Let’s save an investor has been diligently contributed to his/her Retirement Accounts, ROTH IRA and Brokerage accounts…
He/She is in her mid 40’s, married and with let’s say $3,000,000 (nice round number)
Using the 4% rule, this couple would have $120,000 per year, which is more than enough…
If this was you, how would you approach this situation?
Those numbers give you many options. What does your life plan look like? Is early retirement interesting? Do you like your job? Would you like to found your own company? Or retire and volunteer for a worthy organization. Travel the world? Spend time with the grandkids?
Start by doing a retirement plan. What are your living expenses? How will they change in retirement? Health insurance covered?
Personally I retired at 53 when my investments hit 2x my retirement number.
Is that $3MM from investments? Can you continue to grow it? Is it inheritance? How is it invested and managed?
Your situation gives you many choices. Do your research. Choose wisely. And perhaps develop a list of several to try before you decide.
First of all congrats. I would spend more than a little bit of time really deeply thinking about what brings me joy. This would be a joint venture, as I am married. Then we would devise a plan to do that. Three million gives you a lot of flexibility.
Jk
I would be really, really, really cautious about relying on that number. Retiring in the mid 40’s means two extra decades of retirement, and spending, and unexpected events. It is also early enough that children(if any) may still have college and weddings ahead of them. The 4% rule does not come with a guarantee, and you might want to have some extra in retirement to actually do stuff with all that free time.
Sorry to be a party pooper. 8-(
You aren’t a party pooper…
I didn’t disclose that this hypothetical situation also includes a $75,000 pension per year if I worked until 55, 9 more years or $62,500 if i stopped working at 50 and started the pension at 55…
Also, lifetime health insurance for myself at 55
and…if Social Security is still around…
but on the otherhand, I still have a mortgage until 55 ( a 15 year) and a 9 and 12 year olds that still need to go to College…
I guess it all depends… 
If you’re following the 4% rule, ending a 30-year retirement payout period with 5 or 10 times your starting balance is far more likely than running out of money. It’s just the simple arithmetic that the S&P 500 returns about 10% per year on average, and over a 50-60 year investing lifetime your performance will very likely revert to the mean.
I’m 31 years into the 4% rule having quit my engineering job way back in 1994 at age 38. Your biggest money problems will be coping with excessive cash flow and implementing legal tax avoidance.
intercst
Don’t forget that for 2025 a married couple can draw $126,000/yr in qualified dividends and capital gains from a portfolio in the 0% bracket. A neighbor couple with $126,000/yr in wage and salary income will be paying about $18,000/yr in Federal income tax and FICA.
intercst
A few things I would consider, with the understanding that I can’t give financial advice:
Instead of focusing on maximizing future net worth, it might make sense to work on figuring out how to get enough money efficiently available in an accessible fashion. For instance, for someone in his or her 40s, a Roth IRA isn’t usually the best source of money, since only the direct contributions and any rollover contributions that have aged at least 5 years can be accessed without taxes and penalties.
Figure out how you want to spend your time. If you like your job, enjoy the far less stressful environment that comes from knowing you don’t need it. If you don’t like your job but still want to work, figure out how to get yourself into a job you can enjoy, even if it comes with a pay cut. If you don’t want to work, recognize that you will still have 24 hours in your day, and those hours can get really long if you don’t find a fulfilling way to spend them. Charities are often looking for volunteers, for instance.
Should you decide to reduce your income from work to the point where you need to pull money from your investments in order to live, it is important to have an asset allocation strategy that gives you enough “high certainty” money to last through a stock market downturn. Nothing burns through a stock portfolio quite like having to tap it to pay the bills when it’s down substantially.
Recognize the interplay between your income and any subsidies that may be available, like health care premiums. Once you start living off your investments, key costs like medical insurance can swing wildly based on your “income”, which can mess with your budgeting and be a little tough to deal with as that income fluctuates year by year.
As others have mentioned in this thread, the 4% rule is decent when it comes to saving for retirement, but it’s not necessarily the best option when it comes to spending once retired. It makes sense to do a bit of research into alternative retirement portfolio spending strategies and see which, if any, make sense to you.
Even with the limitations of the 4% rule, it’s good to recognize that with a $3,000,000 nest egg, the 4% rule’s $120,000 of available money in year 1 is likely somewhere near the ballpark of what could be made available for withdrawals. Recognize that if you do go full early retiree mode, that money has to cover everything — taxes, any early withdrawal penalties you may face, health insurance, plus all the regular bills…
Flexibility is important for an early retiree. Leave some wiggle room between what you need to pull out to cover your core costs and what your plan allows you to pull out. That way, if health insurance costs spike or the market tanks or your home needs emergency repairs, or whatever, you will be better equipped to deal with it.
