The_4_Percent_Rule_Is_Obsolete
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and hopefully everybody is having a wonderful,
00:00:04.800 | wonderful summer.
00:00:06.240 | It's August 16th, 2020 and the Nasdaq is up over 25%.
00:00:12.440 | The S&P 500 is back to all time highs and the pandemic still rages on.
00:00:18.400 | So frankly, it is unbelievable what's going on in the world today.
00:00:22.600 | And I hope everybody's feeling better.
00:00:25.360 | Hopefully everybody's healthy and hopefully everybody's net worth is close to or at all
00:00:30.520 | time highs as well.
00:00:32.480 | So one of the things I've been talking about in my newsletter is how we should be more
00:00:36.360 | grateful to the Federal Reserve and the central government.
00:00:40.060 | Because without them, without all their stimulus money, their enhanced unemployment benefits,
00:00:45.400 | the stimulus checks to certain folks, I think the stock market would probably go down 50,
00:00:51.520 | 60, 70%.
00:00:52.520 | The real estate market may or may not tank because the bond market would catch a bid
00:00:57.440 | and interest rates would go way down.
00:01:00.120 | But I think overall, we'd be in a much worse place than we are right now.
00:01:05.040 | And so I think we should be thankful, thankful to the Fed for getting it, understanding and
00:01:09.780 | acting quickly that things are really, really bad.
00:01:13.260 | But as soon as I said, hey guys, we should be thankful, I got a number of angry responses
00:01:17.920 | from readers who said, you know what, the Fed is just terrible for us, for the economy
00:01:23.080 | and for the future.
00:01:24.600 | One guy said they create debt, they print money, they weaken the dollar, and they create
00:01:28.960 | socialism.
00:01:29.960 | They also ensure there is an unhealthy power grab at the central government.
00:01:34.020 | We now accept that the central government is the babysitter, mother and protector of
00:01:38.020 | us when we stub our toes financially, physically or by other means such as a national disaster.
00:01:45.080 | And so there's a lot of dissatisfaction with the Fed and the central government.
00:01:49.480 | And I find this response, frankly, quite interesting, because unless you think the central government
00:01:54.500 | manufactured this virus to unleash to the world, so we can have that power grab and
00:01:59.320 | control us all, I think what they're doing is very, very helpful to help stave off poverty,
00:02:06.840 | extended unemployment, you know, a decline in your wealth and housing and stocks and
00:02:11.220 | so forth.
00:02:12.220 | I think they are on the ball.
00:02:14.560 | And without them, the world would be a much worse place.
00:02:18.200 | But there is one thing the central government and the Federal Reserve have done.
00:02:23.000 | And that is, that is they've made retiring early or retiring normally or staying retired
00:02:31.120 | much, much more difficult.
00:02:33.660 | And the reason why is due to a record amount of stimulus being created in a shorter period
00:02:38.680 | of time.
00:02:39.680 | So interest rates have dropped faster than a cement block tied to a dead body thrown
00:02:44.080 | off a boat in the middle of Lake Tahoe by one of Capone's capos.
00:02:49.240 | And so as a result, the 10 year bond yield is at about point 7% at the time of this recording.
00:02:55.640 | And it did decline to about 0.51% a couple months earlier.
00:03:01.200 | So at a 0.7% risk free rate of return, 1 million will only generate $7,000 a year in risk free
00:03:09.160 | income.
00:03:10.160 | And that's pre tax.
00:03:11.160 | So if you've got your home paid off, your health insurance covered, all your debt done
00:03:16.500 | and your kids are all grown up and independent, 7,000 a year plus Social Security will provide
00:03:22.540 | for a very simple retirement lifestyle.
00:03:25.400 | Even if you got the maximum monthly Social Security payment of about $2,900 a month,
00:03:30.660 | that's about $35,000 a year.
00:03:33.300 | Add on the $7,000 a year you get risk free.
00:03:37.540 | Well $42,000 is not exactly living a large, large lifestyle.
00:03:42.900 | Unfortunately, the average Social Security payment is closer to $1,500 a month instead.
00:03:48.100 | So reality, the annual Social Security average benefit is closer to $18,000.
00:03:53.580 | And that is if the Social Security program continues.
00:03:57.880 | Right now it's underfunded by about what 25 to 30%.
00:04:01.240 | So you might have to lop off 25 to 30% on your expected number just to be conservative.
00:04:08.060 | And with all this stimulus being spent, eventually our kids or ourselves or our grandchildren
00:04:13.980 | will have to pay back all this debt.
