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 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.


7 thoughts on “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.

  2. If you calculate your costs for living the next 10 years, everything from housing, car, vacations to pants and food and increase the yearly costs more than infaltion, then you get an idea of how mych monney you will have to take out from your portfolio every year on average.

    If you have a 7-10 year track record on how successfull you have been managing your portfolio, in percentage per year, then you can calculate the size your portfolio have to be.

    If you spend 30ooo usd /year and your portfolio increase 7 % a year: 30000/0,07= 428571 USD

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