Regards,
-Chuck
A quick question Intercst…
If you retired at the peak of 2000, would that have changed your outcome?
Sequence of returns risk???
Many talking heads are saying to use a more conservative 3% withdrawal rate…
Consider working until 50 and then delay your pension until 55. Create an artificial pension for the years between 50 and 55. Then your withdrawal rate to hit 120k per year is more like two percent. Or figure out what you would qualify for pension wise and work the math from there. For almost any result whether it be 30 or 50 years, four percent is safe enough if the future resembles the past. Personal anecdote here, but we have been retired eight years, drew 8 percent for the first four years, then 3.5% the next four years. Have seventy percent more financial assets than when we retired.
I was blessed with the insight at an early age that I never enjoyed sitting in a classroom or an office. But I realized that it was likely necessary if I was going to make some money, so I tolerated it.
Once I’d accumulated enough capital to not need a paycheck in my late 30’s, it was a very easy decision to retire. Over the years, I’ve found that the best part of retirement isn’t the money and wealth, it’s the fact that “there’s nothing I HAVE to do, and nobody I HAVE to report to.” I’d have difficulty filling out a time sheet to account for the past 30 years, other than to say it’s been completely awesome.
intercst
I’m actually working on my annual “Real-Life Retiree Investment Returns” article which will be published on April 1st. As of year end 2024, the Year 2000 early retiree with a 60% stock, 40% fixed income portfolio, rebalanced annually, still has 98% of his initial account balance after 24 years of inflation-adjusted withdrawals and 50%+ stock market declines in 2000 and 2008. There’s little chance he’ll run out of money even if he lives another 25 years.
Here’s last years update – see chart at end of article for the Year 2000 retiree performance.
What most people don’t understand is that the 4% withdrawal isn’t based on “average performance”. It’s literally assuming that you’re going to be retiring at the worst possible time, like the eve of the Stock Market Crash of 1929 and the Great Depression. The asset allocation that allows you to survive that is 60% stock/40% fixed income. If you don’t happen to retire into the next Great Depression, you can increase your stock allocation over time as your portfolio grows as I’ve done – I’ve been 90%+ stock since 1997 and the 50%+ declines in 2000 and 2008 are lost in the round off with portfolio growth over time.
If you wait until you’ve accumulated enough to live off 3%, you’re really just adding to the already substantial hoard of wealth you’re likely to have at the end of 30 years.
intercst
Yep. People don’t comprehend the difference between a 4% withdrawal and the 10% average return on the S&P 500.
After 30 years of withdrawals, as a percent of assets, mine has gone from 4.00% in 1994 to 0.30% in 2024 – and I’m still waiting another year to start drawing Social Security at age 70.
intercst
Is the Warren Buffet Portfolio buying BRKA and letting it ride?
or is it is recommendation of 90% s&P and 10% bonds???
No. The Warren Buffett Portfolio is 75% BRK, 25% fixed income. The portfolio value would be a lot higher if it was 100% BRK.
I’ve got it all, a 10% allocation to BRK, about 20% in index funds and the rest in individual stocks. I’d only be 90/10 if I was withdrawing 1% of assets per year or less. I’m now down to about 96/04 today and am still too heavy in cash and fixed income, but unspent dividend income keeps accumulating, and eventually, you have to set aside some cash for taxes.
intercst
I am not sure it is more than enough. Future inflation, medical expenses other lifestyle creep’s all could potentially torpedo this number. Also, you are still young and potentially have another 40 or even 50 year of life ahead. So do you want to retire early? Think about it.
Again, that’s what most people miss. The investment return of the S&P 500 far exceeds most employees’ wage & salary growth. I had a successful 17-year engineering career in the oil & gas and chemical industries, quit at age 38, and haven’t worked since. Yet my spendable income and net worth is little different from most of my college classmates who kept their noses to the grindstone for an additional 25 or 30 years.
How is that possible? Skim, scam and fraud. You don’t need to start a company, invent something, or really do anything special to retire early. Merely avoiding getting cheated and robbed, and capturing the “skim-free” return of the stock market is enough to do it for you.
Once you graduate to the Leisure Class taxation regime that favors inherited wealth and those living off investment income, taxation is optional (e.g., for 2025 the first $126,000/yr of qualified dividends and capital gains for a married couple is taxed at the 0% rate, assuming that’s your only income.) A neighbor couple with $126,000/yr in wage & salary income will pay about $18,000/yr in Federal income tax and FICA.
