JL "The FI Godfather" Collins breaking down the "guideline" behind the 4% rule. As always, do what's comfortable for you and always check in on your financial situation to ensure you're adapting appropriately.
The study was based entirely on US Markets. Another study was done using markets outside of the US and it found that a safe withdrawal rate was 1-3%. So if anyone outside of the US is watching this you may want to be more conservative unless you're invested 100% in US markets.
Bill Bengen is the first to design this study and name it. And it was actually 4.15% and NEVER failed! Hence the 4% SAFE withdrawal rate. I know, I know, past performance doesn't guarantee future results. But we've had some pretty drastic markets (think great depression or the stagflation of the 70s) and 4% survived.
I have a question about inflation: as far as I can see, the FI community assumes a nominal 4% withdrawal rate. But 'adjusting for inflation' seems to mean that over the years, one withdraws more and more than 4% of the nominal FI number in order to keep up with increasing costs. How can this be calculated correctly in the long run? Also, if you determine a FI number and have a, say, 15-y timeline to reach it, in 15 yrs inflation will already have kicked in. Shouldn't that FI number change too, to reflect that?
The 4% rule goes like this... If you can get an average of 7% returns on your investments, and assume 3% inflation (widely excepted avg), you have 4% of the annual gains left to live off of in perpetuity. The Trinity Study made this loose formula a "safe" assumption to use as a guideline for financial planning. Obviously, all these numbers can fluctuate from year to year, but these are farily safe assumptions to plan against a 30 yr horizon (though it might take you only 15 years to reach your "FI number"). So, in your example, the 15 years of inflation are already built into the equation.
I agree that it is not very clear. Somebody correct me if I'm wrong, but my understanding is that in practice it works as follows: If you need e.g. 40K/year and have already (x25) 1 million saved, the first year of retirement you withdraw 40K, the second 41.2K (assuming a 3% inflation), and so on. I agree on your second point, which is rarely mentioned. The FI number you set out at the beginning is a bit of a rough goal, which you will have to adjust after 15 years. Another item I don't understand is how to account for taxes in your FI number, which can vary a lot across countries...
@@PlayingwithFIREco thanks for the reply! You lost me at the first sentence "u assume 7% gains and 3% inflation and 4% is left to live off of". What about the 3%?
I have a question about the withdrawal. Let's say you have 1 mil and you withdraw 3% at the start of retirement. 15 Years later its at 4 mil but you are only withdrawing 40k per year. Can you basically reset your withdrawal system and then start withdrawing 120k per year or would you then go broke?
Look at the portfolio value at the beginning of the year and withdraw 4 percent of the value and keep it in bank. You can safely so this for next 30 years and then you will go broke.
