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The Fundamental Problem with the 4% Rule for Early Retirement Isn’t the 4% Rule

The 4 percent safe withdrawal rate, short-handed as the “4% rule” is the cornerstone of most discussions about retirement planning, along with its inverse, “25x” (the idea that you need to save roughly 25 times your annual spending, and then you’re good to retire forever on that spending level).

The 4 percent rule has been discussed and debated so much that we can all practically recite the details of the study that brought us the rule, right?

Trinity study… 75% equities, 25% bonds… Spend 4% of your investable asset portfolio each year (not your total net worth)… 30-year time horizon… Monte Carlo simulations… 100% rate of backward-looking success… 

Of course there are other analyses that show lower rates of success over the same period, arguing for the 3% rule instead if we hope to get something close to a guarantee that we won’t outlive our money. And there are the endless debates about what “spending 4 percent” actually means, how inflation factors in, etc. This will go on forever.

But here’s the thing about the whole discussion: Debating whether it should be the 4% rule, the 3.5% rule, the 3 percent rule — heck, the 1 % rule — all of it misses the point.

It especially misses the point for early retirees, who have much more than a 30-year horizon, if we’re all lucky — perhaps several decades more. The 4 percent rule is likely sound mathematically, as explained eloquently by Michael Kitces on a recent Mad Fientist podcast, and it could very well hold into the future, despite dire predictions about future economic growth and market gains.

The specific percent isn’t the issue. Any percent isn’t the issue.

The fundamental problem with any “safe” withdrawal rate is the underlying assumption of level spending over time. 

And you don’t have to be planning for dirtbag years followed by larger-living years, as we are, to be looking ahead to increasing costs in the future. You could be the most disciplined budgeter of all time and still need to plan for your spending to change over time.

Let’s take a look at why.

This is the start of a series that will explore Social Security and Medicare in the context of early retirement. Today’s post dips a toe into the subjects, but we’ll jump all the way in next week. 

The Fundamental Problem with the 4 Percent Rule Isn't the 4 Percent Rule // Early Retirement, financial independence, safe withdrawal rates, level spending assumptions, inflation, expenses that outpace inflation, Medicare expenses, Social Security and pensions that don't keep up with inflation -- the list goes on!

Let’s talk about spending level in terms of a “basket,” the same way the Bureau of Labor Statistics talks about the “basket of goods” that define the consumer price index. Let’s assume we all want to live a lifestyle that feels about the same year to year — living in the same home or in similar-style homes, being able to eat the same types of food year to year, being able to travel and spend on entertainment similarly, buying about the same amount of stuff.

The idea of level spending over time assumes that, if the markets return historical averages, then the 4 percent rule or [insert your chosen safe withdrawal rate here] will beat inflation and allow you to keep living a comparable lifestyle year after year, keeping everything in your lifestyle basket the same.

Which could be true, except for three hugely important factors:

  • Several big categories of expenses increase in cost higher than the rate of inflation,
  • Social Security and many public and private pensions don’t keep up with the rate of inflation, and
  • Health care costs while on Medicare are much higher than most people anticipate

Let’s break those down.

Many Costs Increase Faster Than Inflation

It’s not one or two expense categories that tend to beat inflation, and we’re not talking about outpacing inflation by a percent or two. We’re talking about sometimes massive discrepancies between the rate at which your money will grow and the cost of essential needs, eroding your purchasing power over time, and depleting what’s in your basket if you assume level spending. Let’s look at the biggest costs that outpace inflation. (And for reference, over the past two decades, inflation has averaged out to 2 percent a year, which is normal in a historical context.)

Health care — Health care is top of the list, both because it has outpaced inflation for more than a decade, and because it is a major and unavoidable expenditure for all of us. While health care cost increases have moderated in recent years, they are still expected to increase by 6 to 7 percent a year for the foreseeable future (triple the projected rate of inflation), and that’s not counting the large bumps in premiums many states will see in 2018 to account for the uncertainty that Congress has introduced by refusing to act to stabilize the insurance markets. And future legislative changes could possibly worsen the rate of increase, particularly if the Affordable Care Act provision limiting insurance company profits is removed.

Medication — Specifically within health care, medication costs are skyrocketing across the board. AARP breaks this down in greater detail, noting many drugs that have doubled or tripled in price. And overall, drug prices increased 10 percent from 2015 to 2016 while overall inflation was only 1 percent that year.

Gas — Gas prices have been low in the past few years, but historically, they have outpaced inflation, at times by a large margin. In general, all energy costs tend to be more volatile, and fossil fuel-based energy sources will hit their inevitable decline in production at some point in the not-too-distant future, making the cost of travel, heating and cooling, and electricity hard to predict long term. And remember that higher gas prices trickle down to everything that relies on gas to get to you, like groceries.

Housing, in Some Places — Real estate and rental market trends are highly local, so we can’t make the same sweeping generalizations here that we can in other categories. Over the long term, housing tends to hew fairly close to inflation, but that’s not necessarily true year to year, and it’s absolutely not true in every market. Across the country, housing costs increased 4 percent annually over the last decade, which is double the rate of inflation over that period, and in some outlier markets like Boston and San Francisco, the rate was even above 6 percent annually.

Education — It’s no wonder so many would-be early retiree parents wait until their kids are out of college to pull the ripcord. College costs have gotten out of hand, and there’s no sign of slowing anytime soon. Over the past decade, public colleges increased on average 6 percent a year, while the rate for already more expensive private collages was 5 percent annually.

Entertainment — You may not care about paying for cable TV, or going to Disneyland (the two examples CNN Money calls out), but entertainment costs across the board tend to increase as fast as the market will bear, which is often well above inflation levels, often topping 5 percent or more annually. If you plan to be entertained in the future, it’s worth bearing this in mind. (And for you movie popcorn lovers, the inflation is even higher for you — above 6 percent.)

Social Security and Pension Benefits Don’t Keep Up with Real World Inflation

Not everyone plans on relying on Social Security or a pension in retirement (more on this coming soon!), but for those who do, it’s important not to see that future benefit as equating to a fixed spending level. First, public and private pensions are getting reduced left and right, and second, Social Security benefits will be overhauled at some point in the next decade or so, which could change how the benefits are calculated. But the bigger deal is how poorly both can potentially track against inflation.

Social Security, by law, receives cost of living increases (COLAs) that are pegged to the BLS’s consumer price index (CPI). However, in practice, those increases are often not enough to guard against purchasing power erosion because, many argue, the BLS is looking at the wrong index, and should instead be looking at the CPI for the elderly (CPI-E), a more specific measure that has tended to have higher inflation because of higher Medicare and prescription drug costs, among other factors. So even though Social Security has that protection built in, in reality is doesn’t function as intended, and many seniors find their “basket” shrinking each year.

Medicare Still Comes With Massive Out-of-Pocket Costs

Medicare costs vary enormously with age and health status, of course, but one thing that is consistent is that most Medicare recipients tend to underestimate what their out-of-pocket costs will be under the program. The average Medicare recipient spent almost $5,000 out-of-pocket in 2010 (ages ago in terms of health care costs), an alarming figure considering that half of Medicare recipients have an income under $24,000 a year (in 2010 dollars). I’ve seen varying figures, but data show that most people on Medicare will still spend tens of thousands of dollars — perhaps hundreds of thousands of dollars — on out-of-pocket premiums and medical expenses, making Medicare not quite the cost insulator that some may imagine it to be.

Plus All Those X-Factors…

Then there’s the stuff like long-term care that I’ve written about before, and which could quickly erode anyone’s carefully stockpiled portfolio. And all the unknown unknowns we can’t plan for at all.

Why This Hits Early Retirees Especially Hard

Over a longer time horizon, the magnitude of unknown unknowns increases. And while it might be slightly more realistic to think that someone who’s 65 might have more sense of what their future expenses might be than someone who’s 40 would, there’s still huge variability in both scenarios. But stretch out that timeline and you magnify everything.

The health care unknowns alone should be enough to make all of us pad our portfolios for our later years, but it’s not only health care that should have us all thinking that level spending over the long term just may not be realistic.

Building a Multi-Phase Plan That Works for You

We have a detailed two-phase plan that is aimed toward at least doubling our spending when we reach age 60, but not everyone needs a plan like ours. What matters is that you build in some way of accounting for potential cost increases over time so that you can maintain that comparable basket from year to year. Perhaps it’s building a projection that assumes your spending will increase a few percent each year on top of inflation. Perhaps it’s adjusting your withdrawal rate to account for increasing costs above and beyond inflation. Perhaps it’s going full-on two phase like we have. It’s up to you to find the solution that best suits your needs and circumstances.

How Are You Thinking About Costs Over the Long Term? Want to Debate the 4% Rule? It’s All Fair Game!

Alright guys, let’s dig into all of this in the comments! Are you planning for level spending over the long term, or do you have a plan for dealing with increased costs over time? Think the 4% rule is plenty safe with level spending and want to fight about it? ;-) (Just kidding — we’re all friends here.) Whatever your thoughts, whether it’s on spending or projections or any of it, let’s discuss!

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208 replies »

  1. Great point that other costs can throw off the amount you need every year… stupid health care! ;-)

    Personally, we’re just aiming higher with our estimated future expenses (a lot higher).

    The 4% rule is definitely a great start to get someone on the path pointed in the right direction, but it’s not a perfect system. And it leaves even more room for unpredictability the younger you FIRE.

    — Jim

    • I’m glad (relieved?) ;-) to know that you’re planning for and aiming for higher future expenses! That mindset will serve you well. :-)

  2. I think it makes sense to earn some money in the first phase of early retirement, when you’re relatively young and healthy. If you can retire and work part time, consult, or otherwise bring in a modest amount of income, then you could draw down less of your retirement pie and have more for your later years. That will be our strategy, anyway.

    • We didn’t start there, but that’s where we are now, and it’s our plan for next year and probably the first few years of early retirement. We’ve thought of working a little as being more about hedging against sequence of return risks, but you’re right that it also does conserve some capital. Is it enough to offset higher future costs? Hard to know!

  3. Nice post and all your concerns are valid for anyone FIREed – that’s me – or about to FIRE.

    Here is what we do to avoid most Panic Attacks. :) I use FireCalc and CFIRESim to determine if we have enough. I input all the numbers including how long we expect our retirement to last (I assume we live until 98). Then I set it for a 100% success rate and run. This tells me the spending level we can have, but I like to under-spend by $30K to $40K per year as a Safety Margin.

    Of course, there is no guarantee that our Safety Margin will be enough, but we’ll adapt if necessary. We live in downtown Philly and we could move to a much less expensive city if we must.

