Dec 30

Dangers of Relying on the 4% Rule in Early Retirement Scenarios


Early retirement

Dreaming of Retirement

I recently found myself on a beach in Maui. We had some airline vouchers we needed to use before they expired and decided Hawaii would be a great way to burn them (it was). As I laid there on the warm sand and listened to the ocean waves gently breaking on the shoreline my thoughts drifted to retirement.


‘It sure would be nice to do this full time.’ I thought to myself.


This happens to me every time I lie on warm beaches anywhere. Now when most people dream of early retirement they dream about all the wonderful things they will do, all the places they will travel to, or how their golf game will finally become respectable. I am not most people. My demented, slightly geeky brain did what is only logical in this situation, and that is to perseverate about the philosophical and probabilistic limits of the 4% rule in early retirement…




First a little background. Maybe you don’t even know what the 4% rule is. Many interested in early retirement or financial independence are familiar with the 4% rule, or have at least heard about it in passing. I didn’t learn about this critical tool until my mid 30’s so don’t feel bad if you don’t know about it.


This guy, William P. Bengem, a financial planner probably as geeky as me, first articulated this rule of thumb in 1994 with his very sexy sounding article titled Determining Withdrawal Rates Using Historical Data.


Using a portfolio of somewhere between 50/50 and 75/25 stocks and intermediate treasuries he came to the following conclusion:


Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.


Basically your money should last at least 30 years if you only spend 4% of it each year (inflation adjusted).


Four years later in 1998, the Trinity study (written by three dudes over at Trinity University) confirmed this. By back testing a variety of asset allocations, they came to essentially the same conclusion (although they used high quality corporate bonds instead of treasuries).


There have been tweaks and reexamination of the 4% rule since these initial studies with more asset classes added and tested, but more or less the rule is accepted by most as pretty solid. There are countless online explanations and discussions of the 4% rule if you are interested. My favorite one is here.


Here are a couple of ways to look at the 4% rule if you are having trouble wrapping your head around it.


  • For every 40k/yr you want to spend in retirement you need 1 million dollars (40k is 4% of a million)

  • If you multiply your desired spending by 25, this is the asset base you need. (eg. 55,000 x 25 = $1,375,000).


NOTE: The 4% rule does NOT include investment costs (ie: fund expense ratios or fees paid to a financial planner.) These need to be taken into account.


Every FIRE (financial independence early retirement) blog I’ve read uses the 4% rule as a basis for planning. To question it is considered heresy by some. Some even think it is too conservative because most of the time you can actually withdrawal more than 4% and be just fine. Although the 4% rule is a decent place to start, there are some serious flaws and limitations to be considered. I don’t see these discussed much in the FIRE community but they are important. Although these problems are mildly important in conventional retirement, I feel they are especially important to the early retirement community.


Efficiency is a great thing. It’s beautiful actually. It drives innovation and is a force multiplier in our lives. Many people seeking early financial independence achieve it primarily through efficiency.  The opposite of efficiency is wasteful, and no one wants that. Another term for this is frugality.


There are many examples of people who retired early simply because they could live a great life on a fraction of what the average person can. Combining this with an above average income it is almost impossible not to achieve financial independence earlier than most.


They may use spreadsheets to track their spending and waste nothing. They scour the internet for the cheapest cell phone plan and have grocery shopping down to the lowest cost per calorie possible. They travel hack everything using credit card points and frequent flyer miles to take incredibly cheap vacations. They may live in an extremely low tax environment and have found out how to maximize the tax code to their advantage.


Their life is designed around efficiency. Some are living a lifestyle spending 30k/yr that is more or less equivalent to someone much less efficient (ie: a typical average person) spending 2 or 3 times as much.


This is a great thing to do with your life and my hats off to these who can do this well. The more efficient you are with your limited resources the more you can have in life. Money is time and freedom. The less money we require the freer we become.


Unfortunately at very high income levels I see many people become incredibly inefficient with their money. As money becomes less scarce it is not treated with the same respect and it is often wasted. It is a little painful to watch, especially if they are not happy with their jobs.


For every dollar that we don’t spend on an excessive phone bill or unnecessary gadget is a dollar that we can spend on something else we truly want in life, but there is a dark side to being so efficient. Once you maximize efficiency everywhere where do you cut spending when you need to?


If everything is optimized then, by default, it is a more vulnerable system. If you are paying the absolute lowest cost for everything then you are more vulnerable to inevitable cost inflation. It becomes more difficult to substitute for lower cost alternatives when you are already using the lowest cost alternatives.


If there is an unexpected increase in a cost you have little control over (property taxes, health insurance, electricity, etc.) there are simply fewer places to offset these costs when life is already at maximum efficiency. Everything becomes a point of potential stress on the system as a whole.


If you pay $10 a month for cell phone service instead of $100 this is fantastic, but when you are on the $60 a month plan you can always cut to the $10 plan and $1080 magically appears in your bank account each year. At $10 even throwing away your phone and cancelling service only saves you $120 (and I know you can’t live without your cell phone).


Now I’m not advocating less efficiency or more expensive cell phone plans when cheaper ones are available, but I am saying the 4% rule has a greater chance to inadvertently become the 4.5% rule or 5% rule if your spending needs increase unexpectedly and you can’t find fat to cut elsewhere from your budget. Increasing spending as a percentage of assets will absolutely increase the failure rate.


