, 2020, 10:18 pm

          For my wife and I, our group health insurance will increase from $18K this year to $23K next year. Luckily one of us gets Medicare in 2022. Have fun with that.

  • TAwcan October 26, 2020, 7:57 pm

    I think FIRE is getting easier as more and more people are aware of the concept and are starting earlier than you’d have years ago. Having said that, is it 4% or 5%? Or even 3%? Having some margin of safety is pretty damn important. For folks in the US, the cost of health care can be a big unknown as you get older, so you definitely want to plan for the extra cost as you get older.

    • retirebyforty October 27, 2020, 8:02 am

      You’re right. Starting earlier helps a lot. I wish I was more focused in my 20s.

  • [email protected] October 26, 2020, 4:19 pm

    PS: small typo “$2004,000” should probably be “$204,000”.

  • [email protected] October 26, 2020, 4:16 pm

    I was really surprised to spot the headline from Mr. Bengen and then to find that the story was adjusting the SWR *up*. If anything, I was expecting something lower, 3.5% perhaps.

    But, the thesis seems to be supported by the facts. At least in “today’s” environment, I wonder how long that’ll last.

    Most importantly, for FIRE folks, I think the real headline is that there’s more safety in 4% than we might expect. I don’t know that it’d cause me to go shouting we should reconsider using a 5% level, but that folks touting 3.5% or even 3% as being necessary might be overly cautious.

    • retirebyforty October 27, 2020, 8:04 am

      25x is a good target for FIRE folks. It’s difficult, but not impossible.
      5% should work with a 30 years timeline.

  • Sam @ Financial Samurai October 26, 2020, 3:04 pm

    I’ve got a simple follow up question. Since you retired in 2012, what has your safe withdrawal rate been?

    My thesis is that the majority of people who retire early and support a 4% SWR do not actually follow their own beliefs. The fun part is understanding why the inconsistency.

    • retirebyforty October 27, 2020, 8:06 am

      0%. The SWR is only safe for 30 years. For 50 years, we need to be more conservative.
      At the end of the post, I recommend saving up 25x and avoid withdrawal until 65.
      That’s always been the plan for us.

      • Sam @ Financial Samurai October 27, 2020, 8:58 am

        Thank you Your Honor! I rest my case! 🙂

        It’s important for readers to know what we actually do in addition to what we say and preach. Otherwise, it’s misleading and there’s just massive confusion.

        Money is too important to just tell one side of the story. We need to be more consistent. Otherwise, it’s just jibber jabber nonsense.

        Can you imagine someone retiring early and withdrawing four or 5%, and then a bear market happens and then there’s no turning back because the person has been shut out from the workplace after 5 years? Then the person realizes The people supporting a 4% or 5% withdrawal rate actually don’t even take out that rate And actually have tremendous side income or other career income or spouse income?

        I think we owe it to our readers to be more transparent about what we believe in what we actually do.

        Sam

        • Ben October 27, 2020, 2:13 pm

          Maybe… It depends on whether the blog is a personal blog like RB40, which is just espousing his thoughts and personal blog, vs another site that is actually providing financial advice. Sadly those sites that provide financial advise have a lot of weird incentives that misaligns readers and advisors.

          So I’ll take a look at the lifestyle of RB40 and Financial Samurai and MMM and take a peak at other FIRE bloggers. Their thoughts on the subject are still valuable analysis despite everyone earning extra income.

  • Xrayvsn October 26, 2020, 2:48 pm

    When I first came across his revision I kind was shocked. I thought for sure the 4% initial SWR would be decreased down to 3.5% or lower. Did not expect him to come out and say it should be higher.

    I just think the fixed income portion of a portfolio (ie bonds) at the suggested 40% is not going to be bringing in enough cash to sustain a fire lifestyle.

    I am super conservative when it comes to when I feel I can truly retire. Once I leave medicine it will be very hard to get back in it if things go awry in early retirement.