    • Living in an above-average COL place gives you a built-in contingency that’s good to have, in that you could move somewhere cheaper. But I wonder about those various simulators, and what assumptions they are built on. My sense is that they look at historical scenarios but otherwise assume level spending, which is the flaw in all of this. But that said, it seems like you’ve built quite a cushion into your numbers, so that should help!

      • It does allow you to adjust that… but how is a layperson supposed to calculate a weighted inflation percentage when you don’t know how much those big expenses could increase or how big a share of your income they’ll represent at that point? Not trying to say there’s no way to think about this stuff, but I think it’s worth considering as conservative a projection as you can stomach to ensure you aren’t being too optimistic. ;-)

  4. I believe that spreadsheet nerds (I confess I fall into that category) have never been big fans of the 4% rule, or any other rule that tries to greatly simplify what should be a much more personalized, deep analysis. Once you understand the fundamentals of finance and have a good working knowledge of Excel, you can develop your own system that can be very accurate with projections and “what if” scenarios for your own situation.

    We project our budget revenues, expenses, investment FV with associated withdrawals, etc. using FV projections for each category. These are projected out on an annual basis (past life expectancy to be conservative), with different rates for each category based on the fundamentals of that category (for expenses – health care receives a much higher annual increase rate than garbage collection expenses, as an example). When projecting future years, some categories are added and some are eliminated.

    The beauty of this system is that once it is set up, you can run an unlimited amount of “what if” scenarios by easily changing designated entry cells (such as return and expense rates for any category).

    Then, as you live out each year, you change the projections into actual numbers, and adjust the future projections with updated knowledge (entering into a recession? Time for some adjustments. That side hustle not working out? Eliminate that revenue source).

    Being extremely fiscally conservative, I run countless scenarios to make as reasonably sure as possible that we have more than enough contingency funds not only to survive, but to live a lifestyle we desire.

    ER is just too important to leave to any overly simplistic “rule of thumb” calculation.

    • Something tells me we would get along. :-) #spreadsheetnerdsunite It sounds like you guys have the bases covered on this stuff, and are thinking about things the right way. Of course we can’t known the unknown unknowns, but having a mindset of costs going up and needing to be flexible will only serve you well.

      • Yay… spreadsheet nerds :)

        Loved your reply “Not a Fire blogger”

        There’s a rule of thumb in construction… measure twice, cut once. Two times… I laugh at that. I’ve calculated dozens of scenarios in my “spreadsheet”… maybe hundreds :)

        I’m pretty sure my wife and I could be happy with a pretty level retirement… but because of those pesky unknown unknowns, I’ve got plenty of cushion built in before I’ll take the plunge. And of course, I’m not planning on washing my hands of my spreadsheet once I retire. It’s a living document. I’ll be updating it and adjusting as needed. In the end… yes, there are going to be unknown unknowns, but I’m betting on myself. I’ve been smart and successful with managing my finances my entire working life. There’s no reason to believe I won’t manage and be equally as smart and successful in retirement as well.

      • Yeah, who only checks their spreadsheet once or twice?! WHO ARE THESE PEOPLE?!?!? Hahaha. #constantrefinement

        I think it’s one thing to be happy with a level quality of life, and that is not so hard to imagine. But the fact that that level quality of life will likely increase in inflation-adjusted dollars is the rub. So I’m super glad that you guys have that cushion built in!

    • My wife and I have different views on this subject….I personally like the 4% rule, BECAUSE of the many reasons Ms. ONL and Not a Fire Blogger point out. I personally believe there are too many unknown variables to account for in the future, so assumptions need to be made. Yes, personal assumptions from person to person will differ, but if you need a place to start, the 4% rule is a great starting point without getting overly complicated.

      My spreadsheet has evolved and grown more complicated over time, and I get what you mean about customizing it to yourself. But I am going to play devils advocate….if you keep updating and changing projections, you are looking at a much smaller timeframe than the 4% rule and could sell yourself short. My customized spreadsheet says I’m going to hit my FI number a lot sooner than my original 4% rule (granted I update the 4% projection with raises and real life cost of living). But we are in a bull market, and so my nest egg is growing at 20% each year. So while I am greatly outperfoming my original plan at this point, I like comparing it to my 4% rule and plan on staying the course because I know over time (hopefully not for a long long time) I will regress back towards the mean.

      FYI I also feel like I am very risk adverse. I say I follow the 4% rule, but my spreadsheet is built out year over year, with changing future expenses due to daycare, housing, health care costs, etc. I dont account for future SS, and once I hit my 4% number, I plan to still work, but as an entrepreneur and not for someone else. Hopefully what I earn will be icing on the cake and not because I sold myself short in my planning

      • Your approach is super interesting, and it makes sense! You’re proving that you absolutely can have a conservative financial plan based on the 4% rule, it’s just not based on the 4% rule the way most people talk about it. Keep up the solid thinking!

  5. I agree with you, though I’m not sure I share the same sentiment about gas. Rather, my concern is more about affordable clean energy. With this week’s announcement by GM that they’re TOTALLY eliminating all gas/diesel vehicles, it’s just a matter of time before other big auto makers do the same I think. I know that in the future, I’m not planning on purchasing a gas-powered vehicle IF it makes logistical sense. The timeline on that, though, is the big thing in question…so it may be a concern, but maybe not by the time that I retire. You, on the other hand, probably need to be more concerned about it.

    Eventually oil companies will need to adapt in the future, but the fact of the matter is that we’re in for a rude awakening one way or another with this. Either big dogs like GM will go the way of the dodo or oil companies will (or they’ll change). It’ll shake things up in a way I don’t think we really can understand yet. I wonder what that’ll do to the dynamics of the market.

    All your other points I definitely agree with :)

    • I’m hopeful that the shift to renewables will accelerate in short order, and you make great points. I will add to what I wrote: I used “gas” as a proxy for all fossil fuels, which still form the very large majority of electricity generation fuels across the U.S. Even progressive states that are moving away from coal use mostly natural gas, not solar or wind. And we use natural gas to heat our home, which I don’t see changing anytime soon, and it’s the crazy expensive price of that that has us bundle up indoors. ;-) I believe that renewables can be competitive price-wise, but I think, like you said, there will be some rude awakenings and growing pains and we should all be braced for at least temporarily higher prices, startup costs like buying new EVs, etc.

  6. I like the 4% rule as a base for people to start at then start moving things around depending on how aggressive or conservative they are. You have talked about this in previous post – if you have plans to travel the world have you baked that into your 4% rate? – if not you may be in trouble. You list some other excellent examples above as well on things that could change quickly.

    I used 4% when I took a first shot at our number, added in a travel budget, left social security out of the equation completely (safety net) and assumed we would earn nothing (which we know we will).

    Thanks for the post – always good stuff over here!

    • Thanks, my friend! I’m glad to know that you’ve added several forms of padding to your budget which will, I hope, provide enough to cover all those unknowns. And totally agree that 4% is a useful starting point, but it’s amazing how many people still talk about 4% and 25x after years of planning, and base their preparedness solely on that. (And maybe by “amazing” I actually mean “alarming.”) ;-)

  7. All excellent points and a bit mind boggling at how infrequent this message is delivered in the community. Our plan will likely be similar to yours: 1) build-in escalating costs in outer years to account for healthcare AND more outsourcing of tasks and 2) not “retire” until we hit a more conservative (3%) withdrawal rate, or even lower. Hopefully, this conservatism results in the “worst case scenario” being able to provide substantial donation to various charities at end of life. For those that argue one more year syndrome or that we’re working too long, we enjoy our jobs and have learned how to live with abundant optimism and joy, removing a complaint-paints mentality from our mindset. Either way, we win :)

    • Your plan DOES sound very similar to ours! And I LOVE that you are thinking about leaving a big charitable legacy at the end, if all goes well. :-) Totally with you that it’s not OMY syndrome if you’re just aiming for a higher bar, one that perhaps encompasses a larger dose of realism. ;-)

  8. I like the 4% rule as a baseline too. It’s already pretty damn hard for most people. If you add doubling the expense budget by age 60, then it’d be out of reach.
    I think getting to 4% is good enough and you make adjustment as you go along.
    We’re a bit conservative and we’re not withdrawing yet. For us, we’re planning to work part time for probably 10 more years. Once we’re into our 50s, I’d be comfortable with some withdrawal.
    Healthcare is a huge problem for early retirees. It’s so unpredictable.

    • I think I differ in opinion a little bit in that I don’t think it’s our job to try to make this seem easier for people who aren’t actually able to save enough. It’s to help people think through all the important questions to make sure they are REALLY planning a solid plan, are really ready, etc. So yeah, it’s hard, but I have no intention of sugar coating that because I don’t want to lead anyone down the path when they really aren’t prepared. And I am surprised you’re not withdrawing at all yet, given what a good cushion you have saved! But if your wife is happy continuing to work, then conserving your portfolio as long as possible is a great thing!

    • Yeah I kind of agree. I’ve just started reading this blog but it seems the underlying theme is to warn the community that you need massively more $$ than most in the FI community believe to the point where it would take 2 partner/Vice President salaries to make this work. Its great they were able to amass such a cushion but that’s not realistic for most in the community.

      • That is not my goal at all. I think as you read more, you’ll see that. But I also don’t think people should be winging it as much as many are. And to your final point, saying something is not realistic for most doesn’t mean it’s wrong. Early retirement period isn’t realistic for most. ;-)

  9. I made a similar point (less eloquently) about unknown unknowns in a recent post ‘Thinking the unthinkable for early retirement’. You are about to embark on navigating the longest period of financial management we have ever seen in history. Even a Nuclear decommissioning Trust only has to invest over 40 years! So the debate is welcome and justified IMO.

    Healthcare seems to be a known unknown though and the power of compound interest now works against you! For example 40 years of healthcare increases of only 2% above inflation will double healthcare costs in real terms. i.e. double relative to food, housing, utilities etc. So that’s a serious cost that needs addressing in any plan.

    • Geez… putting things in terms of nuclear decommissioning! That’s heavy. ;-) But yes, I (obviously) couldn’t agree more. 30-50 years is a long freaking time, and none of us know what will happen in that period. But we can know that a LOT of elderly people run out of money, showing that is not a rare phenomenon. So it’s smart to oversave and overplan to some extent. And amen on health care!

      • The problem with oversaving and overplanning is that you lose your life in the process. That time doesn’t come back. Nothing in life is risk free, and time spent doing work you don’t enjoy just to plan for every possible inflation scenario is a HUGE cost. I don’t think that cost is factored into your equation.

