If you’d like to use the 4 percent rule as your safe withdrawal rate but are terrified that it might leave you with nothing a few decades down the road, then I may have a great solution to offer you!
As I’ve been doing more and more research formy latest ebook (which will be all about optimizing “how much” you need to save for retirement), I’ve been getting really excited about some of the cool stuff I’m finding out.
For example, there was the post I did a little while back about how the updated Trinity Study showed that you could use a 7 percent safe withdrawal rate with a 91% chance of success if you don’t adjust your withdrawals for inflation.
The 1994 uber-classic 4 percent rule article from Bill Bengen also showed a 100% chance of success of your money lasting for 50 or more years if you used a safe withdrawal rate of 3.5% with inflation adjustment each year.
This got my creative juices flowing …
Why couldn’t we put the two concepts together and get the best of both worlds?
In this post, I’ve done just that. And I think you’ll be very surprised about how it appears to work out
Doing More With Less
Before I get into the nitty-gritty details, I’d like to start off with the premise for this experiment.
Traditional retirement plans (such as the Bengen 4 percent rule) are usually designed to last for a minimum period of 30 years. If you’re like me and planning to reach financial freedom early on, this presents a problem. I need my money to last me 50 or 60 years; a lot longer than this.
An easy solution is to simply withdraw less money and lower your withdrawal rate. Like I mentioned above, Bengen’s article claimed that a rate of 3.5% worked every time for each 50 year rolling period. When I did my own study using FIRECalc, I found pretty much the same thing.
While that’s great to know, it does present you with a very significant problem: You need more money.
Half a Percent Makes a Big Difference
To illustrate this contrast, if I needed to create a passive income of $5,000 per month ($60,000 per year), then:
- Using a low safe withdrawal rate of 3.5%: $60,000 / 0.035 = $1,714,286
- Using the classic safe withdrawal rate of 4.0%: $60,000 / 0.04 = $1,500,000
That’s a difference of $214,286
That extra $214K is not so easy to come up with. Especially when your goal is to retire early, this means that you now have even less time to work with and leverage compounding returns to help you reach your goal.
Since we can’t very well find a magic investment that will yield a greater return than the S&P500, our only hope is to simply “save more money”.
Unfortunately, that’s easier said than done. I’m sure lots of people would like to experience financial freedom but forgot to start aggressively saving in their early 20’s.