If you are planning an early retirement with maximum efficiency/frugality I would caution against relying on a 4% withdrawal rate, not because the math is faulty, but there are simply too many things that can go wrong such as:

 Early retirement 4% rule


Health is everything. As I write this I’m a bit under the weather. Last night I think I sweat out about 5 pounds of water while whatever horrible virus I have savagely attacked my immune system. Having shaking chills and being scalding hot at the same time is quite miserable. At least the skull crushing headache is gone now. Over my life I have overall enjoyed pretty good health, but there have been times where it has not been optimal.


I won’t bore you with the details but life is just harder and more expensive when you don’t feel well. All that efficiency goes out the window when you have severe pain or are debilitated by illness. It’s tough to not get depressed when your health is suffering and depressed people sometimes have difficulty being frugal and efficient. Many things you once did yourself in good health you may now need to outsource (pay for) while in poor health.


Being healthy is cheap, but healthcare is insanely expensive.


That bare bones, narrow network, high deductible catastrophic plan you are planning on getting in early retirement will absolutely destroy you if you develop an expensive chronic medical condition, or if multiple family members require medical care over a multiyear stretch. Health insurance works great when you are healthy. I’ve noticed many in the early retirement blogosphere are in perfect health and in their 30’s or early 40’s. They don’t worry about their health because they have never experienced poor health.


There is selection bias here. This is great, and I wish them a long and healthy life, but just be warned that health care becomes a big expense for many people in their late 40’s and 50’s, even for people that live very healthy lifestyles. Just because you are not a chain smoking, alcoholic, morbidly obese diabetic doesn’t mean you will not have significant health problems as you age. Vegans that do yoga and CrossFit every day still get cancer, have heart attacks and develop expensive, weird autoimmune disorders.


If you are living a life of maximum efficiency at 30k/yr it may be a shock when your medical expenses jump from $100 to $10,000 per year. This is not hyperbole; I’ve seen this happen to lots of people. Our health care system is great if you are extremely poor or extremely rich, and awful if you are in the middle with crappy health insurance (from an expense metric, not quality).


I know a few will roll their eyes and say they will just move to another country where they can get good health care for pennies on the dollar or some other such scheme, but this is easy to proclaim when you are healthy. It’s tougher to put into practice when you are really sick. When you are truly sick you just go to the doctor and beg them to fix you. This is a hard thing for someone who has not really been sick to understand.


As you age you will be hit with two terrible health care economic realities:


  1. You will probably require more health care and spend more money on it.
  2. Health insurance will become more expensive with costs rising much faster than inflation.


The 4% rule doesn’t really care about this or take it into account. Remember it is usually employed by people at normal retirement age most likely getting ready to jump on Medicare. It assumes spending growth exactly equal to inflation. If your spending inflates faster it falls apart, and it can go into a death spiral faster than that cheap health insurance you just bought.


The ACA beautifully addressed some of the economic issues with health care in early retirement mainly through the subsidies and cost sharing, but it is likely these will be heavily modified or eliminated during the next administration. If health insurance is a big percentage of your retirement spending it may even push people back into the work force in worst case scenarios.


It doesn’t take much to amass big medical costs as I found out earlier this year. A trip to the ER with an x-ray and a few stitches was several thousand dollars out of pocket using my high deductible HSA insurance. To add insult to injury the ER doc who saw us was not contracted with our insurance company for some reason so I got a $700 bill from her while my insurance company only applied about $400 to my deductible (effectively increasing my annual family deductible by $300).


This evil practice is called balance billing, and depending on the composition of your in-network providers you may see a fair bit of this. It has the nasty side effect of dramatically increasing your out of pocket costs above your deductible. If I was on Medicaid I’m guessing this trip to the ER would have been completely covered. Again, health care is great if you are really poor, really rich, or you have great insurance (this is becoming rare). Everyone else gets screwed.


Just in case you don’t believe me I went over to and plugged in some numbers to see what health insurance would cost a married couple near me with no kids at various ages. The only variable I changed was the ages. The results should alarm the early 30’s 4% rule early retirement crowd.

Age of married coupleMonthly premium ($)Annual premium ($)


Let’s assume 40k/yr spending and a post ACA world with no subsidies (I know, maybe not probable, but within the realm of possibility). I picked a middle of the road silver plan with a $5,000 annual deductible. At age 30 insurance will cost $8088/yr or about 20% of annual spending; pretty freaking high but maybe manageable. At age 60 premiums increase to $19,344 or 48%! This is not manageable as it does not even include the $5000/yr deductible that you will more likely be spending a greater percentage of at age 60 than 30 anyways! Your spending on all other items will have to decrease from $31,912 to $20,656.


If you are already living with maximum efficiency how the F%^$ are you going to live off of 35% less income when you are 60? Hopefully you didn’t run into a problem with sequence of returns risk (poor portfolio performance in the early years of your retirement). You are either eating cat food, working at Walmart as a greeter or clinically depressed and cursing all those “the 4% rule can never fail” blogs you read when you were in your 30’s. Maybe all three. Actually, come to think of it, I haven’t seen a greeter the last few times I’ve been in a Walmart so maybe that isn’t an option anymore.


These numbers will look even worse in the future if health care costs increase more than general inflation (although I can’t see how that is sustainable long term). Bottom line is that health care is a real problem in the United States for people that want to retire early or call themselves financially independent. It is a risk that is difficult to hedge against. One would be wise to keep this in mind and not dismiss it. I guess an option is to drastically lower taxable income, live super frugal and go on Medicaid (assuming it is not dismantled in the next 4 years), but this option will not appeal to or be feasible for many people. Furthermore, if your income is too high you will not qualify for Medicaid anyways.