        Everything in life is a risk, and I’d argue you aren’t taking into account very real risks that many people don’t want or can’t afford (namely, the risk of time/life lost at the expense of overplanning and oversaving)

  10. Great concept, but I think the post still overlooks or at least underestimates another big problem. How are people who are used to saving 30, 50, even 70% going to like being constrained by living on a set budget? I know in your personal planning, you have built in phases, allowing for much higher spending later, but most ER blogs I have seen do not account for this.

    I know our personal planning was initially driven by a desire to get out and hike and ski more. We didn’t grow up doing that stuff, we started when we were close to 30. Would we have started buying expensive ski passes let alone splurging for ski, climb and mountain gear and trips if we were focused on a budget? I doubt it and we would not be the people we are today.

    Similarly, we thought we were not able to have kids and…SURPRISE! Our daughter has been an amazing miracle in our lives, but would we have felt that way if we were stuck in a set budget? Kids don’t have to be super expensive, but they don’t cost $0 either!

    Also, our medical budget was close to $0 until a few years ago. Then my wife developed auto-immune sx and has had too many tests, blood work, etc to count in the past few years. It was at first very stressful to her seeing what these expenses were doing to our spending as we were by then tracking spending for traditional retirement planning, even though we are still working and easily able to afford it.

    Bottom line, FI for us is all about continued growth as people. Maybe, this will mean more simplicity and less spending. Maybe, we’ll want to do things that cost a lot of money. I know we don’t want to be confined by a budget as traditional planning requires and this shaped our philosophy.

    • I think we’re in agreement here, so let me know what I’m missing. I *think* we’re both saying that being constrained to a set, level budget for the rest of your life is too confining to allow for both the unknowns out there and personal growth. So we should be planning less around a supposed rule and more around an idea of being able to be flexible. But let me know if I’m misunderstanding!

      • I guess I read the post as focusing on factors like health care, inflation, utility/gas prices etc that are partially or fully out of your control. I think that especially for those retiring in your 40’s or even 30’s as some in the community are, that it is unlikely that we’ll have the same wants, interests, etc in 10 or 20 years, let alone 40 or 50 years and so not very confident in planning on our spending being the same that far in the future, adjusted only for inflation. I think a little bit less confidence and a little bit more flexibility makes sense. We found we were very happy even saving lots of money all along by doing what we wanted and figuring out how to make it work financially, but when we started focusing on tracking our spending and trying to keep it constant as we would in traditional retirement, we found it pretty stressful and it made us less happy.

      • Same here! When we obsessed about tracking and saving as much as we could — as we did all last year — it made us miserable. I don’t recommend it! I meant health care, inflation, etc., more as data points to suggest WHY it’s important to create a plan that allows the potential for higher spending in the future in real dollars. I think we’re agreeing, just using different reasons. ;-)

      • I found myself thinking the same thing as I read this post as far as personal changes being much harder to predict than financial metrics like inflation, market rates of return, the cost of health care, and tax rates (all of which are also very hard to predict over decades of course!). I worry more about my family structure or personal values/preferences changing over time – or at least, I want more freedom to allow for those things to evolve.

        Like I don’t want kids now, but what if I wake up in 10 years and feel strongly that I want to adopt or foster a child or children? Or what if I accidentally get pregnant – or what if I get divorced – or what if my husband dies in a few years and I want to overhaul my lifestyle/move/spend differently? What if I eventually I meet someone else who I want to share my life with whose lifestyle or living standards vary from the ones I set prior to early retirement? What if a sibling or parent or niece or nephew develops a chronic illness or dies suddenly and I want to help out financially or spend years care taking myself?

        I love analyzing my spreadsheets endlessly and trying to account for all the possible variables and scenarios, but my detailed projections have been off wildly so far since I started obsessively tracking my finances 17 years ago. I’ve accepted that I can’t ACTUALLY predict much when it comes to my net worth or income or even spending over long periods. But I am comfortable that I am able to adapt. It all boils down to this: save as much as you can, and then figure out how to live on what you’ve got. Millions of people/retirees do this every year with WAY less analysis than the average financial blogger gives even one post. It doesn’t have to be that complicated. Though it is fun to run the numbers. :)

      • I think you’re absolutely right that personal factors can totally sway what we spend each year. To your final point about lots of folks doing this without so much planning, I don’t think we should call that out as a good thing. Two-thirds of people retire sooner than they plan to, and three-quarters of people (75%!!!!) retire with little to nothing saved for retirement, and they are reliant on Social Security for everything, which is not an existence most of them would choose. Just because spending decreases in retirement for most people doesn’t mean they actually WANT to decrease their spending, and I’m guessing most of us here aren’t hoping to end up in a retirement in which our spending decisions are made for us because of major budget constraints.

  11. Yeah, health care is the big one. You can substitute around gas, to an extent, but it’s harder to substitute for your doctor or a life-saving medication.

    People forget that what’s in the “basket” keeps dramatically improving. But with it, costs go up.

    Nobody is clamoring for 1950s health care in 2017 dollars. That should actually be far cheaper. Worlds cheaper, actually. Every drug used then is in generic form now, and many others too, that didn’t even exist then. Surgeries are less invasive. Methods and technologies improved. Etc.

    Instead, people demand cutting-edge care, which brings cutting-edge costs. (Though it really is amazing what they can do now.)

    Also, as I’m sure you’re aware, Medicare has a large “donut hole” for prescriptions. I would bet that’s where 90% of that $5,000 figure is spent. If you’re on lots of meds, you’re committed to spend several thousand dollars per year, minimum, before your costs plummet.

    But then again, Medicare only even began covering prescriptions at all since 2000 or so – and it’s a tremendous costly benefit to provide. Before that, you were on your own (and many seniors bought supplemental insurance).

    It will be interesting to see what happens when America is forced to actually decide how much health care we want, who will provide it, and how we’ll pay for it. We’re still kicking the can down the road on the big issues for now…

    • I’m sure you know this, but a big provision of the ACA addresses the Medicare donut hole, and the most recent spending numbers on health care are actually based on far LOWER drug costs out-of-pocket. (http://www.aarp.org/health/medicare-insurance/info-01-2011/ask_ms_medicare_question_92.html.) The data on the OOP shows that a lot of that is for visits and procedures, not drugs, and we obviously don’t want to disincentivize people from getting care they need, especially preventive care. But as I’ve said before, we NEED to have that larger conversation you’re referring to, not just the health insurance reform that we’ve discussed so far!

  12. Great Points Mrs.ONL. Like how you discuss the fundamental principles :). Healthcare and Education are the 2 biggies that are playing havoc with our equation as well. Cannot agree more on the impact of technological disruptions. Completely unpredictable.
    The 4% rule is based on historical averages and I think it will still hold true in the future on average. But individually we could end up being one of the outliers from the average and that will not be a good situation to be in! Like you say, we have chosen a safety factor we are comfortable with and are saving against this number.

    • Oh I’m a big fan of looking at the root causes and underlying principles of things. Otherwise, what’s the point? ;-) It’s great you’ve crunched a number that feels good to you and gives you a big safety margin — it’s one thing to talk about being flexible, but another thing to actually build a plan that allows for REAL flexibility. ;-)

  13. All BS! We live on 2 SS checks and 2 pension checks. Total $5000/mo. Our expenses are $3200/mo. Live nicely, travel monthly. 2 nice cars, 1 nice home. Have not touched our savings yet. I am 75, wife 65. 4 kids/4 college degrees, no debt.
    Keep your expenses low. All you need to know

    • That’s great, hjack. Is your pension COLA adjusted or was it at a set amount that never goes up? Also, would you share at what age your retired? I am always on the hunt to learn from people who are already retired. All the financial blogs like this one are great, but for the most part they are written by folks on the younger end who are planning on retiring. Learning from those that have done it is really important.

      • Tim, FIRE Drill Podcast just did an episode with a guy who early retired like ~12 years ago in his 30s. I found it fascinating because, like you, I’m interested in people who have already done it (and have been doing it for a bit).

      • Great tip! And I think learning from folks who’ve retired EARLY, not at a traditional age, has the most to teach us because it’s the most apples-to-apples comparison.

      • Agreed that it’s great to learn from those who already walk the walk. I’m a little worried about survivorship bias though. Not that it can’t work, but the “It worked for me, see? Just do as I did” thing is the same as using historical data- not a (consistent) indication of future returns.

      • Totally agree it’s super important to learn from those who are already retired! Though I do think those on the older end are often insulated from more current circumstances, like that almost no one actually has a defined benefit pension anymore. So it might be nice if you can get one, but good luck finding it.

      • Great post and discussion ONL. To understand the major recency bias, one only needs to count all the FIRE blogs that have sprouted (mine included) in the last 8 years – my rough estimate says over 95% have appeared in the bull market we are in!

        Though I have been investing for nearly 20 years and have seen two major bear markets, I suspect most of the bloggers haven’t. Do you want a sure way for the 4% rule to work? Retire on the 4% rule at the end of a bear market with a portfolio of at least 80% stocks than at the end of a bull market!

    • Your comment seems disproportionately angry and aggressive given how nicely you say you live. Are you sure you are as at peace as you think you are?

  14. We’re a tad bit older – my wife’s and my age average 50. Like you we are planning on a 2 phase retirement, although I haven’t graphed it out to your degree. As I mentioned in an earlier comment, we are currently dealing with OMY syndrome. I’m re-reading Robert and Robyn Charlton’s book now to remind myself that “time” needs to be considered as well as “money”.
    We are fortunate in that one of has a small pension but it is not COLA adjusted. Part of our two phase plan is to consider that the “real value” of that pension decreases annually until it reaches zero at year 20 – about when we anticipate SS payments would begin. But we also don’t count SS payments in our plan. We are planning on not touching tax advantaged assets until year 20. Our conservative growth rate has those assets at a relatively decent value 20 years from now – given that we plan to not touch them until then. Our safe withdrawal will increase. However I didn’t plan on it continually increasing over the remainder of the retirement. That is, in my plan the safe withdrawal rate increases in year 20 and then stays set at that amount until death. From your thoughts above, that thinking may be flawed.
    Our fist 20 years we don;t envision – i believe you call yours “dirtbag” – too modest a retirement. We like our current living style and don’t wish to adjust down, but to your point, I have been considering my percentage withdrawal to be sufficient. It is lower than 4% and lower than what I envisioned at year 20 – but it is static for those first 20 years. After reading your thoughts, I wonder if I shouldn’t build in a slight increase in the percentage withdrawal rate annually or at least every 5 or so years.
    I do have the rental props which would be a small hedge against inflation – but still rental properties come with their own set of unplanned events – tenants leaving, bad tenants, remodel expenses – and these could hit at inopportune times.
    As the other commentators mentioned, flexibility is key. At some time I know I want to jump into the unknown and the problem I have when I start planning and think about everything that could go wrong, I end up firmly back in my OMY syndrome.
    My Dad lost his battle with colon cancer some years back. I kid you not – he retired on a Friday. Within the month he underwent surgery. 5 months later we put him in the ground. I do not wish to repeat his retirement. Fortunately he and Mom were conservative in their habits and my Mom has gone on to enjoy her retirement as much as possible without Dad, but still I’d like to do things a bit differently.
    Best of luck with your plan. I enjoy your blog.

