Have you ever worried that you might run out of money during your retirement?
I find it frustrating that when I read about this topic, the financial gurus and standard financial education all say different things.
But perhaps one of the most disheartening things of all, is that they often say people need to save WAY more than they actually do.
I’ve run retirement calculators and read books and articles that say I will need at least $8 million or more to retire.
$8 million?
That number feels completely out of reach for a majority of people.
And if I went by that, I’d likely feel like I would never actually get there.
But the more I have been reading articles and books recommended within the FIRE community, it really doesn’t sound that complex.
Hint, the financial industry wants to make everything seem complex and out of reach, so that we pundits will simply believe the lie that we have to hand over our money to them in order to take care of our finances.
Instead, I am a firm believer that no one will care more about your money than you, and that actually with some learning and patience, we are all completely capable of managing our money ourselves. But I digress.
Now, back to the topic at hand. Figuring out how to not run out of money during retirement!
One good way to ensure that doesn’t happen is to follow the 4% rule.
What is the 4% Rule?
It’s pretty simple. The 4% rule is a frequently used rule-of-thumb used to determine how much someone can withdraw from their retirement account each year.
So essentially, you will need to have 25X your annual expenses saved to be able to take out 4% of your balance every year.
100% divided by 4% is 25!
So if you wanted to be able to withdraw and spend $50,000 per year during retirement, you would need a nest egg in your retirement accounts of $1,250,000 to be able to safely withdraw $50,000 (4%) of that each year.
By following this approach, you have a very high probability of not running out of money during a 30-year retirement according to the rule.
So if you retired at the traditional age of 65, you’d be able to fund a 30 year retirement through age 95.
How Reliable Is it?
In 1998, three professors from Trinity University conducted a study (known as the Trinity Study) to try and determine safe withdrawal rates from retirement portfolios.
They looked to see what would happen at various withdrawal percentage rates with different types of portfolios (meaning accounts that contained a different mix of stocks and bonds).
They looked at 30 year periods and also made adjustments to account for inflation.
After looking at all types of portfolios, they found that 96% of the time, the portfolio remained intact at the end of the 30 years.
Meaning, there was only a 4% chance of this strategy failing and leaving you broke.
For a majority of the scenarios they ran, not only did people not run out of money, but their money had actually grown substantially during that time.
Pretty incredible right?!
To read the actual study is pretty dry and if you aren’t really into reading about finances, you will likely be bored to tears.
To Sum It Up
One of my favorite authors and giants in the FIRE community is JL Collins who wrote one of my favorite books The Simple Path to Wealth. He wrote an awesome post about this and highlighted some great summary points which I highlight below:
- If you are ultra conservative and very scared of running out of money, a 3% withdrawal rate had a 100% success rate.
- The mix in your portfolio is extremely important. You cannot have all bonds and expect for this to work. You need to have a heavy concentration into stocks. At a minimum, it should be a mix of 75% stocks/25% bonds.
- Withdrawing 7% or more each year will most likely mean you will run out of money before you are retired (aka my nightmare).
Additional Resources on This Topic
If you want to read more on this rule and the findings, I’d suggest some awesome (way more in depth articles) here:
Here is the actual Trinity Study (which includes all of the data/charts for examples)
“How to Retire Forever on a Fixed Chunk of Money” – Mr. Money Mustache
“Safe Withdrawal Rate for Early Retires” – Mad Fientist
“How Has the 4% Rule Held Up Since The Tech Bubble and the 2008 Financial Crisis” – Michael Kitces
