Betting On The 4% Rule Alone?

Is your early retirement in the cards? The famous Trinity Study by William Bengen in the 1980s, was the first major analysis to put forth the idea of 4% annual safe withdrawal rate of your nest egg for retirement living expenses. It’s become a popular rule of thumb for people thinking about how much they need to save.

I frequently tell people about the 4% Rule who don’t seem to have done any retirement planning and don’t know where to start. Just simply figure out how much you spend annually now, adjust if that’s likely to go up or down for any reason, and multiply the figure by 25x to arrive at the lump sum needed to support 4% withdrawals over a 30 year retirement.

This simple math gets people started, although they should add in more for an earlier retirement and test all of their assumptions as many ways as possible.

This new ARTICLE by MarketWatch does some exploration of the 4% Rule and some of the limitations inherent in it. I thought the write up was pretty spot on. I also have suggested that people play some games with different online Monte Carlo calculators, such as the popular FIREcalc that I wrote about in this POST.

Our financial planner recently shared a new, proprietary, analytical tool that they have that does Monte Carlo estimates based not on historical data, but their economists’ view of future market results, tax trends, and price inflation. A lot of historical number still goes into it, but it uses their best view of the future. I like the tool and it is accessible from their website. (I find it a bit more conservative than FIREcalc, which isn’t a bad thing in this case!)

What’s most important for people planning for FIRE (financial independence & retiring early) is that they use a variety of analyses and test their assumptions as many different ways as they can think before they make the leap. These are all ways that I tested (and continue to test) our finances for what we hope will be many enjoyable years of FIRE.

Image Credit: Pixabay

2 thoughts on “Betting On The 4% Rule Alone?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s