You’ve probably heard of the 4% rule when it comes to safe withdrawal rates.
If not, here it is in a nutshell:
You can withdraw 4% of your portfolio each year and not run out of money.
i.e. for every $1M you have, you can generate $40,000 per year in passive income.
The problem with the 4% rule
What happens when the market has an off year and your $1M is now $800,000? Should you take 4% of $800k ($32,000) or keep taking $40,000 (5% withdrawal rate)?
What if 2008 happens again and you have 4 years below the high water mark?
hmmm
The problem with the 4% rule for Financial Zen (aka fatFIRE)
The problem with the 4% rule if you retire in your 40’s is that you’ve got 60 years to make your money last.
The original academic study that came up with the 4% rule assumed a “normal” retirement age of 65 and a funeral at 90, so you only needed 25 years.
And that’s why many in the fatFIRE community assume a 3% SWR. After all it’s better to play it conservative than be broke at 90.
Why Financial Zen uses a 5% SWR
Our two bucket passive income method is rather unique.
Instead of indiscriminately withdrawing 4% (or 3%) from a 60/40 portfolio (60% stocks / 40% bonds) like every other retirement system, we break it down into the individual pieces.
You need some money to pay the bills and take vacations (that’s the bond bucket).
And you need some money to replenish the money you spend (that’s the stock bucket).
Each piece has enough of a buffer to survive inflation and slow growth or no growth years.
It’s been improved upon greatly over the years, but the foundation was laid 14 years ago and it’s been back tested to even survive the great depression.
So don’t you worry. When you’re time comes and it’s time to turn your savings into income, we got you covered.