If you’re a max-FICA wage earner from your mid to late 20’s (pretty common in engineering for good performers who move around) you don’t get much in additional Social Security benefits after about age 45 or so. Once you hit the 2nd bend point of the AIME calculation you qualify for 77% of the maximum monthly benefit while paying about half the FICA taxes of someone with 35 years of Max-FICA earnings. There’s not much of a penalty for having lots of zero earning years in your Social Security record.
You compound these advantages over 20 or 30 years, and it’s a fortune. Under current tax law, about the dumbest thing a person can do is to work for wage & salary income.
intercst
Do you have a preferred way to invest in the S&P 500? Any ways you would avoid? Is there any reason to look beyond the Fidelity 500 Index Fund (FXAIX) for someone already with Fidelity?
Thanks!
Wow…
I went down the rabbit hole and read your article…then did more clicking…and then more research about you…
You were at the forefront of the FIRE movement before everyone else???
While Mr. Money Mustache gets all the fame and recognition, what about you?
You have a lot of valuable information to share…Were you an active member of the the Motley Fool Rule your Retirement service? I never joined because I was never that close to retiring…
This is a real risk. A key way to deal with it is to have enough money invested in higher certainty assets than stocks to ride through a down market. Even @intercst — our resident very early retiree — started with an asset allocation plan that included non-stock holdings. @intercst has been able to increase his stock allocation over time, due to the market’s long-run growth exceeding his draw-down needs.
My personal plan is a diversified investment grade bond ladder of roughly 5 years, with two years of flexibility on either side to help deal with market volatility. I also plan to keep a 3-6 month cash emergency fund, both to cover unexpected expenses and to deal with the potential loss of some of those bonds to default.
Let’s ignore inflation for a moment to make the math easier. Say I expect to need $6,000 in “income” per month to cover all my costs. Of that, say I expect $2,000 per month from Social Security, leaving $4,000 per month to come from my portfolio. A five year bond ladder would require $240,000 invested ($4,000 * 5 * 12). On top of that, a 6 month emergency fund would require $36,000 ($6,000 * 6).
So that’s $276,000 socked away in “higher certainty” assets than stocks. Note, also, that the $36,000 in cash covers 9 monthly rungs on the 60 month bond ladder. That would be a lot of investment grade defaults before reaching the point where it would affect my lifestyle.
The general plan would be to spend the money from Social Security and the maturing bonds, using “normal” stock returns to keep the bond ladder around that five year length.
Let’s also say that the $276,000 is part of an overall $1,000,000 portfolio. That leaves $724,000 available for stock investing. If the market delivers a 10% return in a year, that’s $72,400 of gains and dividends. Compare that to the $48,000 of maturing bonds that need to be replaced, and it becomes feasible to harvest some of the gains & dividends to keep the bond ladder topped off, leaving the rest invested in stocks. Remember, also, that most bonds pay interest, which can also be used to help shore up cash or extend the bond ladder if needed.
Of course, the stock market will not always deliver 10% returns. That’s why spending is tied to the maturing bonds and Social Security, and why the bond ladder has a five year target with +/- two years of flexibility.
A bad year in the market means I let the bond ladder shrink. A really, really good year in the market means I add more length to the bond ladder. A “normal” year in the market means I replenish the maturing bonds, while still keeping some of the stock gains compounding for potential long-term growth. The unpredictability of the market in any given year, the potential for substantial near-term market losses, and the fact that bills need to be paid means there’s always a need for some higher certainty assets…
Over the long haul, it’s quite possible that the percentage allocation to bonds will drop, but it won’t go to 0, since those maturing bonds provide spending cash and protection against sequence of return risks.
Now, in reality, I would likely have more than $240,000 in bonds for that five year ladder. I might have $48,000 for the first year, $51,000 for the second year, $54,000 for the third year, etc., to anticipate some level of inflation. So while the concept generally holds, the actual numbers will be a bit different.
Does this cover all potential risks? No. If the US completely collapses, I’m in a world of hurt. If we face hyperinflation, my embedded inflation estimate won’t be sufficient to cover the cost increases. If formerly investment grade companies start going bankrupt en masse across industries, chances are that both my bonds and my stocks will suffer…
There comes a point, though, where you have to accept the risk. I’m generally of the perspective that if things get that bad, I’ll probably have bigger things to worry about than just my portfolio…
Regards,
-Chuck