    Right now I am at an anticipated 3.1% swr off of my investment portfolio and I still want to make sure I pad it some more. Healthcare costs and other unexpected life issues may occur and I don’t want it to force me into a less than ideal lifestyle.

    I will likely have saved too much but that is a better alternative than not enough. Plus at that point I can really loosen the pursestrings and go all out if I feel like it.

    • retirebyforty October 27, 2020, 8:08 am

      I was surprised as well. 4% is safer than I thought. For a 30 years period, most people have plenty of money left.
      3.1% is a great goal. I think it should work for FIRE.

  • Matt @ OMB October 26, 2020, 2:13 pm

    At the end of the day it comes down to the person retiring, if you’re frugal and are ready to FIRE at the ripe old age of 38 then you are probably ok with 5% because you will live within your means. But for someone just eaking by with a propensity to let lifestyle creep get the best of them then in all reality 4% likely won’t save them. It comes down to mindset and approach, most people have some form of income beyond the stock market.

    • retirebyforty October 27, 2020, 8:11 am

      Everyone has to find their own path. Most FIRE folks are very smart and we are flexible. I’m sure we can adjust as needed.

  • Alec October 26, 2020, 11:41 am

    “The US has controlled inflation very well over the last 100 years so it isn’t a big problem for us. Recently, the Federal Reserve Board (the Fed) is pushing inflation down even further by cutting the interest rate.”

    I believe there are many incorrect ideas in those 2 sentences – inflation is not inherent in an economy. During the 19th century for example, when there was some, but much less than now, government interference in banking and the money supply, there was basically ZERO inflation over the entire century! There was an (imperfect) gold standard, and it was much superior to the horrible Federal Reserve System that we have now. Inflation didn’t really pick up in earnest until AFTER the Fed was created.

    Current inflation, which is caused by the Federal Reserve increasing the money supply, slowly destroys the value of money. Because of the Cantillion Effect, those close to the newly created money (e.g. big banks) do much better while low income earners get the shaft. The value of money is cut in half about every 25 years with a 3% inflation rate. Thinking the Federal Reserve controlled inflation well is delusional – the Fed creates the inflation and screws almost everyone over!

    Next, central banks all over the world have recently been talking about how inflation is now “too low”. There is no real reason given why low inflation is bad – it doesn’t make any sense why the average person would want their cost of living to go up. The central banks now are talking about dialing up inflation past 3% to ‘catch up’ for low inflation years. Again, this makes no sense. With the huuuuge amounts of money that governments have been digitally printing this year in response to the Covid lockdowns, increased inflation is almost inevitable in the coming years. That is one of the reasons why gold and silver have been doing so well since March.

    I wouldn’t count on the stock market doing well and low inflation over the coming years. Tighten your belt on spending now in case things get really rocky over the next few years.

  • Tabitha October 26, 2020, 10:01 am

    I’m confused as to why you would spend $200,000 the first year and then withdraw $40,800 the next?
    “At the time of retirement, set the withdrawal rate to 4% of your portfolio. So if you retire with $5 million dollars, then you can safely spend $200,000 the first year.
    Adjust for inflation every year. If inflation is 2%, then you can withdraw $40,800 next year.”

    • retirebyforty October 26, 2020, 11:05 am

      Oops, sorry about that. I fixed the problem. My editor is supposed to catch that kind of thing.

  • freddy smidlap October 26, 2020, 9:49 am

    i’ve always thought withdrawals should be dynamic and subject to change. for me it starts with a cash or c/d allocation that is larger than most people, something like 3 years of expenses. i rarely consider the very early retiree because we’re already 50-something in our house so we can get our initial social security in 5 years if we like. i believe studies like this are fun but backward looking thought exercises but life and the markets aren’t linear. i think we’re more of the school that if we have a good market year then withdraw more and put it on the cash pile whether we need it or not. we’ll see how it turns out but i hope to spend it all!

