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I DID ACHIEVE financial independence and retire early—if you count age 64 as early. My friend Jose, a true believer in FIRE, or financial independence-retire early, celebrated his retirement at 44. That took a steely nerve that I lacked, plus I had big college bills to pay before retiring.
One big challenge of FIRE, of course, is that your savings might need to last 40 or even 50 years. Vanguard Group recently published a research paper to help FIRE followers go the distance. It includes major tinkering with the 4% rule, which was designed with only a 30-year retirement in mind.
Under the 4% rule, you withdraw 4% of your savings in the first year of retirement, then raise that dollar amount by the rate of inflation in the second year and so on thereafter. This approach worked 82% of the time over a 30-year period with a 50% stock-50% bond portfolio. If retirement gets stretched to 50 years, however, the success rate fell to a discouraging 36%, Vanguard’s researchers found.
To improve the odds, they suggest FIRE followers try these four steps:
There are no automatic inflation adjustments under this dynamic spending model, so the shoe would pinch if higher inflation turns out not to be “transitory.” Still, the concept follows human nature: Tighten your belt when balances are down and spend a bit more when they’re higher.
Does this mean the 4% rule is repealed? Not really. FIRE followers who adhere to all four steps could start with a 4% withdrawal rate, the researchers found, and have at least an 85% chance that their savings would last a full 50 years. Your results may vary, of course. Good luck, Jose.
What FIRE retiree with a 50-year time horizon (or 60+ years like Mr. Money Mustache, who retired at 30) is going to hold 50% bonds? That’s crazy.
I think a much better long-term strategy than using a fixed % involves using some version of a “required minimum distribution” which is an actuarially adjusted annual amount. This adjusts for age, life expectancy, and prior returns. It still doesn’t adjust for variability in future returns, but that is unknowable in any case.
To do this, you treat your whole balance under consideration like it was in an IRA, look up the RMD in the actuarial table (which is available for younger ages also) and take that as your target amount.
I think it is worth noting that the Vanguard analysis used the following assumptions.
We use forecasts from the Vanguard Capital Markets Model® to estimate future returns. The VCMM’s 10-year median return forecasts are 4.02% for U.S. stocks and 1.31% for U.S. bonds—both below the historical averages. Its inflation forecast is 1.58%. Accounting for inflation, the 10-year VCMM median forecasts of real returns are 2.44% for U.S. stocks and –0.27% for U.S. bonds. These forecasts reflect the “initial conditions” (stock market valuations and real interest rate and inflation expectations) that prevailed in December 2020.