Nobody wants to talk about this, but about 41% of first marriages end in divorce. It is 60% and 73% for second and third marriages respectively, in case you were wondering. Divorce can be a financial weapon of mass destruction. No one thinks it will happen to them, but it is too common of an event to completely dismiss no matter how happily married you are.


The good news is divorce seemed to peak in the 1970’s and early 1980’s, perhaps related to the feminist movement that had long lasting structural impacts on society. As women gained more economic freedom, the traditional model and reasons for marriage were disrupted. People now are marrying later in life, and probably for slightly different reasons. Traditional rolls are not as clear as they once were. I’m not going to argue whether these are good or bad, but it seems to be having a stabilizing effect on marriage, as the divorce rate is declining whereas the freedom to get divorced is probably increasing.


It is worth the thought experiment to examine what you would do economically if you found yourself divorced tomorrow with a suitcase and 50% of your assets. For some, they would be in a better economic position, but most would be in a tough spot. Most of my friends that went through divorce did not come out the other side in a financially better position.


Marriage is usually financially efficient, especially when spouses are on the same page and have the same financial values. I can tell you this; if you were planning on living on $40k as a couple it is unlikely you will be happy living on $20k as a single. Throw a couple kids into the mix and things get complicated and expensive really fast.


I’m not saying you should keep working in a job you hate on the off chance you will become divorced, but there are a lot of people sitting in bars all around the world looking at the bottom of a beer mug wondering what went wrong. The stone cold truth is that people change. The person you are at 40 or 55 is probably pretty different than the person at 25 that got married. Multiply that by two people, add in human nature and you have a probability of failure that is greater than zero.


retirement flower


Speaking of kids, they are not free. If you are a 32 year old DINK couple and planning on retirement in a couple years because you read a cool blog and they told you kids don’t cost anything, they are lying to you. Yes, it is possible to spend very little on kids, people on limited income do it all the time, but in reality part of the fun stuff in my life is being able to provide cool things for my kids to do and see.


Plane tickets are twice as much for a family of 4 than a family of 2, but I don’t want to stop traveling. The club sports and music lessons are also expensive. I don’t have to pay for them and I wouldn’t if I had very limited resources, but I do because it brings me happiness. You can go bare bones expenses with kids, many people do and are completely happy, but budget appropriately and don’t be surprised if they cost more than you think they will.



Lifestyle inflation

Most retirement studies show that spending slowly decreases over time in retirement and overall this is good news to those relying on the 4% rule, but all of these studies assume a conventional retirement age at around 60 or 65. If we look at demographic spending over the entire population we see that our peak spending years are between 45-54, with 35-44 not far behind. When most people need the 4% rule to work their spending is already on a naturally decreasing glide path.

retirement spending

What this means is that if you retire early and it is based on your spending patterns in your late 20’s and early 30’s, you may not be accounting for the natural inflation in spending that normally will happen as you enter peak spending years from ages 35-54. As you fight this natural uptick in spending what would normally feel like healthy frugality may instead feel like deprivation.


The 4% rule must account for this increase in spending to make sure it is robust enough to withstand time. Of course this will not affect everyone, but it affects enough people to make a nice pretty bar graph with striking differences in spending by age.


Additionally, I want you to go re-read the above paragraph on health insurance. That graph does include the cost of health insurance, but when I dug into the data there was only about a $1500 difference between the 25-34 and 55-64 cohorts. This is much different than the over $11,000 difference I observed comparing the unsubsidized cost of a silver ACA plan at age 30 and 60. This is likely due to the fact that most of these people are either working (and their health insurance is being heavily subsidized by their employer), on Medicaid (not paying premiums) or are buying lower quality insurance as they age because they cannot afford it. The true cost of health insurance for an early retiree is hidden and excluded from this data.



I’ll just go back to work

This is the default position of every article I read regarding portfolio failure, and I think every early retiree has to consider this a non-zero possibility. For many this would not be a significant problem, but there are some factors to consider here. If your portfolio is failing the 4% rule it is doing so either because of one or more disasters in your life (divorce, health problem, poor investment strategies, massive unexpected costs), or a disaster in the general economy (major recession or depression, war, etc.). In both of these scenario categories it may be impossible or extremely difficult to:


  1. Find work or

  2. Actually do work


If you suffer a traumatic head injury requiring ongoing medical treatment and physical therapy it is unlikely you will be able to find meaningful work. When the unemployment rate is 12% and the stock market just fell 51% it is unlikely a 55 year old who has been out of the workforce for 10 years is going to be the first or even 100th pick for a given job opening. When bad things are correlated they have compounding effects and this can be devastating. Just when your need to generate income is at its highest your ability to do it may be at its lowest.


For someone in a highly specialized, high barrier-to-entry field, it may be very difficult to actually get back into that field. My guess is that it would be very difficult for a physician, lawyer or software developer to get hired in their field after being out of the workforce for 20 years. There is age discrimination in many industries, and this may be a big factor in one’s decision to leave the workforce.


Thanks for destroying my hopes and dreams

By this point you are probably a little depressed. This is understandable so let me cheer you up a bit. The 4% rule is still a good rule regardless of its flaws. First of all, the 4% rule is designed to work for 30 years in all economic scenarios regardless of when you retire if you follow it’s rules. In order for it to fail, you have to retire in a year that has been worse than every other year in modern history. If you are retiring at or beyond traditional retirement age with less than 30 years of life expectancy with social security and Medicare in reach I would consider the 4% rule pretty much bulletproof. Additionally, in most years of retirement the 4% rule is actually too conservative. Most of the time you will end up with far more money than you need.