    • retirebyforty October 27, 2020, 8:14 am

      Wow, you guys are very close to regular retirement. It sounds like you’re set.
      We’ll build a bigger cash pile before Mrs. RB40 retires. For now, we only have about 6 months of cash.

  • Noel October 26, 2020, 9:44 am

    Those searching for an excuse to take the “easy road” to FIRE have now found their excuse. Everyone has different annual expenditures and retirement horizons, so their really isn’t a one size fits all early retirement plan. The market is not expected have all that great of returns this coming decade with valuations so high, but who knows, we could have another ten year bull run or a lost decade.

    I personally am opting for a 3.75% retirement SWR w/ a pension helping to supplement at 55. Why anyone would risk all their hard work by cutting corners and saving less is beyond me. “Plan for the worst, hope for the best.”

    • retirebyforty October 27, 2020, 8:16 am

      Are there real people looking for the “easy road”? I don’t think anyone looking for the easy way out can stick with it long enough to accumulate 25x.
      3.75% is a great target. You can always increase it if things go well.

  • Jim @ Route to Retire October 26, 2020, 8:18 am

    I haven’t seen this before so thanks for writing about it!

    That’s definitely good news for the FIRE community. Before we retired, I loosely based our plan around the 4% rule just to get in the ballpark. That said, we also have a duplex as a rental property in the mix so that’s a big help.

    Regardless, I plan to still try to keep our spending low when possible. No need to spend every penny for the year just because we should be able to. Since we’re still at the very beginning of our early retirement, the sequence of returns risk still doesn’t have me completely comfortable right now.

  • Sam @ Financial Samurai October 26, 2020, 8:15 am

    Joe – There is something you and Bill have that many traditional retirees do not. Gainful employment and a working spouse.

    Bill commented on my Property Safe Withdrawal post that he has had 4 careers post retirement and is doing consulting. Please feel free to read his long comment to my many questions yourself. Therefore, of course he can raise his safe withdrawal rate to 5% or higher.

    And of course, if you have a working spouse and supplemental retirement income from your site, which I fully encourage, then it is safer to have a higher withdrawal rate.

    But if you don’t have multiple careers after retirement like Bill, a working spouse that provides income and subsidized health care, and supplemental retirement income, then it’s not an apples-to-apples comparison.

    Here’s an exercise. Pretend both you and your wife retired in 2012 and you didn’t have the $420,000+ in blog revenue you reported since the start. Would you honestly withdraw at 4% or 5% for the first year or two? I think you’d say no based on your frugal habits. Instead, what you guys would do would be to try and make more money or spend less.

    People in the finance community must remember we are living in different worlds compared to the majority.

    Build your passive income, supplemental active retirement income, and convince your spouse to work for years after you retire, and THEN feel free to withdraw at a higher. But if not, keep working or be more conservative, at least for the first few years of retirement.

    Sam

  • Dr Goh H October 26, 2020, 7:30 am

    It is a good news but I would rather be safe than sorry. 4 percent is good enough for me and actually I’m working towards 3%

  • Ed October 26, 2020, 7:21 am

    I saw that shift in the SWR too, but I’m not buying into the 5% (or even 4.5%.) Valuations are just too high right now, and I’m not sure where decent returns are going to come from in the next few years. I’d much rather be safe and have money left over to give away at the end. We’re going for 30x and will still probably follow your plan of earning something for awhile to keep the withdrawals down. We’ll just do work we enjoy at a pace we choose.

    • retirebyforty October 26, 2020, 9:37 am

      Wow, everyone is so pessimistic! 🙂
      I’d be great if you can move to part-time. Is this possible?

