3023: Trouble with the 4 Percent Rule by Jillian Johnsrud on A Flexible Approach to Financial Independence

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[00:00:58] now. Sign up at readthejoe.com slash subscribe dash swap. That's readthejoe.com slash subscribe dash swap. Level up your money game. Subscribe to The Average Joe now. This is Optimal Finance Daily. Trouble with the 4% rule by Jillian Johnsrud of Jillian

[00:01:23] Johnsrud.com. Over the past two years, I've been in the unique position to talk with and consult dozens of people who are considering retiring early or are one to two years into their early retirement. Not glossy media coverage of how awesome early retirement is, but in-depth and private conversations. I love that people are seeking financial independence, but I have a bone

[00:01:48] to pick with the 4% rule. The history of the 4% rule is based on stock market calculations ran in different scenarios. The math is very compelling. No matter when you retire, you are safe to pull 4% of your stock portfolio and run very little risk of ever running out of money. I have 0% issue with the math behind the 4% rule. Ah, if only life were as simple as math. Therein lies the trouble with the

[00:02:17] 4% rule. It's all math and doesn't deal with how we feel when the rubber hits the road, the mindset and emotions. Here's the typical fire path financial independence retire early. Step one, experience burnout or overwhelmed with a job. Think to yourself, I can't do this forever and in fact, I don't want to. Step two, hear about fire. Learn about the 4% rule. Step three, step up your investing game and reduce expenses.

[00:02:47] Invest like crazy for 5 to 15 years. Step four, get close to the 4% rule lump sum needed. Feel hesitant. Start rethinking this whole thing. Response one, increase your number and push out the date or response two, email me for help. The fundamental problem with the 4% rule. People who achieve fire are most often savers. In general, these three things are true.

[00:03:14] Number one, they enjoy earning money. Payday is fun. Number two, they like investing money. Investing brings joy. Number three, they love watching those investments grow. They saved up this large lump sum so they would never have to work again. But here's what never work again looks like. Number one, they aren't earning money. Sad face. Number two, they aren't investing money. Sad face. Number three,

[00:03:45] they're pulling money from investments causing that balance to shrink. Really sad face. Going from working full time to not working at all is a huge transition. And transitions deregulate us. Every time. It's why we're stressed when we start a new job, buy a new home, move across the country, or try to get all the kids out of the house in the morning. 95% of the time when I mentor people,

[00:04:10] it's to help with life transitions. Because that's when we need help. Especially if the transition is optional. No one is forcing you to do this hard thing. And you can back out at any time. If your entire plan is based on the 4% rule, it looks like this. Willingly opt for this huge life transition while stopping three things you like, like earning, investing, and growing investments. And at the same time, start three things you don't like, not earning, not investing, and shrinking your investments.

[00:04:40] I know people have spent years doggedly pursuing a fire plan solely based on the 4% rule, only to find out they don't want to pull 4% a year from their investments. In my work, I see this being less problematic for people 55 to 75 years old. Although, have you met the people freaked out about taking mandatory distributions at 70? Yep, it happens. For people 30 to 55,

[00:05:04] living solely on a 4% withdrawal freaks them the heck out when the rubber hits the road. Here's the order in which I see people happy about spending money. Number one, happiest money spent is from pensions, earned income, social security, any fixed income, and house hacking. Number two, tolerable money spent is from rental income, dividends, and interest payments. And number three,

[00:05:31] unhappy money spent is from cash reserves and pulling from investments. What if we make a better and happier plan? You can have 100% confidence in the 4% rule and still not enjoy pulling out 4% a year. So what if you made a different plan? A plan that felt a little more palatable when the time comes to leave your 9 to 5 job. If plan A is amass a huge lump sum and pull 4% a year, what could

[00:06:00] plan B look like? Plan B often ends up being the better plan. It's more customized. It's more refined to your own goals and values. It's not one size fits all. It's a choose your own adventure plan. When the off-the-shelf plan A doesn't fit, it's time to look at plan B. Plan B takes some flexible thinking and some creativity. But in the end, it's a plan that you will pull the trigger on and enjoy.

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[00:07:23] makes saving automatic, perfect for building an emergency fund or saving for a house. Cancel your unwanted subscriptions and reach your financial goals faster with Rocket Money. Go to rocketmoney.com slash OFD today. That's rocketmoney.com slash OFD. Rocketmoney.com slash OFD. If you liked this article, I would encourage you to head over to Jillian's blog and check out her

[00:07:50] other articles on what she's calling flexible fire. She talks about setting up multiple streams of passive and passion income that will allow early retirees to be less dependent on the 4% rule. It makes a lot of sense to me, especially when you think about the transition from saving and investing aggressively to flipping a switch and then not earning any more money and drawing down from investments. I'm also reminded by this article again, that personal finance is really personal.

[00:08:18] Just because others are retiring early with the 4% rule doesn't mean it's the only way to go about it. There are lots of flavors of fire that have been discussed in recent years, including barista fi, coast fi, and I love Jillian's addition with flexible fire. That'll do it for today and another installment of Optimal Finance Daily. Have a happy Thursday. Thank you for being here every day and listening, and I'll see you on the Friday show tomorrow where optimal life awaits. the end of the Friday show now. you you Thank you.