    • Hooray for the two-phasers! ;-) I think it’s worth considering perhaps adding a few spending ramp-ups in your first phase. (And also, to clarify, when I say “dirtbag,” we’re still going to live a life that is luxurious by any measure. We own a great house, we live in a beautiful place, we will eat well and get travel. We may just camp more and stay in hostels that we will in our later years.) ;-) But it sounds like you have several big hedges, namely your rentals and Social Security, which even if you don’t count on it, will likely still be there for you in some form. As you said, the equal and opposite risk is that you spend all your good years working, so you can’t get so caught up in mitigating EVERY risk that you never take the leap. ;-) *Especially* given what you witnessed with your dad. Trust that you’ve done the hard work here — it sounds like you’re there, and now it’s just time to pump yourself up to make the leap!

  15. I wrote about this some time ago, and my basic position is that the 4% rule isn’t a rule. It’s a foundation. A suggestion. Somewhere to start when you’re looking at how much you might need over the long term. I *believe* that the Trinity study claims to take inflation into account, but honestly, I don’t know the specifics. It’s been a long time since I’ve looked into it.

    For us, we’re starting at around 3% and we’re going to take it year by year. We don’t necessarily have a detailed plan laid out because, well, things change. Plans change. We like to take things year by year and adjust as we go. Though we can’t necessarily control healthcare costs, we CAN control where we spend our money, adjust our driving frequency, change how we spend on entertainment…things like that. And, we’re not counting on social security at all once the time comes.

    I agree with the commenters (and YOU) that early retirement is about flexibility and being willing to change with the tide. It’s a baseline, and I believe a reasonable one to start the process of figuring out all the numbers in our respective situations.

    • Trinity takes the standard CPI rate of inflation into account, not real-world inflation that accounts for the big things that have huge variability, like health care. Plus, that’s only based on historical rates, and health care costs haven’t always skyrocketed as they’re doing now. So my problem isn’t with the study or the 4% rule or any other percent, but with this idea that we’ll be good with level spending forever. I think for many people, that will equate to a slowly degrading quality of life as our spending power erodes, and I know that’s not what any of us envision for ourselves!

      You know I love that you guys are doing 3% and not banking on SS, even though I know Courtney extended her career a little longer to make sure she had enough SS/Medicare credits. Those are both really good hedges against future uncertainty! (Or just if you decide you want to start paying rent again in the future.)

  16. Humans certainly suck at predicting the future.

    Those unknowns keep many people in the workforce for “just one more year” to build up a lifetime emergency fund.

    Yet the most successful way to handle risk has been insurance, and most of us do exactly that. We all strive to cover our potential gaps with health insurance, longevity insurance, and traditional property/liability insurance. We don’t totally eliminate the risks (as Social Security and inflation may demonstrate) yet we greatly mitigate their effects.

    I agree with your skepticism on level spending, but I’m not sure that spending is constantly rising. In spite of all the scary statistics about inflation (in many different sectors), researchers like Michael Kitces have also seen the “retirement spending smile”. What if everyone optimized their FI expenses, focused their spending on the things they value, and even earned a little extra income in their FI from labor or investments? What if an equity-heavy asset allocation actually outpaces the CPI– just as it’s predicted to?

    Over our last 15+ years of FI, our non-discretionary expenses have actually dropped. (So has our discretionary spending, but that’s another topic.) Despite two nasty recessions, our net worth has nearly tripled. Today our 4% SWR is closer to a 2% SWR, which researchers agree is sustainable. This is exactly what an 80% success rate models. If we were having an unsuccessful result from the 4% SWR we would have seen it coming, adjusted our spending (and our earning), and tracked it until the success rate took over again.

    I agree that the 4% SWR has many deficiencies in assumptions and modeling. However 25x expenses is a very good tripwire for FI, and humans can adjust better than both the computer models of risk as well as of FI. I’m glad these unknowns didn’t keep me in the workforce to build up a portfolio of 50x expenses.

    • We suck at telling the future?! So I guess my side hustle as a tarot card reader in retirement is probably not the best idea, huh? ;-)

      This stuff is all about balance, and I would absolutely NOT argue that people should keep working forever just to head off all potential financial risks. But I think 25X is probably a bit too optimistic for most people. We know, re: level spending, that *most* people in retirement end up spending less, but it’s a chicken or egg question: Do they spend less because they want to, or because they have to, because they undersaved or are constrained by Social Security? None of us aiming for FI want to think that that could be us, but it COULD be if we don’t assume that spending may need to go up at some point. (Certainly not every year, as you said, and probably not in a linear way, other than basic inflation adjustments.)

      The funny thing about ANY safe withdrawal rate is it’s going to look absurdly conservative for the large majority of people. Even 6.8% is considered safe in many historical scenarios, though we can’t know that until we look back in hindsight. It sounds like you guys got lucky in not hitting a major sequence of returns roadblock in your first few years, which set you up for huge growth over time, which is how it should work. And then you can decide whether to increase your spending, give more to charity, leave a bigger inheritance, etc. If only we could predict when those SORRs would hit, we could all optimize our saving and spending a whole lot better! ;-)

      To be continued on our FinCon panel? ;-)

      • Yes– a great discussion for our FinCon panel!

        We stopped working in June 2002, and the market bottomed out in October. Then the Great Recession interrupted our net worth compounding. I think those comprise a credible SORR scenario. We survived it mainly by variable spending techniques that aren’t (yet) modeled in the 4% SWR. If that’s good luck then I’d hate to encounter bad luck.

        Even the 4% SWR is going to look absurdly conservative for at least 80% of the people who follow it. That’s the definition of the success rate, even before people try to work “just one more year” to reach 100% success.

      • I think you’re right about that — legit SORR periods all the way! And you’re totally right that 4% *will* end up being very conservative for most. To us, ending up with tons of money at the end would count as a win, though (bigger charitable legacy!), so we’re okay with that. ;-)

    • Thank you for a great comment. I appreciate hearing from people who are really living through what many of us are still just modeling in spreadsheets.

      As many have mentioned, a goal of amassing 25x annual spending is an intelligible and useful introduction to the concept of FI. In retirement, using a 3-4% WR as a baseline and adjusting from there should work out for most people, especially if they’ve thought out insurance and other backup needs. As you noted, it’s not a rigid 4% “rule” and anyone intelligent and thoughtful enough to plan for FI/RE can additionally plan and make changes as life progresses.

      • Absolutely. We view our initial withdrawal rate as a starting point. And if the markets behave themselves, we’ll consider increasing our withdrawals accordingly. But better to overplan and start small with those withdrawals, and see how it all goes.

  17. Monte Carlo simulations use history as a guide for how the future may unfold. Your savings may have survived the past, but who knows the future? I don’t count SS in my calculations usually, but mostly consider it a bonus at 70, so more of our other resources will be saved. We’ll see how that works.

    • I think anyone who can afford to count Social Security as gravy is smart to do so! Of course, that’s a privileged position to be in, so it’s not realistic for everyone.

  18. You gave yourself a great setup, so I just want to give you a prod and ask you to address all the risks you list here. There need to be ways ordinary people can reduce their risk for the big ticket items. For example, buying a house will eliminate most of the inflation of housing. You only need to worry about tax increases, and create a plan for maintenance. Then costs will be known, if somewhat lumpy.

    • I would LOVE if there were ways to manage risks on all these items. As an obsessive planner, I’ve mitigated every risk we possibly can. But these in particular are problematic because they are SO unknown, most especially health care — both because the policies are in limbo, the costs continue to outpace inflation AND none of us know if and when we may need to make use of intensive health care services. So I’d love to have a good answer for you, but there isn’t one. ;-)

      • The answer for us has been enrolling in a healthcare sharing cooperative, specifically Medishare. Its the most economical and progressive answer to healthcare that exists in our country. No profits, no middleman. Just people directly sharing the costs of healthcare with each other. It certainly isn’t for everyone because these organizations are rooted in biblical values, but for us it has been HUGE on our road to FI

      • Just curious — have you had to weather any big and unexpected expenses while on your healthshare? We’ve known some folks who’ve had to shell out tens of thousands of dollars on these plans, which makes it not a great solution for those with limited means.

  19. To Tim and the others. I retired at 63. SS check $1600/mo. Wife kdg teacher ( public school). Our youngest daughter was 14. We received a check each month for $1400. This check stopped when she graduated HS. I worked a p/t job netting $600/mo. Wife had all of us on school health insurance. We had $400,000 in savings. Now about $450K. Still don’t touch it. All in money markets. Have had it that way since 1999. I was afraid of a crash. Have left it there. We sleep well at night.
    Moved from D.C. to SC. Have a beautiful condo/ house in a gated community without the gate. 2000/sqft. Have a $175,000 mortgage for 25 years. Pay $1030/mo+ $250/ condo fee. Travel all over USA. Car, plane etc. Children here, in Phoenix, Charlottesville and Manassas. 5 grands.

    • I’m glad your situation works well for you, particularly because a health care catastrophe could plow through much of your invested assets pretty quickly. So it’s a good thing your pensions and SS cover your expenses. That said, this is not an apples-to-apples comparison because you both worked much longer than readers here are hoping to do, meaning that your SS benefit is much higher than most of ours will be (factoring in many $0 income years into the calculation), and the defined benefit pensions it sounds like you have are extremely hard to find these days. So while your path worked for you, it’s not necessarily replicable anymore.

      • Good reply ONL. SS estimates that my income will only be at $1300 per month due to the “many 0’s” as you say, which in my case is partly due to employment abroad outside the SS system. On top of it, I assume only 75% of it will be paid out due to shortfall as the SS trustees estimate. That gets to about $12K a year. In addition, for planning purposes I assume I will get only $10k/year, because it’s still 20 years out for me. I have also modeled at zero SS as well but feel that’s overly conservative for mid 40’s cohort, as I believe we will get SS. AARP is too powerful a group for politicians to ignore!