  • Felipe October 26, 2020, 5:41 am

    Having just FIREd sort of early, I can say it would have been harder before Obamacare. I like to have a lot of backup plans. No Obamacare, move abroad. I really don’t want to go back to my old work again just for insurance.
    Bad 70s style inflation, move abroad to a country not pegged to the dollar, ruling out Belize, Ecuador or Panama for that reason.
    One more development that makes FIRE easier is employers accepting remote work more widely now. So I can geoarbitrage if I choose and have part time work in my old field. I’ve already had those offers but have declined so far.
    We’re more on the 3 percent rule. I never felt comfortable on four percent.

    • retirebyforty October 26, 2020, 9:36 am

      It’s good to have some backup plans. I enjoyed Belize. We should visit again soon.
      Anyway, I plan on moving around somewhat often. If a location doesn’t work out, we can always move on to another.
      That’s what is happening in Chiang Mai. The cost of living increased and many expats moved to Vietnam.
      I think 4% is very good when you’re 65. For early retirement, you’d need more or work a bit.

  • Aaron Smykowski October 26, 2020, 4:39 am

    This is not sound advice to advocate a 5% withdrawal rate. For every “FIRE” blogger that successfully “retires” with 25x but in actuality has income streams coming in from another person working or their own independent ventures there’s 10 other people thinking that this works by just saving 20-25x expenses and never earning another dime. Striving for FI is a very worthwhile endeavor, but those looking for FIRE with 50-60 year time horizons really need to read through the SWR series on Early Retirement Now. He shows the simulations and the math behind why 3.25%-3.5% is a higher probability but still not risk free withdrawal rate.

    Those average returns of 7% also assume an average CAPE ratio of ~15. Right now it’s 31.

    Mr. Tako said it well – why would you add on more risk when the downside of running out of money is so catastrophic. And you can’t easily just “get a job” at 60 or 70 and recover. Compound interest works magically in the accumulation phase. Capital reduction also accelerates in the negative direction during the drawdown phase if you have to draw from your capital during a bear market.

    • retirebyforty October 26, 2020, 9:34 am

      5% is fine for 30 years, but not for FIRE.
      Also, I’m pretty sure there are no “10 other people thinking that this works by saving 20-25x”. People pursuing FIRE are pretty smart. They can work it out themselves. We are not rigid rule followers.
      Everyone has to figure out for themselves.
      3.25-3.5% sounds good. I read some of ERN’s series. It’s good, but focuses too much on the numbers. I think 4% is a good guideline and you just need to adjust as life goes.

  • David @iretiredyoung October 26, 2020, 4:01 am

    Is it just me, or is that there are a bunch of people saying that the 4% SWR is too optimistic nowadays and another bunch of people saying that it’s too pessimistic these days?

    • retirebyforty October 26, 2020, 9:27 am

      Yes… I think 4% is a great goal. Once you get there, you can figure out what to do next.
      It’s already a very difficult goal for most people.

  • Brad (Fee-only Financial Planner) October 26, 2020, 3:25 am

    I read that updated report earlier also. The challenge with these rules is that there are so many variables – rarely does one person’s exact SWR match another person’s.

    Big factors that impact the SWR, but aren’t addressed often enough:

    1) The individual’s current age and life expectancy. The 4% rule was based on a 30-year timeline (as noted in this post). Someone with a 20-year remaining life expectancy has a very different SWR than someone with a 50-year remaining life expectancy. “Experts” telling people they’re all set when they get 25x their spending in investments is misleading without more details.

    2) The individual’s specific investment portfolio. The Trinity report had a very specific portfolio allocation used in their tests. If your portfolio varies from their test model, it would make sense that your results will also vary. Plus, remember that past returns do not guarantee future results.

    These rules of thumb are great for estimates and starting points, but each person should do additional work (or work with someone for help) to clarify a solid financial plan for themselves.

  • WTK October 26, 2020, 3:22 am

    Hi,

    I think that it is entirely up to one to decipher and decide on the FIRE amount. Different people have different circumstance and hence this will lead to different FIRE figure. A general guide is that 4% withdrawal rate will be a good gauge for the start.