Also the 4% rule does not take into account money from:


  1. Social security income.

  2. Pension income.

  3. Inheritance or gifts.

  4. Additional income through part time work or side projects.

  5. Income producing real estate.


It is pretty unlikely that someone who retires early will not have one or more of these sources of money at some point in the future.


Nor does it take into account decreased spending due to:


  1. Paid off mortgage.

  2. Downsizing.

  3. Decreased expenses related to kids.


The point being, there are variables in your life that will alter the probability you will stick to your inflation adjusted 4% both positively and negatively. Relying blindly on a rule of thumb to apply to your life is unwise as it will play out differently for each of us.


 pondering retirement

In order to save the village we had to destroy it

There is somewhat of a paradox regarding the issue of efficiency I want to touch on. Please excuse the tangent. Although being more efficient creates a lower margin of error in some ways I discussed above, it opens up many more possibilities of making a side income that will actually matter to you.


Someone who can live off 30k per year can go earn 15k per year and increase their income by 50%, whereas if you are at a baseline spending of 100k/yr this is only a 15% increase. The absolute dollar amount is the same, but the impact felt will be much greater for the person living off a lower income. Nearly anyone able to work can find a job that pays 15k/yr if needed, regardless of their background.


As is usual though, it is more about the psychology than the math. I think it is much more psychologically challenging for someone in a high paying former career to go back to a lower paying, and most likely entry level job, often times with a much lower level of autonomy than in their former career. When you were making $400k/yr as an intellectual property lawyer it may be a bitter pill to find your skillset obsolete and have to take a job that pays 10X less in your mid 60’s.


As I ponder the 4% rule for myself I am acutely aware that there is absolutely nothing I can do with my time that will guarantee me more money per hour than what I do right now without taking a tremendous amount of risk or getting very lucky. Once I am out of the workforce for a decade or two, I can’t reenter as a physician for all practical purposes. This is my chance to build up my war chest, so I have to be sure there is enough there before I drop everything to go surf full time in Hawaii.


I have to make sure my plan is robust enough to withstand at least one or more of the following: major medical disaster, drastic increase health insurance costs, some lifestyle inflation or a divorce. In fact, I have already seen mild lifestyle inflation seep into my life over the last 5 years (as long as I have been accurately tracking my spending).


Now that I am working part-time I have more flexibility and time to travel. We bought a car and did some house renovations which I did not account for in initial retirement planning. Of course I cannot design a plan that will survive every disaster because life is just too unpredictable.


If I plan for everything then I just have to keep working forever, and that is not what I want to do. I can’t let fear rule my life, but I would rather work a bit longer now than have to go back to work when I’m 60. Maybe I’ll want to work anyways at that age because I’m bored, but I want the absolute freedom to make that choice for myself.


My approach

I won’t tell you what to do, but I will share with you how I am approaching this situation. I simply changed the 4% rule to the 3% rule. This is completely arbitrary, but it gives me a 25% cushion. It gives me peace and quiets my constantly worrying mind. I will give you some arbitrary made-up numbers to ponder to see how this could affect someone.



Let’s say I want to live on $40,000/year and my current net income after taxes is $80,000. Using the 4% rule I would need an asset base of $1,000,000. Using the 3% rule I would need $1,333,333 or an extra $333,333. This sounds like a lot, but it is not really as big of a burden as you may think for a high level saver. Since I would be saving $40,000/yr (because no rational person who wanted to retire early would save less than 50% of their income at this level) how many more years would I have to work? If we assume a 7% return and 3% inflation it’s about four more years of work (actually I would need a base of about $1,500,000 four years in the future because the $40,000/yr spending would have increased to $45,000/yr with inflation).


Yikes! 4 years of work is a big price to pay for such safety, but there is an upside. First I can quit any time during those 4 years if my risk tolerance or assessment changes. Second, if I am too safe the penalty is I work an extra 4 years, but the reward is now I have a big pile of assets at my disposal. If I aim for 3%, but the 4% rule would have worked I will end up with more money than I can spend. This is a pretty great problem to have.


Some consider this a failure because they worked too long, but I don’t see it this way. You can decide to either give it away to causes that are meaningful to you, or you can spend it on luxuries that were considered out of your reach. You can buy mosquito nets for destitute people in malaria infected areas, have a room named after you in that new cancer center the hospital is raising money for or blow it all on exotic cars, strippers and cocaine – whatever makes you happy.


The 4% rule is designed for a theoretical life. It is an academic construct. It is not a study where they took large cohorts of real people and followed them through retirement as they lived off of 4% of their assets to see what happened. It doesn’t take into account the messiness of life whether that is accidents, mistakes or tragedy. Behavior is usually what causes failure, not math. For early retirement all we have are a few case studies that are incomplete at this point. I haven’t stumbled upon many blogs or articles that have a real stress test thrown in there. If you find them show them to me. Just be clear on what the 4% rule is, and what it is not.


Regardless of what you decide to do, building margins of safety into your plans is always a good idea. Have alternate ways to make money if needed. Develop multiple streams of income. Have ways to cut spending if needed. Be extra cautious if retiring during periods of time where market valuations are extremely high, or interest rates extremely low. Keep adjusting your plans to changes in tax and health care law.


The 4% rule is a great place to start, and it will work the vast majority of the time if you follow the set of assumptions it is based upon, but realize its limitations for your personal situation and be flexible. There is a real cost to being more cautious and only you can decide if it is worth it.