        My logic for 3.27% SWR for these bull market times is explained here: http://tenfactorialrocks.com/hacking-the-retirement-calculators/

      • I think that’s smart, to estimate SS below what they currently show for you. It’s absolutely true that the formulas could change. The fix could come on the income side (for example, removing the SS cap so that people pay FICA on their full income), but it could also come on the payout side. (Though on AARP… the latest ACA repeal effort would have been HORRIBLE for people 50-64, as well as for Medicare recipients, but that wasn’t what stopped it. We shouldn’t get too complacent!)

      • I hear you Ms. ONL, but remember that ACA did not have “legs” – it was a product of the previous administration that simply may get thrown out by the current administration. Social Security is a different animal altogether – It is entrenched in American Society and part of every generation’s psyche. AARP will pull out the canons and shoot down any politician who attempts to kill it. It is a sure hara-kiri for every politician – people will talk about it but I believe no one will dare touch it!

      • ACA certainly isn’t as deeply rooted as SS is, but with each passing year, it has grown in popularity, and I think the fact that the Senate couldn’t repeal it this year means something significant. It has already become entrenched in some big ways, particularly the provisions on pre-existing condition coverage and free preventive care. But agree that AARP would go to the mat for Medicare and SS in a way we’ve never seen before if it really came down to it.

  20. I listen to the Podcast and the use of the Shiller CAP10……very interesting. However today’s Shiller CAP 10 is the highest since 1929, suggesting that we are in store for a down turn. However I read a recent post that made a good point that the current 10 year time frame for the Shiller ratio starts in 2007.

    “It so happens that 10 years ago was the summer of 2007, right around the time that the Great Recession began.

    So the 10-year period of 2007-2017 happens to be a historically bad period for earnings. First you have the recession itself from 2007 to 2009. Then you have the slow recovery, from a very low level, over the following years — and even that included some very shaky times such as 2011, which was also really a bear market for just about everything in the world except the S&P 500.

    Then, more recently, you had weak earnings in many sectors in the 2014-2016 period. That includes the oil price collapse, which devastated the earnings of the entire energy sector, a big part of the S&P 500. It also includes the market downturn of 2015-early 2016, when weak earnings across the board made it very common to refer to an “earnings recession” at the time.

    CAPE, like any price to earnings measure, is a ratio: It is calculated as stock prices divided by 10-year average earnings. Thus you can get a very high CAPE value not only because of very high stock prices, but also because of very low average earnings. And that is precisely what we have for this particular 10-year period from 2007-2017.”

    My point is that like every forward looking tool it it still based on history.

    So I think the comments I have read here where people are projecting 25% more expenees then they think they will need or not counting Social security ( using it as gravy) are all smart things to do.

    So the I live by “plan for the worst and hope for the best” and everything should be okay.

    • We are with you in planning for the worst, hoping for the best! You’re getting into an area I didn’t touch on this post, of whether future gains will be comparable to historical gains, as well as sequence of returns risks for those looking to retire at this particular moment in the market cycles. (Hi!) So if we take that uncertainty and ADD it to the question of whether level spending over time is realistic (what this post is about), we have MANY reasons to be extra conservative in our planning!

    • The COLA in SS doesn’t keep up with real inflation, so I assume y’all have a plan for dealing with eroding spending power over time.

      • (Just as an FYI, your last few comments to hjackfeldmanJack have the potential to come off as very passive-aggressive. You likely meant well, but perhaps different phrasing could be more inclusive. For example, I know you have young readers who will still be getting DB pensions, and your higher income readers or those who started working quite young but will still retire early may still have significant SS benefits.)

      • No, I meant it to be snarky. I don’t appreciate when someone who has never commented before comes in and calls everything I’ve written, after extensive research, “total BS.” It was a rude comment, and I responded accordingly.

        I appreciate YOUR comment, though, and do attempt to be inclusive here. But I think it’s important to clarify when the experiences of commenters are not broadly applicable to the audience here. It’s absolutely true that lots of folks reading here will get SS, and some may even have DB pensions, but the latter is not the norm at all anymore, and the ones that still exist are getting downgraded left and right. Which is all a horrible shame, and not remotely fair to the people who were promised a certain standard of living when they took that job ages ago.

      • Yes, that “total BS” part was very rude. The rest of that person’s comments seemed more like sharing their experience, though, so I tried to overlook the distasteful opening salvo. I didn’t realize it was a brand new commenter.

        I think we can agree that no one person’s experience is broadly applicable, but I still like hearing many of points of view and experiences. That’s why I read your blog, even though I only agree with (AKA can fit my situation into) about 3/4 of it. :)

        My mother’s is one of all those DB pensions with disappearing benefits. She and her peers were forced to take lower salaries back in the day when the benefits were promised, then when the same budget gap that led to the low salaries reappeared at pension time, the pension money started to vanish as well. As you said, it’s wildly unfair.

        I have my fingers crossed that my DB pension stays solvent. It’s corporate rather than governmental, which seems to bode well… but I might roll the lump sum into another retirement account if I get that option when I leave the company, just to be safe.

      • Ugh — I hate hearing stories like your mom’s! I understand that companies and public entities have major challenges funding pensions as well as ongoing operations, but there’s just no excuse for the mismanagement of funds that has led so many to this place where they’re now not making good on their promises right at the time when their retirees are least able to go out and hustle to make more money. I definitely don’t blame you for considering a lump sum cashout if it’s an option when you leave!

  21. I have never liked the 4% rule for anything other as a high level starting point. As many have rightly said they have done this from the bottom up – that is the approach we have taken in 10 year Windows where we adjust our core basket of expenses – both their proportion in relation to the overall need and the effects of inflation. As always there is a cushion.

    Also I think most planning tools miss the dividend contribution as part of your annual need as well as continued capital appreciation – both which can reduce the impact of the 4% rule or even needing to touch the core of your nest egg to produce the income required in retirement

    If you aren’t good with spreadsheets I think the Optimal Retirement Planning tool – extended version is a great tool to use since it covers dozens of variables that align with certain stages and milestones in life. It also produces a withdrawal schedule based on your spending plans and assets classes.

    I think the Ms ONL has done a very good job of highlighting that there are both funding and spending stages and horizons to consider as you build out what is essentially the plan that will drive the rest of your non working life

    Lastly if your plan is razor thin or if a few bad years sends you back to work full time or requires you to shelter in place to ride out the downturn then you actually don’t have enough saved. I think that is the most important thing to cover and it’s a bigger issue in early years when you want the most freedom than it out years. This is why I believe the net worth “number” (even though MS ONL doesn’t have hers here) is much closer to 2 million for most people retiring at or around 50, 2.5 million to 3 million if you are 40 of you do not plan to work at all

    I know some will say those are unattainable numbers and that you can live on 40,000 on a nest egg of 1 million but I seriously doubt I would call that “living”. I would call that scraping by.

    Good luck everyone – I am just a few months away and look forward to the next phase of our lives

    • If your house is paid off, and you no longer pay FICA, and are no longer saving, 40k should give you the spending power of a 60k salaried position. That is the median household income. At least half the population would be happy to live at that income.

      • Which might be enough at this point in time, but maintaining that indefinitely on a $1M nest egg relies a LOT on the 4% rule continuing to be true into the future (impossible to predict), and assumes that you can never increase your spending, even if you need to based on rising health care costs, etc. Doing what you’re comfortable with is what matters, but these are valid and important questions to be asking so we don’t all inadvertently undersave because we didn’t account for expenses that outpace inflation.

    • Wohoo for being so close! We share your excitement. :-) The dividends point is a good one, but the flipside of that is that historical averages DEPEND on reinvesting dividends, which many of us will stop doing when we retire, since we’ll already be taxed on those dividends. So we actually have to adjust our projected market gains downward to account for dividends coming out instead of reinvesting them. (The 9-11% historical average doesn’t account for inflation and also assumes reinvestment. This is why some of us think planning for 2-3% real returns over the long term is wise. And I believe essentially anything that beats inflation is great.) I’m also with you in thinking many folks are setting aside too little and are going to put themselves into a tough spot in the future, perhaps once it is too late in life to easily earn more and address the problem, and that concerns me. Working toward some of those bigger targest feels smart for a lot of folks, especially given all the unknowns out there!

  22. I don’t count on my future government social programs but I know that they will be there and I’m darn well going to spend them and adjust what I take from my retirement savings at that time.

    In Canada we have CPP (Canada Pension Plan) which we pay into our entire working lives via deductions on our paycheques. At 60 we can start to receive payments for this (most do 65 but I wont) and in my case I will get about $600/month and my wife $300 (it is a calculation of how much you paid in and years you paid in). My wife and I are the same age so the nearly $12,000 year will be nice.

    Also in Canada every one of us is entitled to OAS (Old Age Security) at the age of 65 and it is indexed with inflation so goes up every year. The current amount is $598 so when the time comes the wife and I will enjoy getting that nearly $14,000 per year.

    Combine the above two amounts and that is $26,000 a year that we will get in 20 years which I feel provides a very safe buffer for poor years until I get to that point. I also haven’t worked those numbers into my equation as they are my safety net and not being banked on.

    Lastly having our health care system of the Great White North I can feel confident knowing I will have zero out of pocket expenses to worry about during our retirement. That being said prescriptions suck here and we don’t have coverage for that so it will be something that needs to be monitored if something major were to happen to us.

    I think the most important thing I can do is just manage my expenses and have a variable withdrawal rate. The more I can leave in my retirement accounts the more money there will be working for me longer.

    • You guys have WAY more safety net than we do, so it makes sense you are less stressed about needing contingencies down the road. Of course, by providing so many social services, it also means you guys — by definition — can’t have a situation in which too many people retire early. A lot of European countries are on the brink of a demographic crisis, because birth rates are down and there aren’t enough workers to pay into supporting the payouts for current retirees. Will be interesting to see what happens. But in the meantime, enjoy that sound sleep you get that your friends to the south can’t always enjoy. ;-)

    • I am a Canadian too, but working in the US at the moment. I would stay here for ever if it was not for my wife’s pre-existing condition, she has MS. So for us FIRE means that we will have to go back to Canada. Otherwise the 4% rules would require us to work until 65 to pay for her meds … and maybe even more so if they change the pre-existing condition coverage. In our case healthcare in the US would make it impossible or way to stressful.

      So I guess we will have to come down here 6 months per year as snow birds to get away from the snow and spend our money. Not ideal, but way safer.

