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 let’s 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.