*When applying the 4% rule you also need to take into account state and federal taxes. Although many people account for property tax because it is wrapped up in their mortgage payment many people do not account for state and federal taxes when planning. These will likely be lower for the early retiree but will be heavily dependent on where you withdrawal money from in retirement (traditional IRA’s, Roth, non-qualified accounts, etc.), how much you are realizing as income and the tax code of the state you live in. These are real costs that will have to be considered. The good news is the federal tax code is currently very favorable to the low spending early retiree and using the proper tools one can get their income pretty high with negligible federal tax. Don’t feel guilty; you have likely already paid significant tax on this money, especially if you were a high income W2 earner in your pre-retirement life. The bad news is if you live in a state with high state income tax this will probably be a significant expense regardless of your income. There are a handful of states with average income tax rates over 9%!








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  1. Thank you for an article that just makes sure we are keeping it real. I don’t plan on being an early retiree, but as you say, health changes can change that for anyone.

    All you can ever do, is do your best with what you have. Save where you can. Earn what you can. Plan. But don’t forget to live a little. If you aren’t living, you are dying.

    cd :O)

    1. Medical disaster is the biggest problem in my mind. I can handle lifestyle inflation, divorce, efficiency, etc. but I have not figured out a way to hedge against significantly increasing health care costs with a great deal of confidence. I’ve seen so many peoples lives turned upside down by health issues, probably doesn’t help that I’m in medicine.

    • RocDoc on December 30, 2016 at 11:27 am
    • Reply

    Excellent post and a lot of sobering information. I also have planned for a 3% withdrawal rate in retirement. Healthcare costs are the wildcard for me. It’s tough to predict how expensive health care will become as we get older and wait for Medicare eligibility age. Right now, my husband and I both have health care mainly paid for by work so we’re sheltered from the true cost. I think I’ll probably keep doing a small amount of self employed physician work at least for a little while longer even after I leave full time work. That way I can deduct the health care premium costs as a business expense.

    1. For every doc I know retiring health care costs are a big concern. Part time work later into life can be a great option.

  2. Nice breakdown of all the ways the 4% rule can break down. I have similar plans and thoughts on working a bit longer to build up that cushion. We should have > 33x current expenses in retirement assets before considering an actual retirement.

    There are too many unknowns in the 50+ years that we might have left on this earth. If I’m going to have any regret, I’d rather regret working a few years longer and having “too much” money than regret quitting too soon and not earning more at my peak potential.


    1. The truth is that for many physicians living a frugal life we can save up much more than 50% of our income and move from 25X to 33X (4% to 3%) in 2-3 years. Once you get to the 4% point much of your net worth growth is coming from the portfolio, not actual work income. If I was still massively burned out I would call it quits at 4%…but it is just too easy to take the extra step. I think I’m just justifying one more year syndrome 🙂

  3. Eye-catching headline, good post, great analysis, and thanks for the link!

    I have to admit that I was more than a little sad by the time I persevered to your “hopes & dreams” paragraphs. I’m feeling all better now… or I will as soon as the surf comes back up and the groms go back to school.

    People spend a lot of time trying to drive the 4% SWR to 100% success. I don’t think that can be done unless (as you pointed out) it’s called the 3% SWR.

    But here’s a contrary thought: people can go with a 90% success rate and then insure against the 10% failure.

    “Insurance” might be as simple as an annuity (maybe Social Security is all they’ll need) or a variable spending plan (like Bob Clyatt’s 4%/95% rule, Guyton’s guardrails, or Kitces’ ratchets). Retirees could allocate two years of expenses (8%) to cash for surviving the sequence-of-returns risk during bear markets. (Maybe we should name that “the Nords Safety Net”.) It also helps to keep an asset allocation that’s high in equities (>70%) although it also requires a much higher tolerance for volatility. That last is easier said than done.

    I don’t have simple answers to the failure rate. However people are working longer than they want to in order to end up with way more than they need, and after 14 years of financial independence I’m glad that I didn’t keep working for “just one more year”.

    1. Haha, thanks for reading Nords and you are welcome. I almost missed this comment as for some reason as it was caught in the spam folder!

      You bring up good points, although there is always a cost to safety. Every time I have looked at annuities and cash cushion as an option I am dismayed by the low expected return, especially for annuities while young. At my age they don’t even pay 4%. I feel like I am trading one risk for another, namely that inflation would absolutely destroy my safety net and leave me in a worse position.

      Social security is great and should not be underestimated. Hopefully it will not be too gutted by the time I get there! I love the idea of variable spending, although it will break down in times of extreme stress as I mention above.

      You are absolutely right though, nothing in 100%. It is easy to continue justifying one more year. At some point the fear is not healthy and one has to take the leap. You took that leap and are one of my early retirement heroes 🙂

      PS: Maybe I’ll come back to Hawaii and you can teach me to surf. If I don’t get eaten by a shark or otherwise perish we can have a couple of beers and talk philosophy 😉

  4. Thanks for a great post!
    I think people have too much faith in over-simplified rules that don’t apply to everyone.
    I also agree though that if you have to pick a rule, the Rule of 33 is closer to being realistic.

    1. Some people probably still feel nervous at 3% whereas others pull the plug at 6%, just a matter of understanding your risk tolerance. In my experience my cohort (physicians) tend heavily towards lower risk tolerance. Other groups (entrepreneurs, real estate investors) seem to have a much higher risk tolerance.

  5. Hey, HP.

    A well thought out post on the 4% rule. In my office I start with the 4% rule with clients and work from there. Increasing costs in the healthcare arena has the real risk of throwing a wrench into the retirement plan. It takes planning to make it work regardless your age at retirement.

    1. Agreed. At risk of sounding like a broken record, health care costs are difficult to deal with and they can spiral out of control. People who have never had to really deal with the health care system can’t wrap their heads around this.

