3685: Rant: Stop Focusing on the 4% Rule by Mr. 1500 Days on Safe Withdrawal Rate

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[00:01:00] This is Optimal Finance Daily. Rant. Stop focusing on the 4% rule by Mr. 1500days of 1500days.com. And I'm Justin Malek. I read articles and give some commentary to go along with it to give us both a little reminder about what's important every day of the year. So with that, let's get right to it as we optimize your life.

[00:01:28] Rant. Stop focusing on the 4% rule by Mr. 1500days of 1500days.com. Ooh, I've never written a title all in caps before. You know it's gonna get real. Nothing in the financial independence community drives me crazier than the endless debate over the 4% rule. Brace yourselves. My most vulnerable money moment.

[00:01:56] First, I'll tell you about my most vulnerable moment. It may be surprisingly similar to yours. Let's take a trip down memory lane. Let's go back to 1998. I just finished my computer studies and was interviewing for my first job. My financial picture? Wasn't good. Debt. $60,000 in university and credit card debt. Emergency fund? LOL. Savings and investments? More LOL.

[00:02:26] And then there was all of the work stuff. Experience? None. Network? None. I had just graduated so I knew no one who could help me get a job. Community? Almost none. I had friends from college and high school but not much going on otherwise. Despite my situation, I wasn't worried at all. On the contrary, I was full of optimism. Interviewing was thrilling.

[00:02:52] My first job paid me the worst salary I'd ever have in my career but I was still making far more money than I ever did before. $37,000 a year. I liked my work and it felt good to no longer struggle. I could actually buy real food. Why am I telling you all of this? Stay tuned, patient listener. Stop focusing on the 4% rule.

[00:03:17] There is no shortage of pundits eager to tell you why you'll end up eating cat food someday should you follow the 4% rule. Or folks who tell you that the 4% rule should be the 3.25% rule. The 4% rule is great as a very general starting point but please don't focus on it after that. Following, I lay out my reasons for why I think the 4% rule mostly sucks.

[00:03:45] Number 1, it's all based on historical data. Have you ever heard this? Past performance is no guarantee of future results. The 4% projections came from past performance of the stock market. No one on earth knows what the stock market is going to do tomorrow morning, much less the next 5 decades. I happen to think that it could be much better.

[00:04:12] Stock market expansion is mainly fueled by productivity gains. Artificial intelligence will go a very long way to increasing productivity. Your job may not be safe, but your portfolio may do very well. Or it may not. The only thing that I'm completely certain about is that future returns are uncertain. Actually, if you have a job that a robot or computer could take, maybe you should worry a little.

[00:04:41] Number 2, sequence of returns risk is overrated. Sequence of returns risk. Quote, A hit to your investment portfolio in the early years of retirement leads to poor returns over the long haul because there's less money to compound. Your most vulnerable years are those right after you retire. End quote. Example,

[00:05:06] You quit work on January 1st, 2025, and the stock market drops 40% on June 1st, 2026. Now there's a lot less money for compounding to work its magic on, resulting in lower long-term returns. The key word in the definition is early. If a stock market anomaly happens shortly after you quit work, that's the best time to go back to work.

[00:05:33] You still have your skills, your network, and if you retired early, youth. Number 3, it doesn't have to be all or nothing. When I quit, I wanted to get to my FI number as fast as possible and then leave forever. That's how it worked out, but that's not how I'd do it if I could hit replay. It doesn't have to be an all or nothing situation.

[00:05:59] For example, your kids will only be at home with you for a narrow slice of time. Consider taking time off when they're young and going back to work when they go to school. Another solution is to take a sabbatical or go part-time. Let money serve you wherever you are in life. Number 4, retirement is a stupid word because most don't retire.

[00:06:24] I can't think of anyone who has quit their job and never earned money again. The Internet Retirement Police, or IRP, call these folks out often. They're still earning money. They're not really retired. The IRP have a point, maybe. If you can figure out how to retire early, you're probably driven. Of course, you're not going to sit around. Watching TV all day sounds like... We like to do stuff.