    WTK

    • retirebyforty October 26, 2020, 9:26 am

      You’re right, of course. Everyone has to find their own path.
      Saving 25x is a great start. Once you’re there, you can figure out what your next goal should be.
      Although, if I’m 60 and have 20x, I’d retire rather than keep working full-time.

  • Dave @ Accidental FIRE October 26, 2020, 2:17 am

    I agree with Mr. Tako about pushing safe boundaries. Plus I’d like to add that a safe withdrawal rate is not akin to a light switch, it’s not a thing that is or isn’t a number. Everything is on a floating grey scale and also waxes and wanes over time. So it’s best to overshoot by a lot and then some more. I’ll get a pension at 62 which will be tremendously helpful to bring down my rate. I hope to have a SWR possibly as low as 2%. If my graphic arts business keeps growing as it is I’ll hit that for sure.

    • retirebyforty October 26, 2020, 9:25 am

      I agree with overshooting, but not by a lot. For most people, that means working longer for many years.
      Overshooting a bit is good. Great job with your graphic art business. Having some income after early retirement is the key to a smooth 50 years.

  • Mr. Tako October 26, 2020, 1:20 am

    The need for some folks to push the boundaries of what is safe is mind boggling to me.

    It’s the old driving a 10,000 pound truck over a 11,000 pound safe bridge problem. Why would you want to be that close to disaster? If you were a sensible person that didn’t want to die, you’d drive on the 20,000 pound bridge.

    The same goes for safe withdrawal rates — why be anywhere close to disaster? The stock market has a habit of doing the unexpected, and inflation is far from predictable.

    This is why I’m happy with our withdrawal rate at around 2.5%.

    • retirebyforty October 26, 2020, 9:23 am

      Good point about having a margin of safety. 4% has a good margin for 30 years. It’s very safe and too conservative for most retirees.
      However, our timeline is much longer. A lot can happen in 50 years. The stock market is very different than 30 years ago too.
      I think 2.5% is good for now. You can adjust it to 4-5% when you’re 65, IMO.

    • EarlyRetirementNow October 26, 2020, 9:51 am

      That’s a great analogy. Unfortunately, the truck over the bridge analogy is even worse: Even the good old 4% Rule is already pushing it with negative real bond yields and a CAPE>30. Bengen seems to make the case that we can drive a 15t truck over a 10t bridge if we drive fast enough. See my post on my blog today (SWR Series Part 41) on why I don’t believe small-cap stocks and low inflation will not afford you a 5% SWR.
      That said: 2.5% seems ultra-safe even for crusty old Big ERN. You can easily take it to 3.5%, buddy! 🙂

    • Ben October 28, 2020, 1:39 am

      One of my concerns is whether the high CAPE and low interest rates reflect a Japanification of the US/major economies.

      What’s the SWR of Japan according to the Dimson and Marsh datasets? It is only 0.27% SAFEMAX.

      If we include countries that were invaded, like Austria it is even lower. I don’t want to speculate on failed states since I know it is 0.

      Here’s the problem, historical datasets show 4%. No-one is ever going to actually use any of the data. I also aimed for 4%, retired at 3%, and now wonder 2 years later whether I should earn some income. Why? because people want to produce, not consume, and anxiety about the % withdrawal rate goes away if you have income.

      Also, my country may fail next (a very realistic probability as our finance members keep telling the country), so I need to figure out how to earn some foreign income. No safe withdrawal rate helps a country that Japanifies, or fails, and so the arguing of SAFEMAX at 4%, 5%, 3% or even 0% is academic.

  • Backpack Finance October 26, 2020, 1:07 am

    Well, that’s what I call a twist ?. Just in the opposite direction of Financial Samurai’s 0.5% SWR post.

    I still wouldn’t be comfortable being a very early retiree and relying only on 5% of my portfolio. Same with the 4% rule.

    These are all great benchmarks or milestones to reach but that’s about it.

