October MinDrench: Is the 4% Rule Still a Viable Rule of Thumb?
Welcome to MinDrenchTM, our monthly spotlight section that features some of the best, timeless, masterpieces out there. Whether if it’s in the form of a blog post, podcast, documentary, book or any format, the important thing here is that it should enrich your mind and help you on your journey to true happiness, fueled by financial independence.
In this edition of MinDrench, we want to cover the topic of the 4% rule as a rule of thumb. This rule is used to determine the amount of funds to withdraw from a retirement account each year. It seeks to provide a steady stream of income to a retiree without depleting the balance for a number of years. A 4% withdrawal rate is what’s considered an annual “safe” withdrawal rate from a portfolio.
Some folks who want to retire early or have retired, are concerned whether this rule still stands, due to the low yields seen in the markets lately. Another concern is that the Trinity Study assumptions were based on a portfolio lasting around 30 years. How would it fare for someone with a 40-60 year retirement timeframe? These concerns and more are addressed by Justin from Root of Good, Joe from Retire By 40, Mr. Money Mustache, the Mad Fientist, Jason from Mr. Free at 33 and Vanguard in the articles featured this month.
Now let’s drench your mind with some enriching ideas and content. Without any further ado, here are our picks of the month.
MinDrench for October 2016
Justin presents the many variations of the 4% rule and what strategies have been working for his family.
Excerpt: “I’ve got the battle hardened skin to weather a massive blizzard of hurt that the market occasionally snows down on us. In the past year you’ve seen my stoic posts on losing $36,000, $64,000, and even $74,000 in a single month. I just don’t care. But if those kinds of losses showed up month after month without reprieve (as they did in the 2007-2009 period), I wouldn’t be blindly following the ‘spend 4% of your initial portfolio value adjusted for inflation’ rule. I would be looking for ways to cut spending in order to conserve what’s left of my portfolio. That’s human nature.”
Joe Udo from Retire By 40 retired from his full-time job in 2012 to become a stay-at-home-dad. During that time his expenses were rock bottom. A major concern of his about the 4% rule is that 25 times your annual expenses might not be enough to retire. In this article, Joe suggests to save more than 25x your spending to have a cushion in retirement.
Excerpt: “One of the biggest risks to retirement is having a few bad years in the beginning of your retirement. Imagine if you retired with 25x expenses at the end of 2007. In about a year, your stock investment would have dropped by 50%. If your investments were all in stocks, your 25x would have turned into 12x. A few bad years in the beginning of your retirement will wreak havoc on your retirement portfolio.”
MMM presents a more optimistic view of the 4% rule. He believes that there’s nothing to fear for Mustachians when it comes to planning for a 4% withdrawal rate.
Excerpt: “To people like you and me who will enjoy 60-year retirements, that would not be successful – we want our money to last much longer than 30 years. Luckily, the math in this case is pretty interesting: there is very little difference between a 30-year period, and an infinite year period, when determining how long your money will last.”
There’s lot of useful data in this article where the Mad Fientist analyzes how the safe withdrawal rate applies to early retirees. This one is a must-read for all of those on the FIRE bandwagon.
Excerpt: “Most of the conclusions in this article are based on the great research that Michael Kitces, one of the internet’s most respected retirement planners, has done on this topic. I’ve cited the source material below so I highly encourage you to read through the articles that I link to because they are packed with additional information that will help you feel even more confident about the conclusions of this post.”
Jason, who is back with a new blog, doesn’t think that one should zero in so much on a number for financial freedom. He believes that being financially free ‘really comes down to making sure the passive income your investments are generating on your behalf cover your bills’.
Except: “While I’m in no way advocating straying from the basic math, and I’m certainly not saying that one shouldn’t still save and invest enough to become financially free in the classical sense whereby passive income exceeds expenses, feeling like you need to conform to some exact definition or hit some exact number down to the penny seems unnecessary.”
In this podcast, Rob Berger from Dough Roller, interviews two investment analysts at Vanguard to hear what the retirement leading industry professionals have to say about the 4% rule.
Excerpt: “I think when we talk about the 4 percent spending rule, two factors come into play which are paramount. For instance, the asset allocation and the other one is the time horizon. I bring that up because I think there is a lot of focus on the 4 percent spending rule of thumb, but you need to keep in mind the time horizons.”
What withdrawal rate does the Enchumbao Couple plan to use?
We’re planning to use a 4% withdrawal rate. We’ll probably do a variation such as withdrawing 4% of the balance of the portfolio every year (one of the variations that Justin talks about in his article) instead of taking the initial 4% amount and adjusting it for inflation every year, regardless of the balance.
The Trinity Study assumes that you’ll never make another dollar again, but we’re going to stay active in retirement. Therefore, some form of income, besides investment income, is likely to follow. El que no trabaja, se oxida. That translates to “if you don’t work, you’ll get rusty”, so staying active is key. There are no intentions, however, of holding a job. That’s a major difference between having money coming your way because you’re doing what you like vs. having to work at any job because you need the money.
We’re also running our numbers without counting on social security, but there should be some form of it available for us 30 years from now. As far as the low yields that we’re seeing today, when you count the total return on your investments on your calculations, there’s no need to worry about those low yields.
In the end, it’s all about being flexible with our spending and not acting roboticly by inflating our lifestyles without regards to the market changes. Moreover, if we maintain austerity during good times, then there’s no need to worry about the bad times. The Enchumbao way is a 4% withdrawal rate all the way, baby!!!
Last month we gave an update on our Freedom Fund. That article gained some traction and became the most read article of the month.
Excerpt: “Don’t tell us that retirement will be bad for our health, when we’ll be more active than ever. Don’t tell us that maintaining relationships will be more difficult in retirement, when we’ll have more time than ever to nourish those relationships.”
Until next time…
This concludes our list of mind-drenching content for the month. Our inspiring words for this month are:
“Retirement marks the end of working for someone else and the beginning of living for yourself.”
~ Unknown author
You’ve worked hard to achieve financial independence, let the investment engine do its magic and enjoy an early retirement!
Read an article that should be featured on MinDrench? Please email us with the link and subject line: MinDrench Submission at firstname.lastname@example.org.
Happy reading, listening or viewing!