[00:06:54] And when you do stuff you really like, you're probably going to do a pretty good job and make some money. If your plan was to retire on an initial withdrawal rate of $40,000 a year, making just $5,000 from your fart fetish channel on OnlyFans, brings your withdrawal rate down to 3.5%. Number 5, if disaster happens, you still have a lot of money. Let's say that this happens to you.

[00:07:24] You retire with $1 million, and three months later, the very big, no good, bad, black swan thing happens, and your portfolio gets kicked down to $500,000. That would suck, but you'd still have $500,000. That money buys a lot of time to figure it out. Imagine having $10,000 saved and getting fired from your job. And number 6,

[00:07:52] you're awesome, the most important. Remember how I started this post telling you how pathetic I was back in 1998? I'm on firmer ground now. I'll bet you're so much better off too. Consider the financial suit of armor that comes with a couple decades of life. A good partner. Some of you have a solid partner. If that's you, I have great news. You have redundancy built into your life.

[00:08:20] If the world goes to hell and you can't get a job, maybe your partner can. Experience. You're not fresh out of school anymore. You have years of experience and skills. If I wanted to go back to work, I'd have to brush up on my coding and take less pay, but I could do it. A network. You have a network of past coworkers you can lean on. I worked for four different entities and made many connections.

[00:08:48] There are lots of people I could call to get a job. Community. I'll bet that you have lots of friends and neighbors to support you. And money. Ah, we're back to where we started. I'll bet you have more of it than you did when you started working. Probably a lot more. So, believe in yourself. Given how awesome you are, why do you spend all of your time worrying about how the stock market is going to perform?

[00:09:17] It's completely out of your control. Here's what to do instead. Quit formal work with a withdrawal rate that allows you to sleep at night. Then, don't think about it. If bad things happen, know that you're a smart, resourceful person who will find a way. You've already figured out how to retire early, which is a pretty cool accomplishment. Instead of thinking about VTSAX, focus on your strengths.

[00:09:46] Know that your partner, your skills, your network, and your community will be there to help you out if it all goes down the cover. You're in far better shape than you were when you were just out of school. What is the point of all of this? I see people postponing their dreams all the time for one more year. I just don't trust the 4% rule, so I'm going with 3.25%. That's great.

[00:10:15] Now, instead of having to save $1,000,000 to get to your $40,000 withdrawal rate, you have to come up with $1,230,000. How many more years will that take? When you get there, are you just going to move the goalposts again? Instead of obsessing over withdrawal rates, use your precious brain power and time to figure out how to live your best life. Never forget this.

[00:10:43] You probably won't run out of money, but you will run out of life. So one more time, stop worrying. You just listened to the post titled, Rant. Stop Focusing on the 4% Rule by Mr. 1500 Days of 1500days.com. I'll be right back with my commentary. You know what's funny? We'll hit the gym, eat clean,

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[00:13:08] at oneskin.co slash OFD. That's 15% off at oneskin.co with code OFD. After your purchase, they'll ask where you heard about them. Please support the show and tell them we sent you. Thank you to Mr. 1500 Days. This was a fun, ranty one, but with a really good message. For anyone not deep in the financial independence world, the 4% rule is basically a rough guideline

[00:13:36] for how much you can pull from your savings each year without running out. And his whole point is that people get so obsessed with fine-tuning that number. 4%, no wait, 3.25%. That they end up working years longer than they need to, chasing a bigger and bigger pile. And there's a great line near the end. He says, you probably won't run out of money, but you will run out of life.

[00:14:04] It's true that we can spend so much energy trying to make a decision perfectly safe that we forget the clock is ticking. The other part I liked was his reminder that a spreadsheet number isn't your only safety net. You've also got your skills, your experience, the people around you, all the things you've built up over the years. If something went wrong, you're not the same broke person you were at 22. You'd find a way. Now, I don't think this means

[00:14:34] throwing all caution out the window. It's more about not letting the fear of a worst case keep you frozen in place. So maybe the takeaway is to pick a number that lets you sleep at night and then go actually live. And with that, I'll leave it there for today. Thank you for being here. Have a great rest of your day and I'll see you tomorrow where your optimal life awaits.