Is The 4% Withdrawal Rate Enough To FIRE?

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What’s going on peeps!

Whilst on the bus earlier today, I was reading a FIRE blog which is a personal fave of mine, called Young Adult Money.

I think the blog is predominantly about young adults and money.

David does a fantastic job with his blog, and I thoroughly suggest you go through his other posts – they’re pretty awesome!

Actually, I was reading up on their latest post on Basics of FIRE: Financial Independence Retire Early.

For everyone who wants to know what FIRE is and what it’s about, this post provides a great starting point.

The post also goes through the well-known concept of the 4% withdrawal rule.

What’s the 4% Withdrawal Rule?

The 4% rule is based on The Trinity Study, which famously depicts the safe withdrawal rates from retirement portfolios which grow or shrink irregularly over time.

Image result for growing and shrinking gif
“I can handle my portfolios growing OK, it’s when they become Antman that I start to get worried”.

Basically put, it states that with a 4% withdrawal rate, you could withdraw 4% of your investments at the beginning of your retirement, and you’d have a very good chance of not running out of money – because your portfolio would still be growing over time.

Another way to think of it is in order to FIRE, aim for 25x of your living expenses.

So if you spend $4,000 per month of $48,000 per year, you would require $48,000 x 25 = $1,200,000 in investments to retire.

What’s Wrong With It?

Nothing is wrong.

In fact, it is a very widely acceptable measure (probably most important metric) in the FIRE community.

However (uh oh, here it comes), the post goes on to say that:

“The logic is most likely sound for traditional retirees retiring today, who on average are retired for 30 years or less. But for early retirement, with a much longer timeline and so many more unknowns, I don’t believe 25x is quite safe enough.”

David agrees.

And I agree with David.

MrsFrugalSamurai agrees with me.

Therefore David agrees with MrsFrugalSamurai?

My logic is most likely not sound.

Image result for head scratch
Even George Double U is confused.

Logic or not, the biggest bug bear of the 4% rule, is healthcare.

Healthcare Costs…

Are bloody rising.

This is an undeniable fact.

In fact, they are rising at such a rapid pace, that 1m Aussies put off seeing their doctors.

And this article from the SMH last year states that:

“The latest health spending data from the Australian Institute of Health and Welfare… shows patients spent $3.9 billion on out-of-pocket hospital expenses in 2017-18, up $560 million or 17 per cent over the financial year, and quadruple the amount spent a decade earlier”.

Oh and look, here are private health insurance increases as well…

“The cost of private health insurance is set to have the lowest growth in eighteen years, but the average premium increase will still be twice the rate of inflation“.

What’s more, the increases in healthcare comes at a time of flat wages growth.

Life’s not fair (sad face).


Yep, I agree.

And I think this crucial point is often missed with FIRE participants and those who have FIRE’d already.

Call me controversial but I don’t think enough people have factored in the rising cost of healthcare (and how much their health costs may be as they get older) when they work out their numbers.

We are all living older as technological and medical advances result in more cures and drugs becoming available.

Image result for drugs
It’s…it’s for medicinal use Mum… I have er… the flu”.

It’s OK to think you are going to live on $25,000 as a young, healthy adult. But in a few more decades… who knows?

“Shrugs shoulders and cocks head to the side”.

What to do?

The simplest solution I can think of, is to fudge the numbers.

By that I mean, don’t use the 4% rule, or 25x your living expenses.

David’s post suggests that “…Your scenarios should range from a withdrawal rate of 2.9% (35x expected annual expenses in retirement) to 4.0% (25x)….”

Actually in our household, we go even further…

The Frugal Samurai’s Withdrawal Rate

Lo and behold! I’ve actually posted on this before… on June 27, 2018.

7 Thoughts on How to Approach FIRE (Part 3)

Wow! Would ya look at that.

It was back on the old site design and layout… sigh, gets me all nostalgic and sentimental just looking at it.

Anyhow, in this post, I wrote:

“With the increase in living standards and the fact we are living longer, means that the bills and expenses would surely pile up as we age.

Hence I’ve gone with a figure of $150,000 inflation-adjusted in passive income.

At a withdrawal rate of 2.5%, this would mean around $6m inflation-adjusted assets to achieve this”.

That’s right.

Our withdrawal rate that I base our FIRE numbers off is on 2.5%.

Which I think should have us covered in the long run.

Final Thought

I think anyone who is on the path to FIRE should be applauded.

I mean, how sweet would it be to have F U money. I’m grinning like a Cheshire Cat just thinking about it.

The thing that’s great about the FIRE community is that everyone runs our own race, with our own tools and path to get there, yet support and encourage each other along the way.

All I’m saying is, don’t be too short-sighted but have the foresight to see what may arise not in your 30’s or 40’s or 50’s… but in your 70’s, 80’s and (with increasing likelihood) beyond.

After all, I’ll always remember my Mum’s cherished advice:

“The 1 before the 0’s is the most important number, without the 1 you have nothing. The 1 is your health”.

And I agree with Mum.

So does that mean Mum agrees with Dav… OK OK I’ll stop now.

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  • Tyler Weaver

    I agree with you, the 4% rate seems most sound for typical retirees. I am not sure how healthcare costs work in AU, but in the US the amount you have to pay for the same coverage goes up substantially as you age. Even without considering that healthcare is going up faster than inflation, it would probably be a good idea to at minimum plan for the expenses in today’s market for coverage when you are older.

    The other thing I see getting glossed over commonly is planning for retirement with today’s numbers. So you want to retire on 4k a month today.. Well in 10 years that is 5.6k with a 3.5% increase for inflation.

    • The Frugal Samurai

      Hi Tyler, sounds pretty similar to Oz, although ours would be more on the private health insurance side of things. The public system covers many things as in “free” in the sense we have what’s called a Medicare system (kinda like universal healthcare). As for what you say about planning on today’s numbers… that is SPOT ON. I don’t think enough emphasis has been given to that point. I mean sure retiring at 25 on $25k is a grand plan to have… but that $25k as you rightfully pointed out, will be eroded by inflation when you’re 75. Very astute of you.

  • The Family Escapes

    I agree with you, and David, and… ok, stop 😃

    I just wanted to add a point which I discovered after retiring.
    Before, I read lots of research and was convinced (and still am) that 4% is a safe withdrawal rate.
    Then, I retired!
    ..and discovered that what is (statistically) safe does not necessarily FEEL safe. Withdrawing 4% for me feels like a bit of a risk, even though I’m sure it will be fine in the long term.
    So I decided to consider 4% an upper limit, but in reality I’ll try and stay well below it. Having said that, early retirement is fantastic!

    • The Frugal Samurai

      You lucky duck! What are you doing in early retirement then, go on – make us all jealous! As for the 4% rule… yeah I think the “true” number is probably between 2-4%… whatever works (and continues to work).

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