      • Sigh. It makes me crazy that we let health care be such a huge stumbling block here… enough to make you leave the country, rather than stay here and enrich the nation, pay taxes, etc. But if I were in your shoes, I’d be thinking the exact same way.

  23. My grandmother just turned 83 last week and is amazingly healthy (was hit by a car while walking a month and a half ago and walked away with minor scrapes and bruising after being knocked flat).

    Even so, her healthcare costs are crazy expensive – she has hearing aids, and those eat thousands of dollars alone. Not to mention the cataract surgery she just had. Granted, you CAN skip both hearing aids and cataract surgery, both are a major deal for quality of life.

    Her only income is social security and it 100% would not be enough to live in our HCOL area if she didn’t live with my parents (and has since I was 9mo). If she was living alone, she would have to move away from her grandkids and great grandson, who she gets to see once a week and is the biggest joy of her life.

    • Wow, your grandma is a tough cookie! But yeah, it’s ridiculous that we live in a society where it is a question whether someone can afford to HEAR and SEE. Those are not optional expenses, in my mind. Those are critical for not only quality of life, but also basic safety. (How can she avoid getting hit by more cars if she can’t hear or see them?!) Thank goodness it works that she can live with your parents because, yeah, Social Security alone is not enough, and its spending power shrinks a little every year.

      • Yeah, the guy who hit her was 87, so I wonder how well he could hear or see. Scary situation that turned out fine, but you have to wonder why he was still driving when he clearly didn’t have the reactions he should.

      • Geez, scary all around! So glad she was okay. (And yeah, maybe that guy shouldn’t be driving anymore!) :-/

  24. The most offensive thing about the “4% Rule” is the word “Rule”
    There can never be a rule for something as complicated and idiosyncratic as the withdrawal strategy. Withdrawal rates have to adjusted to account for different interest rates and equity valuations over time as well as idiosyncratic factors: how many years until Pensions, Social Security, retirement horizon, are the pensions adjusted for CPI, etc.

    Unlike you I’m not too troubled about the CPI adjustments. Some categories will have higher inflation, some will have lower inflation. If you ask people for the “felt inflation” most will say their personal rate is higher than what the BLS releases. But we can’t all be above average. This ain’t Lake Wobegon. :) But: If someone really insists on factoring a higher inflation rate, you can easily adjust the safe withdrawal rate. The rule of thumb is that if your expenses grow by x% faster than CPI then you should reduce your safe withdrawal rate by x. (and vice versa)

    I have written many posts on this topic, including this one dealing with how to adjust the withdrawal rate in light of future expected pensions (with or without cost-of-living adjustments):

    • I’m not too concerned about CPI generally, but I do think a lot of folks are underestimating future health care costs, which is no small thing. A single accident or bout of treatable cancer can costs hundreds of thousands of dollars, which isn’t something that shaving half a percent off a withdrawal rate can account for. And given that health care is already approaching 20% of GDP, with no signs of slowing down, we should all be appropriately sobered about potential future health care costs.

      • I second many people underestimate health costs. Under the current ACA, folks in their 60’s pay 3 times what a 25 year old does. That is just the baseline. Inflation adds on top of that as time goes by. If people only think their health care costs will go up by CPI + 1% or so, they are way off. Add to that a bunch of uncertainty. One party still wants universal care dead, and it will continue to want it. If they get a stronger hold on the government, it is gone. No one can budget for what comes next.

      • And it’s worth taking note that recent replacement proposals have all either eliminated the premium cap or allowed it to go to 5x for people in their 60s, so we can’t realistically expect costs to go down, only up, unless we begin to engage in a more transformative discussion about how we actually provide health care, not just sick care.

  25. I’m glad you got into the CPI index. I think that it’s really strange that the CPI is so commonly used in retirement planning when the PCE is an obviously better measure for predicting real consumption (the basket PCE changes over time based on what people actually spend and includes employment benefits). What it lacks in rigor over time, it makes up for in usefulness.

    Anyways, I think for most people, it’s useful to start with the 4% rule in mind, and then as the FI number gets within a few year’s time, they can start thinking more carefully about investment income, whether they need a withdrawal strategy, etc. It certainly doesn’t make a ton of sense to obsess over investment income when you have just $20,000 saved.

    • Totally agree. 4% is great for ballparking some things and setting initial targets, but it’s a blunt instrument in a situation that calls for more nuance. ;-) And I know you know more about CPI than I do, but I will always remember from macroecon 101 the idea that if apples get too expensive, you buy oranges instead, and CPI doesn’t account for big “duh” moments like that. And yet we peg COLAs to it, which makes no sense.

  26. Regardless of what anyone considers to be safe withdrawl rate, think about this:

    If you get some extra income from part time work or selling stuff you don’t need, you can consider the extra to be the savings equivalent as 1/SWR x Extra income.

    Using 4% SWR as example, if you bring in an extra 5K/year while retired, that would be like having 5000/(.04) = $125K of extra retirement savings.

    Just a thought.

    • True, HOWEVER. There are other costs to earning more in retirement, like taxes and *especially* lost health care subsidies. So it’s not quite as simple an equation. ;-)

    • I always have this in the back of my mind. You’re right. Even after paying 10% taxes on that $5k, the benefit is pretty nice. It means you get to keep $4.5k more in your investment accounts.

      • It *could,* but the specifics matter. If you’re getting subsidized health care, earning a little more could cost you big time. Worth doing the math on your own situation, in your own state, and knowing with that various income cliffs are! (I will be writing more about this after I reveal where we live.) ;-)

  27. Thank you for showing that expenses aren’t going to be consistent. That’s one of my biggest pet peeves in personal finance. We’ve been paying child care for two kids, but that’s a short-term expense. Our expenses now are not what our future expenses might be.

    I’ve put together a rough draft of what our future expenses will be over the next 25 years. Like anything so far in the future, it won’t be accurate, but at least it gives us something to start with.

    I see transportation costs coming down over the long term. There are many futurists who see car ownership going away and being replaced with Lyft-like fleets of self-driving electric cars (powered by solar power). I’ve seen these costs approaching 8 or 10 cents a mile vs. the 50-ish or whatever the accepted number is now.

    I’m hoping (maybe even expecting?) that some of the crazy bubbles like health care and college deflate. My state (RI) is already offering two years of public college for free. I wonder if private colleges will be able to continue to increase prices if they have to compete with free. Some might be able to, but I don’t know if all will.

    • All good questions to be asking! And of course none of us know. We were also promised flying cars and civilian space travel by the year 2001. ;-) Hahaha. (I am NOT sad that we don’t have Hal running things, though. Okay, clearly that movie made too much of an impact on me.) I think the best any of us can do is what you did, and try to guess at what future expenses might be, but also just build in some extra cushion at the intervals that feel right to you. None of us want to end up as that old person eating cat food! (I don’t actually think that’s a thing — cat food is expensive! — but that’s the narrative.)

  28. I’m shocked to discover that we’re not actually good at prognostication. That’s not at all why I come here to read! :D

    Having experienced some serious blows in healthcare alongside my parents over the years, I may never shake that underlying worry that whatever we have won’t be enough, but I’m going to keep thinking positively about that and see if we can’t find our happy medium. You’ve convinced me it’s possible ;)

    • Hahaha. And it’s true — *whatever* we save, it *might* not be enough. :-( There’s no certainty in this. The way I think about it is ask myself if I’d rather let that fear paralyze me into working forever, or take the risk knowing these might be my best years and I don’t want to spend them working.

  29. I totally agree with all you are saying. I have three points to make:

    1) given what you are saying, what is an effective way to mitigate this risk of certain costs outpacing inflation? There are really not many ways other than to leave a cushion and spend based on value of the assets.

    2) I think the two phase plan has its advantages but the cost is huge too. When you are young and can really enjoy life, you have to live the dirtbag years; when you are older, you get to spend more freely but each (real) dollar spent will simply be less enjoyable. So from a utility or happiness maximization point of view, it might not be an efficient plan.

    3) If we think of labor as an asset, the price of labor, which is the average wage, might not keep up with the costs of the expenses you are talking about too. For example, there is little growth of real median wage from 2000. In other words, median wage barely manage to keep up with inflation. When faced with the costs that far outpace inflation, even people in the workforce are in trouble. This begs the question – if everyone is trouble, is the trouble real trouble?

    • 1.) No easy answer here! I *do* think that oversaving and building in an allowance for spending to go up at intervals that feel right to you is the right course of action. Other options are to not count Social Security, not count pensions, future inheritances, etc., and to treat those purely as hypothetical hedges. I know that is a higher bar, but it certainly gives more security.

      2.) You’re definitely right that it IS a huge cost to do the 2-phase approach. If the lifestyle you want to live when younger is expensive, then honestly, you might be better off working a little longer. If, like us, you can be happy without spending much, and you see the later bump in spending as being mostly about comfort in travel and such, then the dirtbag years aren’t a negative. (And to be clear, we have a PLENTY large budget in the dirtbag years, too. We are not going to be scraping by.)

      3.) That’s a more meta question, and one I’m not equipped to answer. ;-) But I don’t think “everyone else is doing it” or “lots of other people will be in trouble” is a good reason to slack off in your own finances. ;-)

  30. I agree that simply applying the 4% rule to an extremely early retirement has some serious pitfalls. I love that this is being tackled in the FIRE community, as I think many of us are simply relying on the rule of thumb.

    We wrote something tangentially related a while back, talking about how static, linear assumptions are bullshit: http://www.donebyforty.com/2015/06/linear-assumptions-are-bullshit.html

    We need to either be very conservative in our assumptions if we want to use something like a static withdrawal rate, or use something more nuanced as you’ve suggested in the post.

    • That’s a good way to put it — nothing about any of this is linear, so linear assumptions are hugely problematic!

  31. @GZ: With #2, you begin to get at the heart of the issue – the proverbial elephant in the room. Though not often addressed, the reality is that the ability to enjoy your early working years life AND your FIRE life has a direct correlation with your income. Many bloggers (including Ms. ONL) do not disclose their income or net worth. I respect this (especially when the blogger knows in advance she or he will eventually reveal their identity). But, this makes it very difficult to apply their principals to one’s own situation.

    As a non-blogger, I get the privilege of sharing their knowledge, experiences and expertise (and I feel lucky to do so). I also get to shield myself under the cloak of perpetual anonymity when commenting on blogs and sharing personal information. Because of this, I offer my own situation as an example.

