Our friends at Our Next Life recently got us thinking (as they often do!) about the core tenets of the financial independence movement – the “commandments” of early retirement.
It’s a bit like a religion, isn’t it?
In the beginning, there was the revelation. Through their Word, the Gods of financial independence revealed themselves and their will to the world:
The Book of Dominguez and Robin: “Take back your life by changing the way you relate to money.”
The Book of Charlton: “You don’t need to earn six figures to retire early.”
The Book of Stanley: “The truly wealthy don’t live on Park Avenue; they live next door.”
Financial Armageddon will come, they preached. Millions of consumer drones will reach retirement age and find themselves with nothing. Will your nest egg be large enough come Financial Judgment Day?
Some rejected the financial gospel, but others saw a brighter future without frivolous spending and were “born again” into a new life of frugality and savings. They swore off sinful habits, like daily lattes and high-interest credit card debt. They opened investment accounts. They grew their incomes.
Denominations emerged among the believers. There were the indexers, the dividend investors, the nomads, the frugal weirdos, and the big spenders. Online houses of worship were formed. Some groups were evangelicals, proselytising to all and scolding the unenlightened:
“Downsize thy suburban dwelling, sinner!”
“Cease thy restaurant dining, glutton!”
“Sell thy luxury SUV, heathen!”
Other communities were more the like Unitarian Universalists of the world, accepting of all lifestyles and believing that “it’s fine to do whatever you want with your money, so long as you are doing it deliberately.”
Regardless of the approach, they all followed a similar set of commandments, including the teaching of the Holy Trinity:
“Thou shalt live by the 4 percent rule.”
By mainstream standards, you might call the FIRE community rebellious, subversive, or against-the-grain. But like so many other groups espousing countercultural values (from hippies to hipsters), we sure tend to think about things the same way.
The 4% safe withdrawal rate might be the best example. Based in the research of the Trinity Study, the rule states that annual withdrawals of up to 4% are extremely unlikely to exhaust a portfolio of stocks and bonds – with a 98% success rate for a 75% stock portfolio over a 30-year period, based on 1926-2014 data.
The rule has become the foundation of early retirement planning. With the exception of those with other meaningful sources of passive income (like pensions or rental properties), it’s at the core of seemingly every early retiree’s financial plan. Some believe 4% is too aggressive in today’s world – interest rates are at historic lows, market valuations are at historic highs, and can the world really sustain the level of growth we’ve seen this past century? – but very few are taking the opposite approach and planning on withdrawing more than 4%. We’re a risk-averse bunch.
Which leads me to my confession – my answer to the question Our Next Life posed about the ways in which we reject the FIRE “commandments”:
We’re not holding ourselves to the 4% rule.
Not right now, anyway.
I’ve written in the past about how I’m financially independent alone, but we may not be as a couple. We could have worked several years more to change that, but we wanted to travel now. We wanted to see the world. There’s a price to being too conservative. So we pulled the plug, 4% rule be damned!
To support our travel spending, I’ve been side-hustling more aggressively, but I recently decided to cut off my biggest source of income. Without that cashflow, I’ll be wading into a new world – finally making the real conversion from “savings mode” to “spending mode.” As we travel over the next few years, my withdrawal rate to cover two people’s expenses might be 5%, 6%, or maybe even more. The horror!
I’m not worried about it.
There’s plenty of reason to be optimistic. If we use the Trinity Study as a baseline, a 5% withdrawal rate was still largely successful (77% over 30 years). 6% withdrawals survived the majority of the time (57%). Even 8% (whoa!) survived one-third of the time. I believe many of the arguments for a lower withdrawal rate in today’s environment, but I still find the historical data encouraging.
More comforting than the Trinity data, though, is the vision we have for the coming decades of our lives. We’ll learn new skills and pursue new hobbies, some of which may generate an income. We’ll take on new side hustles. Daniel will likely work full-time again, at least for a while. We’ll probably settle geographically at some point, reducing our travel spending.
We’ll make it work.
If things really go wrong – if worst really comes to worst – I’ll take an office job again. Is that really so bad as a “worst case” scenario, working for a few more months or years in a cushy professional job? For some people, the answer is “Yes, never again!” – a legitimate response if that’s your preference. To me, it’s an acceptable risk.
In my view, this is greatest upside of pursuing financial independence and early retirement at a young age: I can tolerate more risk.
If I were 20 or 30 years older, I wouldn’t be comfortable with an asset allocation of 75% or more in stocks. A major market crash could wipe out the majority of my savings – an unacceptable scenario at traditional retirement age. Instead, I can invest aggressively now and likely benefit from higher average returns over time.
If I were 20 or 30 years older, the prospect of returning to work 5 or 10 years from now would be daunting. I might not have the energy for it. I might not be able to return at all. Age discrimination is real. Instead, I feel reasonably confident that I’ll have the skills and energy for it, if it really comes down to that.
If I were 20 or 30 years older, I might not have the energy to pursue full-time travel like we’re doing today. I might not have my health. Hell, I might not be alive at all! You name it – cancer, heart disease, diabetes, Alzheimer’s – it all runs in my family.
You know what’s scarier than an 80% portfolio survival rate over the next 30 years? An 80% actual survival rate over the next 30 years. It’s not a pleasant statistic to think about, but there’s a meaningful chance one of us won’t live to traditional retirement age. Instead of saving all our dreams for the future, we’re living some of them today.
The 4% withdrawal rate is a great guideline for estimating a savings target, but for us, it’s far from a commandment that must be followed every month.
How important is the 4% rule in your plan? Are we off-base? Overly optimistic? We’d love to hear your thoughts.