    • Joe (arebelspy) on December 31, 2016 at 5:25 am
    • Reply

    “Although the 4% rule is a decent place to start, there are some serious flaws and limitations to be considered. I don’t see these discussed much in the FIRE community”

    …are you kidding?

    They potential pitfalls you mentioned, and many others, are discussed ad nauseum on every ER forum I’ve ever been on (, MMM, ERE, Bogleheads, etc.).

    It got so bad on the MMM forums (people starting threads all the time to complain about why the 4% rule won’t work) someone started a “Stop Worrying About the 4% Rule” thread to reassure people worried about the 4% rule.

    I suggest anyone worried after reading this article go read it to feel better, it has many excellent posts in it:

    The ultimate key to having your retirement finances be a success is flexibility. In spending, in making income, etc., be willing to be flexible. That’s about it. 🙂

    I wouldn’t have commented on this, but for thinking of all the people who will read this article and work so much longer to try and get to an unnecessary 3% WR (unnecessary in that it would have NEVER been required to be that low to be successful in the history of the US over the last 140 years).

    Hopefully they’ll instead read the above thread and go for FREEDOM. 😀

    Good luck, people. 🙂

    1. I had a feeling I would take some flack for this from you Joe 😉

      To be honest 90% of the threads and comments I see on the 4% rule discuss the technical aspects of failure. People discuss the difference between 98% and 99% success rates, argue about the best Monte Carlo simulation to use or how variable spending will increase success rate (it does of course). These are all important but less so than the human factors like getting MS and divorced at the same time, or having a child with expensive special needs the same year health insurance subsidies are gutted. I concede I haven’t read every thread out there, or even a majority but I don’t feel the topics I wrote about in the 5000+ words above are discussed in a ‘clean thread’ that is easily readable (or at least one that I’ve discovered). People talk Ad nauseam about the technical details, but less about the ability to stick with the 4% rule which is what this post is all about really. I wanted to put this all in one place so people can know my thought process and then make an informed decision about what is right for them. Feel free to post a link to this article on any forum thread where you feel it may add value to the discussion, as I would love to see many of the topics above discussed. I understand many will give me grief for my views but I can take it 😉 I would love to hear from people who have gone through some of the issues above and see how they have dealt with them.

      “The ultimate key to having your retirement finances be a success is flexibility. In spending, in making income, etc., be willing to be flexible. That’s about it. ?”

      I agree 100% with your statement here, and that is the conclusion I came to. My point is there are things you can not control for that can stress the limits of flexibility and one needs to be aware of this.

      Lastly, the intent of this was not to scare people or worry them. I think I was quite positive at the end discussing why I think the 4% rule will work for most people. As you know, I seek to maximize my freedom and encourage others to do the same. There are different types of freedom though, not just freedom from working a job. Earning money while you are young and healthy at a rate you will not be able to ever replicate again (many physicians are in this boat) creates freedom and opportunity later in life. Knowing that you can inflate your lifestyle 20% if it strikes your fancy is a form of freedom. Knowing you will probably be able to withstand a major catastrophe in your life and not be forced to go back to work is freedom. Not having anxiety about money is freedom. The further I get in life the more I realize I can not predict my needs or wants too far in advance. For me using 3% SWR maximizes my freedom. For a guy like MMM continuing work until 3% would probably be his personal definition of Hell.

      As always thanks for your comment, they have the side effect of making me write 🙂

      • Ron Cameron on July 31, 2017 at 6:36 am
      • Reply

      Joe, I think part of the problem on those forums is there’s TOO much “information” (noise). Like, 975 comments on the MMM/4% forum you mentioned. I’ve read many, many blog entries on the 4% rule but the forums get way too excessive to efficiently read through them.

      There are many, many people touting the “4% Rule” without digging into the weeds to see what it really entails. And very few ever mention what it actually -feels- like to see your account go down by 30-50%. Many, many people freak out and pull out of their stock investments at that point (which blows the whole plan up). Even some of the best bloggers have said “throw it into an index fund and pull 4% forever”, which would have be catastrophic if you retired in 2000.

      I think The Happy Philosopher put it best: “To question it is considered heresy by some”. Well, we NEED more calm, logical questioning and discussing of all these things. There is a lot of bad, wrong, and misleading information out there. I’ve posted facts (not opinion) on blogs only to have it be laughed at (and even edited to go inline with the original author’s ideas!) as it went against “conventional FIRE” wisdom. When we laugh at or edit facts, it’s not a good situation! Calm, deeper discussion like this post is ALWAYS a positive in my book.

  6. Really good perspective here. Healthcare is the biggest wild card for most people, and I’ve seen the way it can add up to exorbitant levels in my own family for in-home care, Alzheimer’s care, dialysis, etc. Definitely worth planning on some high end-of-life expenses.

    I love your point about efficiency and the impact of side income. 15k of side income can be an enormous risk mitigator if you’re spending only 30k a year. This also lends itself to the possibility of a more immediate “semi-retirement”: once you hit a net worth corresponding to a 4 or 5% WR, you can phase out of full-time work at your discretion and choose more part-time work or side hustle projects.

    Between that flexibility and other “upside” scenarios not accounted for by the 4% rule (like Social Security income), I’m still comfortable with it as a rule of thumb — but obviously it’s not something we can count on blindly.

    1. Thanks Matt. There is a pretty complicated interplay between efficiency and frugality, percentage of ‘necessary’ expenses, and ability to change income percentage that all push and pull of each other to some extent. I absolutely love the idea of part-time work (for obvious reasons) and side hustles. Keeping an income later in to life solves a lot of problems. SSI is also a huge help for people, especially if spending needs are modest.