    My spouse and I are high income earners. We earn over $300,000 / year in active income (salaries as employees and our own business). We began our careers very young and stayed with the same employer. My employer was kind enough to pay for the completion of my undergraduate and graduate degrees.
    Imagine that for a minute – receiving a high level of income for decades, and knowing FIRE principals from the beginning (when, to most people, the term fire simply referred to something that provided heat). We maintain our lifestyle by spending $140,000 / year (pre-tax). All other earnings have been appropriately invested for 30 years. When the recession hit, it was easy for us to continue investing during this fantastic buying period.

    So – with that level of income, it has been easy to “really enjoy life” while young (we both also enjoyed our jobs and private business). And, when we retire in our early 50’s in two years, it will be easy to continue with a high level of financial freedom.

    Would that same situation apply if our salaries were $60,000 / year? Those that follow the frugal and / or minimalist doctrine would say, “yes, absolutely,” and for them, this may be correct. I would submit that it is much more challenging, but possible.

    The ONLs don’t reveal their numbers. Though I usually prefer FIRE bloggers who do, this is my favorite FIRE site (go figure). From reading their blog, it is easy to determine they are high income earners, and likely have a high net worth. They don’t hide this fact. Keep that in mind when reading their principals and applying them to your own situation. And, I encourage readers to also find FIRE bloggers who do reveal their numbers that are similar one’s own.

    • I appreciated your response here, as we are in the boat of only bringing in about $80,000 post-tax dollars (total with my spouse) and we’re trying to achieve FIRE and are open about our frugal living, expenses, and now mortgage pay-off plan on my blog.

      I find I enjoy reading others stories, especially when they share more of the numbers, but so many FIRE enthusiasts make 3-4 times our salary. When someone doesn’t reveal their numbers, then I absolutely assume they make far more than we do (especially as they can achieve their goals in such short periods of time).

      In the end, I do find that frugal living and achieving financial goals is such a personal decision, but no matter where one is on the income scale or where they start, each step on the way makes like that much better (especially when people choose to just get out of debt!).

      • I’m definitely sensitive to the fact that most people don’t earn what we earn, and that’s a big part of why we *don’t* share numbers. Because I think a lot of the principles apply broadly, but if folks saw our numbers, they might think they can’t do what we did. And I don’t think that’s true. Might the timeline be different? Absolutely? But we’ve also known people who earn less than us and who did it faster. So it goes both ways. Anyway, appreciate you reading despite some of our circumstantial differences! ;-)

    • I appreciate this comment a lot! It is 100% true that we are both six-figure earners, and that NO DOUBT impacts a lot about our journey. From the speed with which we can do this to the larger margin of error we can take with things. Unexpected $10,000 tax bill earlier this year? No big deal. But we know that would seriously slow down someone else — it’s more than half a 401(k) annual contribution! We live on a LOT less than you do, which is why we can save at such a high rate, so our spending doesn’t look so different from lots of other folks pursuing ER, but we know what a privilege it is to hit our goals so quickly.

      A lot about our circumstances is why I don’t focus on HOW to get to early retirement, but more the questions to ask yourself along the way, to make sure your plan is solid and that you’re mentally and emotionally prepared. That’s the stuff that I think is applicable to everyone!

  32. Great post Ms. ONL. Sounds like there needs to be a lot of planning around the 4% rule of thumb (if I may).
    As far as SS goes, I won’t get that unless I work in the States for 10 years and I won’t be able to do that. So that in turn means, I need to fortify my plan even more for old age. Which is why, I am going to leave my 401k alone for the next 30 odd years while keeping my contributions as long as I am in the US. After that, I am hoping market growth and compounding will help multiply it enough that I have another nest egg waiting for me when I am 60.
    In a country like India (my home) 4% won’t work because the inflation itself is 8%. I’ll have to work extra hard these next few years to get my corpus up to a respectable safe amount.

    • Wow — 8% inflation! That must be hard to stomach! :-( I think you’re smart, though, to try to keep those 401(k) funds growing untouched as long as possible, given all the things we might need to hedge against!

  33. Great post, as usual. It gets me thinking more about the “rules” and questioning what works best for our situation. We currently are planning for a 4% rule, but we are not considering our pensions, social security or other options in our savings goals. For us, not including those incomes will help hedge against inflation and increased medical costs, as well as living in a high COLA in NJ, we won’t stay if we cannot afford to live in it post-retirement. Luckily, we work in careers where we get two months off per year so we enjoy mini retirements each year!

    Keep up the great work.

    • Thanks, Kate! :-D That’s super smart not to count your pensions and SS in your calculation, so you have at least some cushion built in. And, like us, you could move somewhere cheaper if you had to, which is a great contingency! For those who are already living as cheaply as possible, there’s not much fallback space.

  34. Excellent call outs here! We are on the “still figuring out our FI plan”… but I am more on the conservative side when it comes to planning (which is funny because I’ll be more risk tolerant in the investing area… stocks all the way in the accumulation phase, baby!). I like your idea of a multi-phase and <4% plan. Seems like it is worth the good sleep to avoid stress/worry about a riskier situation.

    • Yeah, our retirement projections are the only area of life in which we’d use the term “conservative.” ;-) Multi-phase can mean many things, and it doesn’t have to be as clear-cut as ours, so long as you have SOME cushion that will allow you to step up future spending if you need to.

  35. I think it’s been mentioned in the comments above, but I’ll reiterate that the biggest variable in future spending for many early retirees is their offspring.

    We spend some money on our kids now, but piano lessons are nothing compared to auto insurance for a 16-year old, travel sports, or annual passes for a ski hill or golf course or whatever they might be into in the coming years. Then there’s “failure to launch,” weddings, bail money. You just never know.

    Our solution is to overshoot our target. If we have more than enough when our boys are on their own, I’ll have no regrets.


    • Our solution is no kids. One less variable! ;-) Haha. I didn’t list kids here because they aren’t universal, but also because we do know plenty of folks who either wait til they’re out of college to retire early, or who set a hard line on what they pay for, making it less variable. But it’s certainly something important to consider for all the parents!

  36. Good points about possible unexpected costs in our retirement years. Let’s hope that the ACA is able to keep moderating insurance/sick care costs despite recent political meddling. I’m really not worried about the future cost of housing, gas/fossil fuels, and what passes for entertainment popularly. Dependence on the latter two can be nearly removed, and it’s relatively easy for someone on the FI path to make changes to help with their housing situation. The cost of higher education certainly keeps rising, but again, one can find one’s way without it, and/or there are still plenty of community colleges and scholarships out there to mitigate the expense.

    As I’m sure you saw in that KFF link (We love you, KFF!) you posted, some of the highest out-of-pocket costs are paid by Medicare beneficiaries with Alzheimer’s dementia and end-stage renal disease. These are both largely self-inflicted diseases in this country, stemming from poor dietary options and sedentarism. AD, ESRD, diabetes, and their ilk are sure to buoy up the average OOP costs. We all know we can’t depend on perfect health forever, but as always, taking excellent care of oneself is a great way to reduce spending on sick care.

    My most significant concern about Medicare is its failure to provide catastrophic coverage. I would much rather pay for an ACA plan until I die than go on Medicare at age 65.

    • You might find this post worth reading: https://ournextlife.com/2017/06/28/health-spreadsheet/. While we can all improve our ODDS of living longer and healthier, it bothers me a little when folks talk about health as being totally under our control. (Which I know you weren’t saying — you were talking about two specific medical conditions. Though the jury is still out on the cause of Alzheimer’s, and there’s a heavy genetic component, so I think it’s unfair to paint all Alzheimer’s patients as “to blame.” This also assumes that everyone has equal opportunity to make healthy choices, and that’s clearly not the case. Food deserts, gym deserts, unsafe neighborhoods, the fact that fast food is cheaper than healthy food, horrible food in schools and institutions, etc.) This is deeply personal to me because I am health-OBSESSED (and will write more about this once “out”), and yet have some significant health challenges due to one variant in a single, solitary gene. Mr. ONL is a super fit guy who eats healthily, and yet he has a serious autoimmune disease with an unknown trigger that is likely environmental and therefore unavoidable. So we’re always likely to be those high cost patients, and it’s hard not to take offense when folks say that health is within our control, ergo unhealthy people are at fault. And if you read the comments on that post, you’ll see a few folks saying, essentially, that I must be lying about our habits for us to have the issues we do. So there’s already stigma around health issues, there’s the fear of not being able to have our stuff covered in the future, and on top of that I get called a liar and to blame on my own site. ;-) You’re getting a long response just because you seem like a thoughtful person, and this is clearly something I think a lot about! Appreciate your deep engagement on this stuff!

      • You are so right Ms. ONL. I became a Type 1 Diabetic in my 20’s. I had no control over getting the disease since no one knows exactly what causes it. And despite taking mostly excellent care of myself for the last 25 years, in the last few months I found out I have the early stages of retinopathy and macular edema. Thank God for newer better treatments to preserve vision as long as possible, and that I have been able to be vigilant about having my retinas checked and caught it early. But ensuring my access great, new (translated costly) treatment to preserve vision, in addition to what it costs to take good care of my diabetes, is about as high on my priority list as it gets. We can all be self righteous about health until “it” happens to us. Healthcare if we want to retire prior to medicare is IMO the number one threat to the 4% rule, 2% rule, or whatever rule we like unless it’s more like the 0.0001% rule.

      • 100% truth: “We can all be self-righteous about health until ‘it’ happens to us.” YES. I’m sorry you drew the short straw on this, though I’m glad to know you’re so vigilant about protecting your health. I hope your eye issues don’t progress — that sounds terrifying. :-(

      • Thank you for linking back to that post. (I have actually read ALL of your posts.) When I went back to review it, I saw that you had responded to a comment I left last summer, so I replied again. Thank you for these opportunities for dialogue. I am interested to hear more about your thoughts on health once you are able to say more. I particularly hope you find time for a post on epigenetics, and as I said previously, for one on what changes we can help make to improve everyone’s health collectively.

        I hope you don’t think I was blaming dementia patients for their illness. You’ll see that I listed dietary OPTIONS as a primary cause–if we’re interested in allocating blame, our lobbyists, subsidies, laws, institutions, and social patterns would receive the brunt of it. This bears out in the food deserts and other calamities you listed that we permit in our culture.

        I understand your worries about always being the high cost patients. We all have at least one area in our budgets where we have to devote extra savings, more than someone else might think is reasonable. As I know you also believe, that’s part of why this is called personal finance. When it has to do with health, though, I suspect it just feels really unfair. It sure seems like it from my perspective.

        I’m sorry you have to put up with those who think you are lying or that your health is 100% within your control. In this case, I apologize if I made you take offense at my comment above–as you can see, that was not the intent. You’re right about stigma. That’s an area I hope to be able to help with during my life, a bit at a time.

