How Much Money Is Enough? Fuck the 4 % rule.

I often read blog posts on how people are retiring with 1.000.000 USD and then live off 40.000 USD/Year.

Put it another way. They stick to the 4 % rule.

There has been made a study called “The Trinity Study”. Which is often referred to in the FIRE community.

They took a close look on how much you can withdraw from a portfolio with different allocations to stocks and bonds.

I think the 4 % rule is ridiculous conservative. 

Take a look at the chart below from the trinity study:

This chart will tell us if you have a 1.000 $ portfolio and a 100 % stock allocation, and we withdraw 8 % of the initial amount (80 $), we have a 76 % chance of success.

76 % of every 30 year period between 1926-2009 would never run out of money.

That 76 % means that you NEVER EVER earn another dollar in your life.

So if we are 20 something years old spending a modest 15.000 $/year. (Which I do)

We could retire with as little as:

15.000 $ / 8 % = 187.500 $ 

And have a 76 % chance of NEVER running out of money if we NEVER earn another dime.

“But I don’t feel comfortable withdrawing 8 % of my portfolio”

All right. Then lets round it up to a withdrawal rate of 7 %.

Then we can retire with a 100 % stock portfolio of:

215.000 $ and have 87 % chance of NEVER running out of money.

If we make a 30 year Monte Carlo simulation with a portfolio of 215.000 $ and withdrawing 15.000 $/year annual*:

If we look at the chart above. We can be pessimistic and say that 1 out 10 times the portfolio will not survive.

We can also be positive and see that 1 out of 10 times we will end up 7.200.000 $. Or put it another way, more than 30 times you initial investment.

We could also only do average. And end up with 1.500.000 $.

And we have done this by laying in over hammock for 30 years.

If we however can manage to earn some money.

And I’m not talking about a huge amount of money.

Let’s just say that we start a business of doing something we like. We don’t want the business to be something we do everyday.

Let’s call it a “Fooling-around-company”.

What if we could make 5.000 $/ year with this company?

Then we only need to withdraw 10.000 $/year on our portfolio. This is how a 30 year Monte Carlo simulation look like if we only withdraw 10.000 $/year instead of 15.000 $/year*:

We have now gone from a 87 % success rate to a 96 % success rate.

And in 30 years you will at the 50th percentile end up with 2.400.000 $ instead of your 1.400.000 $

So by earning 150.000 $ over that 30 year period. (5.000 $/year x 30 years = 150.000 $)

We are likely to have another million on our account.

Or we could withdraw 4 % each year instead of withdrawing a fixed amount of 10.000 $/year. This means if the value of our portfolio goes up, our spending can go up.

Then the situation will look like this*:

After 30 years of withdrawing we are more likely to withdraw 16.000 $ /year. And if we are lucky it will be +30.000 $/year. (Adjusted for inflation)

So please. Be a bit skeptical whenever you read the we need 25 times our annual spending.

If we are willing to be a bit flexible, by doing so we can retire A LOT sooner.


2 meninger om “How Much Money Is Enough? Fuck the 4 % rule.”

  1. Hej Loui,

    Jeg er langt hen af vejen enig i, at 4% kan være konservativt, hvis du indstiller dig på at være fleksibel og evt. tjener lidt ved siden af.

    Angående 7%. Tænker du, det er realistisk? Hvis du nupper 7% hvert år, og betaler 0,5% i omkostninger, så skal markedet kaste 7,5% af for, at du er break-even.

    Bh Anders

    1. Hej Anders.

      Det er bestemt ikke realistisk at gøre i mange år. Og her tænker jeg +10 år.
      Men jeg ville ikke være bekymret for at ødelægge mine finanser hvis jeg ramte en 7 % SWR portefølje, hvor at jeg så holdte fem års fri fx.
      Hvis man vælger så høj en SWR skal man være indstillet på at skulle tjene nogle penge i et eller andet omfang på et eller andet tidspunkt.
      Håber det var svar nok.

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