  7. Excellent post and a needed perspective that is missing from the FIRE community posts on SWR. As I’ve commented in a few posts, another important aspect is on predicted future investment returns which many experts consider to be a bit lower going forward. The 4% academic studies were based on US stock market returns which were unusually high the last 100 years compared to the rest of the world. For example, Wade Pfau has looked at this using global stock markets and found that 4% would have failed in many cases. 3% is a much safer SWR considering the points you covered and a bit more conservative expectation for future investment returns. Plus, US stocks are quite highly valued right now so an early retirement now on a 4% withdrawal rate and mostly US stocks feels very uncomfortable to me.

    I still believe 4% is still likely to work but I am much more comfortable with 3% as general advice to others. Personally my plan is based on an uber-conservative 2% or lower since I also have a high income which will likely be gone for good once I retire early. I’m likely to regret cutting off this income/savings stream too early if my plan is too tight. As you indicate, the money we are saving is for our freedom. What is the point if our plan is so tight we could become very restricted if one of the reasonably probable things happen that changes our expenses by $5,000-$10,000 per year? The future me is unlikely to be really mad if I work a few more years and have more freedom for the rest of my (hopefully) long life. But he’ll be pissed if my future freedom is restricted because I stopped working a few years too early. Thanks for the article and contribution to the FIRE community. Yours is a needed voice!

    1. Thank you Micheal. I purposefully didn’t go into the weeds with analysis of the technical aspects of the 4% rule. I have read many conflicting opinions on the topic and my simplistic solution is just to average them together and accept that the 4% rule will work with *almost* 100% certainty for the set of assumptions it was generated from (30years, no fees, etc.). I am just not smart enough to analyze all the data myself or understand the math and probabilities that lie behind those analyses. Pfau is a brilliant guy, but I think he is a bit too conservative. If I stack his opinions upon my concerns then I probably can never retire 😉

      2% seems overkill to me, but again everyone has their own interpretation of the data and risk tolerance. For me personally going to 2% would lengthen my career longer than I would like. It will be really tough to turn off that income stream though.

    • Hatton1 on January 1, 2017 at 4:59 am
    • Reply

    This is a great post! The reason that I continue to work part time is to continue to own a business so that I can purchase health insurance through my state medical society. They cannot sell individual policies any more thanks to ACA. I encourage any one thinking about retiring prior to 65 to check out ACA rates for 50s and 60s. If you are healthy you will be upset. I reduced my stress by retiring from ob but continuing to do gyn 3 days /week. I think this decreases the sequence of returns risk and as mentions decreases health insurance costs.

    1. Sounds like a great plan H1. I was absolutely shell shocked looking at health insurance pricing. The other edge of that blade is the increases in price have been accompanied by decreases in quality. In order for my group to keep health insurance costs reasonable, our deductible and out of pocket costs just keep going up. This has the effect of cost shifting from the healthy to the sick. The ACA tried to cost shift back to the healthy, but I think that trend is over for a while.

      Continuing to work part-time and build an asset base is a great way to mitigate sequencing risk. That is my strategy. I’ve known several docs who have somehow managed to eliminate call and go part time and it has been a game changer. I loved delivering babies in medical school (except for that one me and the anesthesiologist had to deliver ourselves because it came out so fast!) but I couldn’t imagine doing it every night in my 50’s or 60’s!

    • Curt Morrison, MD, FACC, CFA on January 1, 2017 at 9:17 am
    • Reply

    I second all of your concerns, especially regarding healthcare costs.

    It’s important to note that past U.S. performance is no guarantee of future results. The 4% rule is apparently the 3.05% rule for British citizens, the 2.18% rule for Spaniards, and the 0.93% rule for the French. The news is much worse for the Japanese. See:

    Further, U.S. stock and bond valuations are extremely high now, and this predicts correspondingly low returns, even if future U.S. growth equals past growth.

    This blogger published a very helpful series of articles on safe withdrawal rates using original data:

    Unless/until valuations decline substantially I won’t feel comfortable with a SWR above 3%, and then only if there is ample fat in the budget.

    On the other hand, I can offer optimism regarding the return to work. I left cardiology at 41 yo with no plan because of severe burnout. I read finance and accounting books all day because that was interesting. That led to an unexpected job as a healthcare equity analyst 2 1/2 years later. I earned less money, but it was still six figures. You can probably expect to do better than minimum wage work.

    Much later I developed a severe illness out of the clear blue sky. (I had always been fit and trim and assumed I’d grow old like Jack LaLanne. Not in the cards.) I was misdiagnosed by the Director of Cardiology at a community hospital, and I’m fairly sure I’d be dead now if not for my cardiology training. That near-death experience renewed my interest in medicine and I returned to practice after a 13 year absence. It can be done.

    1. Thanks for the articles Curt, I especially enjoyed the earlyretirementnow series on safe withdrawal rates. Excellent stuff. I’m not smart enough to analyze all the financial technical factors that may disrupt the 4% rule and I have seen it argued from both sides – too risky or too conservative. Since I am pretty wasteful and ridiculous in my spending compared to many in the FIRE space I feel like 3% could really not fail me in all but complete catastrophe – and in that case no amount of savings will be all that helpful.

      I think your story about going back to work in medicine after a long hiatus would be inspiring to many. You should consider writing about it an publishing it somewhere (maybe you already have).

      You are correct in that there are plenty of opportunities for physicians to make pretty good money consulting or leveraging their knowledge and skills in other fields. I have certainly thought about this as a possibility after I transition away from being a physician.