        I am also passionate about the determinates of health, preventing illness, and getting the word about about the lesser-known treatments/cures for common ailments. Perhaps I should start my own blog. :)

      • I forgot to mention–it is more accurate to say that there is SOMETIMES a genetic PREDISPOSITION in a given person, but Alzheimer’s disease is well-recognized to be multifactorial, and that environment and lifestyle factors can hugely change both incidence and outcomes.

  37. So many unknown unknowns (I’ve been reading Taleb lately) make planning for such a long-phase without multiple redundancies unwise. But you already know that my version of FIRE is very different from others’ versions. Keeping my toe in my business and being able to adjust as the world and my needs change will hopefully offer extra protections.

    • I think it will offer extra protections. And yeah, I’m clearly more conservative on this issue then many, but I think multiple redundancies or contingencies or hedges make an abundance of sense. I know that is not what a lot of folks want to hear, because they don’t want to prolong their working careers, but this is too big a deal to rush it or use shortcuts.

  38. I agree that the level of spending is a critical factor. For me, it has led to a year by year estimation of likely spend based on changing needs. While it’s still an estimation, being able to have that future picture is very useful. I’m not an advocate of the 4% rule as it eats and depletes portfolio which I consider as the “core wealth generator”. Hence, I invest largely into dividend stocks and other income generating instruments.

    • The question of portfolio depletion vs. oversaving for dividends is a bigger debate we’ll leave for another day! ;-) But re: year-by-year spending, it’s smart you’ve done some projecting out instead of assumed level spending over time. :-)

  39. We FIRE’d at the end of last year (it might actually stick) at ages 48 and 49.

    I’d be curious to know what growth rate folks are assuming for their portfolio growth?

    • Congrats! We’ve seen folks using projections all over the map, from some that make us super nervous at 11% (no joke), down to 1-2% real returns after inflation. We’re in the 2% after inflation camp, but of course that’s just our best guess to be on the safe side. ;-)

      • Yup. We’re using 4% nominal/2%-ish real as well. Some are using 11%?!? Ugh. You should put a poll on your site.

        Good luck tomorrow! 😁

      • Yes, for real, I have had people cite incredibly high (to me) rates they are projecting. I’m always like, “Every year?!?! Have you heard of recessions??” ;-)

  40. I’m really glad you wrote about this. Most blogs tell people to save 25x their expenses and call it a day. It’s way too basic given the different variables from person to person, as well as all the other factors (stock market returns, government policies, etc.) that will impact our account balances and spending.

    I used the template you gave me in a previous comment (thanks!) and took a similar approach of doubling my expenses at 60. It was reassuring to see that the account balances I’m aiming for work under various return rate scenarios. It was also nice to see that I could have the means to spend more in my older years, when my original projections had my expenses increasing by a steady 2%/year.

    I was already planning to spend about $15k/year more than I do now, due to healthcare costs. Hopefully it isn’t actually that much but I figure it’s better to plan for it than to not. Sad that in a country like the US our healthcare is a huge unknown and can change at any time…..

    • I LOVE knowing that your projections all look good to be able to bump your spending later on — future you will thank you! (And I love that you always had that instinct to bump up your spending later for health care costs… though I share your sadness that we have to think that way in this country…)

  41. It’s worthwhile to understand where the 4% rule came from. The rule is based on a series of data starting in 1926. The dilemma is the economy is not smooth, but bumpy and people want to take out smooth withdrawals either fixed or inflation adjusted from their bumpy portfolio. The question asked is what is the safe % withdrawal amount you can remove from a 50:50 portfolio such that if you started on the worst year you would still have money on the 30th year. Worst years are years like 1972-73 because of stagflation, early 60’s, great depression etc. Retirement has 2 major killers, inflation and bear markets. Over the long term a trend may be positive but over the short term quite negative. If you start in a quite negative period, and you start withdrawing money you may run out of money before your portfolio has a chance to recover a positive trend. Bill Began was the original author of the 4% rule and he found in that data series 4% was the withdrawal number (actually 4.5%) whereby a portfolio never failed in 30 years of withdrawal. If you start withdrawing money on a bad year, AND have not planned for food, medical, energy or other expenses it’s a double whammy on the longevity of your portfolio.

    His model has nothing to do with the very important questions raised in this article namely how to deal with increasing expenses in the face of constant withdrawal. It is important to note his model is historical, so it’s a presumption to presume future conditions will be the same as past conditions. Also I think there is over reliance on calculators like FIREcalc, which are also uses a historical data set. Also I think it’s VERY difficult to project 50 years into the future based on historical data. EX: So what happens when your presumed part time just in case job becomes robotitized? The future is based on creative destruction and the past is based on status quo.

    Thanks for bringing up this topic.


    • I guess based on this article retirement has 3 major killers, inflation, bear market, and overspending!

      • I think that’s exactly right! And I think people talk a lot about bear markets and overspending, but less so about inflation, especially the expenses like health care that outpace regular inflation.

    • Couldn’t agree more — I think there is major overreliance on models that cannot predict the future, and also largely don’t account for the need to increase spending at unpredictable points over time. Which of course makes the planning that much more difficult. But better to know that going in than to be under the illusion that simulators are a guarantee of success.

  42. Love the post. This topic is important to me as I consider early retirement, and I have given it a lot of thought. In my mind the biggest unknown is health care costs which are very hard to hedge against, even with insurance. I wrote a post on this a while ago which touches on some of these issues and a few others.


    Seems like the things we want are deflating, while the things we need are inflating.

    • Thanks, pal! What a great way to put it — things we want are deflating, things we need are inflating.

  43. Nice post reminding us that the devil is in the details. I do think the Trinity study and the 4% rule are good places to start.

    As an oncologist, I see things probably a bit different and think of things in terms of recurrence curves. With a recurrence curve, every day a patient lives without cancer, they increase the chance of living without recurrence. Basically, the curve becomes less steep over time as people who are going to recur do, and people were going to be cured remain so.

    Another way to look at this is at time zero, 50% of people will recur five years later. However, five years later only 25% of those without recurrence. Recurrence in the subsequent five years. Those who make it to 10 years out, only 10% will suffer recurrence.

    For example, your five-year chance of failure at time zero is 50%, your five your chance of failure at five years is 25% and your five years chance of failure at 10 years is 10%.

    I think of the 4% rule in this way. If, early in retirement I spend 3% for maybe a decade, And the portfolio looks solid after that decade, I can possibly escalate to 4% for the next decade. This is because i’ve already made it down the portfolio survival curve into less steep sections. So then I spend 4% for the next decade, and if things still look good barring some huge downturn in the portfolio or huge cost-of-living increases you explain, maybe then I can escalate the 5% in my older years to cover for more expenses likely in older years such as healthcare.

    I don’t find it useful to speculate with multiple decimal place accuracy on the myriad factors that can increase my portfolio requirements and/or decrease my withdrawal rates. However, I think knowing these factors exist and pointing out possible magnitudes of impact is important. This is exactly what you do in your post, paint with a broad strokes. Great post!

    • Recurrence curves and sequence of returns risk seem to have similar underlying principles. And it’s a lot like longevity in general: your life expectancy at birth is one thing, but the longer you live, the longer your life expectancy gets.

      Totally agree that speculating about every possible eventuality is an exercise in pointlessness, but knowing that spending will likely need to increase upward over time around certain expenses is key — and sounds like you’re doing that! :-)

  44. Good article. Just one nit. I would remove Gas/Oil entirely from your analysis. It has generally tracked inflation on average. https://inflationdata.com/articles/wp-content/uploads/2015/01/Inflation-Adjusted-Gasoline-Jan-2016.jpg

    Also, you claim that oil prices will inevitably increase once production falls. However, Peak Oil has been largely discredited and we are much more likely to see Peak Demand, followed by a readjustment in crude prices due to falling demand.

    • Hi Angela — I would not claim to be an expert on this stuff. I was going based on other I found that said gas and heating oil can outpace inflation. Thanks for raising this.

  45. I’m excited to hear more about pensions and any advice you have! My husband has already retired with his pension and I’m about to do the same next summer…and several questions keep popping up. I will be fairly young (48..young in pension years) so working on identifying a potential Plan B if needed. Lots of questions and the financial people I have spoken to don’t know how to answer them. So, bring on the pension article! :)

    • I don’t know that I’m qualified to write about pensions, as I’ve never had the option of one! But I’ll definitely be writing more about challenges facing early AND traditional retirees in short order. ;-)

  46. I think you have to be flexible, I don’t put social security or my HSA savings into my numbers, both will be gravy if available. Most people I know with Medicare said it is cheaper (with more coverage) then when they had employer coverage, I hope that is true, I work in healthcare and there are a ton of different programs out there where people don’t have to pay for meds once on Medicare, hopefully they will always be available. I plan on working part-time (after I travel as long or little as I feel like it) if I am able to go back to my profession I can get insurance cheap, if not I will do a lower paying job that has benefits (hospitals generally offer benefits at 20 hours a week for all employees)

  47. From my personal experience, you are 100% correct. Spending during retirement — ESPECIALLY early retirement — isn’t level. There may be some baseline that you tend toward (like reverting to the mean, basically), but some years you spend a lot, and some years you spend a little.

    I look at it as being similar to the stock market. Over the long run, stocks offer a 6.8% real return. That’s their average. But average is NOT normal. Some years, stocks drop 20%. Other years they’re up 40%. But they’re very rarely at or near 6.8%.

    The same is true with spending. I say that my average spending is around $36,000. (That’s a guess that has turned out to be somewhat inaccurate.) In reality, that varies. The year following my divorce was relatively cheap. I didn’t travel much, and I rented a small apartment. During our RV trip around the country, we actually didn’t spend much at all (aside from the RV purchase itself).

    But this year, 2017, I’ve spent TONS! I bought a new home and had to do some repairs. I purchased a website. I did some travel. I built my writing hut. And so on. It’s a very expensive year. The most expensive, in fact, since I entered early retirement.

    I think there needs to be more discussion out there of what life is ACTUALLY like in early retirement. Because from my experience, it’s not a static thing.

    • So glad you chimed in and shared this, JD! I hope some of the folks who think spending is level and average at all times will take note, given that you speak from years of experience. I’d love if you’d share more about your actual life when you have Get Rich Slowly back up and running the way you want, and it’s definitely something we’ll do as well!

  48. I really agree your views. There can be too much X factors in life. We cannot always follow the 4% rules. We need to be flexible.