    • retirebyforty October 26, 2020, 9:19 am

      For FIRE, you’d need at least 25x if you don’t plan to earn some money.
      Once I’m 65, I’d be very comfortable setting the withdrawal rate at 5%.

  • Ernie Zelinski October 26, 2020, 12:52 am

    I used to think about the 4 percent rule and then reduced to 3 percent to be safe.
    But I am 71 now and am fortunate in that I have not had to withdraw any money from my Retirement Account and Prosperity Account since I turned 65. In fact, the accounts have grown nicely in the last six or seven years because my intellectual property gave me a great residual income.

    Ultimately, I would like a pretax income of $120,000 a year in retirement. If I can continue to earn at least $50,000 in pretax income a year from my creative works (over the last 7 years the average was around $250,000 in pretax income) and with the $17,000 a year from the Canadian Government related pensions, I can easily bump the withdrawal rate to 5 percent.

    • retirebyforty October 26, 2020, 9:18 am

      I think that’s great. You can use your creativity and keep your mind sharp.
      I’d bump it up to 5% when I’m 71 as well.

  • Financial Freedom Countdown October 25, 2020, 11:30 pm

    Finally a voice of reason. I am planning for a 3% SWR and if I run out of money when I am 100 it is fine. I know 2020 was the worst year for anyone to FIRE since we are all stuck inside. But I would have been unable to concentrate on work anyway.

    BTW are you still doing the series on newly retired FIRE folks? I know last time you ran an interview; I was still slaving away haha

    • retirebyforty October 26, 2020, 8:55 am

      I think 3% is very safe for early retirement. That’s a great goal. I’ll DM you about the interview.
      I’ll put a set of questions together. Thanks!

  • Money Ronin October 25, 2020, 10:10 pm

    As you probably know, Financial Samurai kicked up a huge fuss by suggesting a 0.5% rate. I think it was great for generating discussion and increasing site traffic, but the 4% to 5% makes much more sense to me. Most people’s goal is not to retire forever.
    A lot of it does depend on how many years you plan to be retired. As much as I’d like to live until 110 the odds are not in most people’s favor. And while it might be nice to have something to leave something to my 85 year old kids, dying with a $0 net worth is okay, too.
    If I run out of money because I outlive my retirement fund, I guess my kids or the government will need to chip in. It worked for my grandparents. A lot of things can happen over the length of an early retirement. I retired in my early 40s in 2013 and my wealth has grown faster than when I had a job. My wife still chooses to work but we lost more than half of our income when I stopped working. Now I focus on managing our investments.

    • retirebyforty October 26, 2020, 8:54 am

      That’s a great point. I don’t need to leave $10 million to my son when I die at 95. He’ll be 60 years old. If he can’t take care of himself by then, he’d just waste the money. I’d rather help when he’s in his 20s.
      0.5% withdrawal rate is way overkill.

      • Sam @ Financial Samurai October 26, 2020, 1:31 pm

        Don’t get stuck on $10 million. $11.58 million is the estate tax threshold per person and can easily go down based on history, especially if Biden wins.

        If the threshold goes down then spend more money as to avoid the 40% death tax.

        • retirebyforty October 27, 2020, 8:12 am

          I still don’t think my son will need that much when he’s 65. He should be independent by then. Why would he need so much money at retirement age?

  • Lazy Man and Money October 25, 2020, 9:45 pm

    Does he include the costs of health care in his update? I guess by including inflation he probably does? It seems to me that like health care is very different now. I also wonder if Social Security is factored in this. I think that maybe it isn’t, because it would be very hard to know what everyone’s SS payments are.

    The CAPE is so much higher now and has been for years. I think that’s why many people are erring towards 3% as a safe withdrawal rate.

    • retirebyforty October 26, 2020, 8:51 am

      I think that’s just part of the cost of living. Also, he’s looking at normal retirement age so most people have access to Medicare.
      3% is a solid goal, but you have to get to 4% first. 🙂

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