    2. Thanks for the shout-out! Very much appreciated. And thanks to The Happy Philosopher. This is an excellent and very comprehensive article. Agree 100%. Cheers and Happy New Year everybody!

  8. Excellent post THP! To avoid adding many links that confirms how much we agree with each other, I thought I will leave this comment.

    Your important post expands on the real-life risks that no SWR or DGI strategy can truly claim to overcome. A retiree is, unfortunately, faced with probabilistic choices (like SWR) in a deterministic world of unpredictable outcomes. Even without major tail-risk events, I agree entirely on the ‘efficiency’ part. My article covers this point using the concept of Marginal Utility:
    I have another article that should post later this week on the factors why FI is mandatory and RE is optional that you may like. I believe that some “inefficiency” in expenses (on which our FIRE is based on) is actually good – it contributes to our life happiness (especially if the spending adds to your convenience in lifestyle). Looking at an inverted way, it also gives you an expense area to cut should the need arise during severe bear markets. You can cut the fat, but not the flesh. Agree with you on child care as well – I believe in sensible frugality, which I cover in one of my articles.

    Though healthcare is cheaper in many parts of Asia (one example I cover in my website), I also apply a realistic lens here: If you haven’t lived abroad for considerable time when you were younger and able, the idea of packing up at age 60 to an exotic locale that you know nothing about just because the healthcare costs are low is simply a pipe dream:

    Looks like we agree on many points. Thanks for this well-written article.

    1. Thanks for the comment TFR. I love frugality as it is such an elegant solution to financial independence and freedom, but most of us are not happy taking it to the extreme. People that retire at 30 on maximum efficiency are the outliers. Most people I know just can’t sustain that kind of lifestyle. It feels like deprivation to them.

      Everything we do in life is a cycle, including our attitudes and habits. We naturally drift from frugality to inefficiency and back again.

      I agree with you geographical arbitrage is not practical for everyone. It takes a certain personality type to really be happy in a situation like this. I like your suggestion of giving things a test run while you are young and healthy to see if it is feasible.

    • David Ann Arbor on January 13, 2017 at 6:47 am
    • Reply

    Wow what an excellent blog post!!
    I think a lot of early retirees have a side gig income, so the 4% SWR is more theory than practice for them.

    1. Thank you David. Absolutely agree with you that having a side gig changes everything.

    • VagabondMD on June 21, 2017 at 8:25 am
    • Reply

    This is fantastic! Somehow, I missed it the first time around. Lots of really great pearls (and pitfalls). I will have a guest blog exploding (literally, sort of) the many ways kids can derail early retirement dreams.

    In general, people (especially young people) tend to extrapolate the present to the future, indefinitely. As an example, I ran like a gazelle in my 20’s and 30’s and thought I always would. I ignored the advice of the people around me in their 40’s and 50’s who were former runners. I thought they were just slackers, fat and lazy. Well, I am in my early 50’s and my knees are creaky and my right great toe is arthritic, and I rarely feel like a gazelle…more like a running donkey, if you can imagine that. I think I look like that, too, with all of the adjustments to my stride and various compensations.

    As for me, I am now targeting a 3.33% SWR (maybe a hair higher if I have to add fancy Hawaiian shoes to my budget. 😀 ). This is knowing that we have the health care piece likely solved and our early retirement is virtually geriatric in the FIRE community, targeted to age 55.

    1. Thank you sir, much appreciated. Kids can be as cheap or as expensive as you want them to be, but you are right, they can complicate finances greatly. One thing I have found to be almost universally true is that physicians think it is their duty to pay for their kids entire educational expense at any institution of learning for any time period. That is expensive.

      You point is well taken. Extrapolating present to future is guesswork, and errors can compound greatly over time.

      My “fancy shoe budget” is worth at least a 0.001% reduction in my SWR 😉

    • CanadianLawyer on July 24, 2017 at 7:03 am
    • Reply

    Hi HP,

    I found your blog through MadFientist and I have read through many of your posts. I am curious on your opinion of the 4% rule if healthcare costs are not an issue. As a Canadian, healthcare is for the most part covered by the government through taxes and I do not see that going away anytime soon (that would be political suicide). Would this make the 4% rule safer? I am a lawyer so I tend towards lower risk tolerance as well. Still about a decade off from early retirement, but would greatly value your opinion on this. Thanks!

    1. Thanks for the question. Health care in the United States is the one externality that I have not been able to wrap my arms around. If health care costs are a known entity the 4% rule just got a whole lot more robust. I feel I can hedge against all other threats. It is worth going through the mental exercise of looking at worst case scenarios though. Stress testing your plan will make the unknown less scary.

    • Ron Cameron on July 31, 2017 at 6:53 am
    • Reply

    Thank you so much for this post! It’s refreshing to have a level-headed counterpoint/addendum to the “facts” of FIRE. The moment that everyone says “Of COURSE you can (xyz)”, questions should be asked. You’re only the second person I’ve read that brought up the point that if you’re living bare bones to begin with and need some cushion, you might just be screwed. I’m a big fan of being prepared, and that means planning for the what if’s. Excellent job of remind us of them. Sometimes everyone (myself included) gets so caught up in the shock and awe of early retirement that we forget to question and investigate things.

    1. Yeah, I’ve known people in retirement that hit “frugal fatigue” and wanted to live a little and loosen the purse strings but were confined. It can result in bit of bitterness. There are a lot of knives in the air to juggle when considering retirement, and early retirement has the unfortunate side effect of compounding errors in our calculations.

  1. […] « Dangers of Relying on the 4% Rule in Early Retirement Scenarios […]

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