00:04:16.760 | And I know some of you guys are saying, look, well, interest rates are down.
00:04:20.900 | That means that other risk assets are looking relatively more attractive because you're
00:04:25.580 | only getting so little in a risk free 10 year bond yield or a money market account.
00:04:31.300 | So therefore, why not invest in stocks and real estate?
00:04:34.460 | And that's what you're seeing happening.
00:04:36.500 | People are investing in the stock market more and in the real estate market more across
00:04:41.060 | the nation because interest rates are so low.
00:04:44.220 | However, don't forget, if you are a retiree or you're planning on retiring in the next
00:04:49.780 | five years or maybe even 10 years, you are going to be more risk averse.
00:04:55.540 | You're going to lower your risk profile because you don't want to rewind and go back in time
00:05:00.580 | and lose your money and then have to spend all that time to make up all your potential
00:05:04.380 | losses.
00:05:05.380 | We're lucky, folks.
00:05:06.380 | March 2020, we saw what, around a 32% decline from the peak to the trough.
00:05:11.580 | I think it would have been down 60, 70% if the federal government and the Federal Reserve
00:05:17.180 | didn't step in.
00:05:18.780 | It's important to understand that the risk free rate of return, the 10 year bond yield
00:05:23.780 | is intertwined with risk assets and risk asset returns.
00:05:30.400 | For example, a company looking to raise money to fund operations isn't going to issue a
00:05:34.660 | bond that pays 8% unless it's in very dire straits.
00:05:39.100 | Instead, a company will probably discover that adding an additional 2% or 3% interest
00:05:44.740 | rate premium to the 10 year bond yield will garner enough demand.
00:05:49.460 | Supply and demand, folks.
00:05:50.880 | Everything is relative.
00:05:51.880 | If you think about it from a dividend paying perspective, companies, they've grown in value
00:05:58.380 | because their operations have grown, but also there's a large attraction to dividend paying
00:06:03.700 | companies.
00:06:04.700 | Now, in the past, maybe a dividend payout ratio was 80% and the yield would be somewhere
00:06:11.140 | around 3% to 4%.
00:06:13.980 | But now with the 10 year bond yield at under 1%, senior management of the company is going
00:06:19.340 | to rationally think, "Okay, what is the lowest dividend payout ratio and the lowest dividend
00:06:25.900 | yield we can have so that investors still invest in our stocks, still hold our stocks,
00:06:33.820 | while the company also retains the most amount of operating capital to fund operations, expansion,
00:06:41.340 | and so forth?"
00:06:42.780 | So logically, any rational management will start thinking, "Okay, let's cut the dividend
00:06:46.980 | payout ratio, let's lower the dividend yield because we don't have to pay as much.
00:06:52.500 | Everything is relative because if they don't want us, well, the alternative is only earning
00:06:57.700 | 0.7% in a 10 year bond yield or maybe other companies are paying 2.7% to 3.7%.
00:07:03.980 | Now because our company is in a stronger financial position, I think we're going to be good enough
00:07:09.780 | with a 2.5% yield or a 2% yield from a 3.5% to 4%.
00:07:14.160 | This is how management thinks.
00:07:16.940 | This is how companies are run.
00:07:18.540 | They need to find the optimal balance between attracting investors, attracting capital,
00:07:25.100 | and running their operations and keeping capital to expand and maybe plan for a rainy day.
00:07:31.700 | It is my belief that using the 10 year bond yield as a barometer for retirement income
00:07:36.340 | generation is conservative, but I also believe the ideal withdrawal rate in retirement doesn't
00:07:42.340 | touch principles as long as your estate is below the estate tax threshold.
00:07:46.820 | In other words, if your estate is above $11.58 million per person, feel free to increase
00:07:53.260 | your withdrawal rate to whatever you want.
00:07:55.580 | 5%, 6%, 8%, 10%.
00:07:58.300 | You got to do the math because paying a 40% death tax on every dollar above the estate
00:08:03.380 | tax threshold is a crying shame and nobody should do that.
00:08:07.100 | If you die with too much money, you lose.
00:08:09.720 | It's a waste of resources, a waste of time.
00:08:12.980 | Might as well spend it on your children and charitable organizations now while you're
00:08:16.300 | still alive because it feels better and you can see the results of your giving.
00:08:21.620 | Alright, so now we've come to the heart of the issue.
00:08:25.620 | Why the 4% rule is outdated.
00:08:29.100 | The 4% rule is based on the Trinity University study conducted by three Trinity University
00:08:34.940 | professors back in 1998.
00:08:37.820 | So more than 22 years ago, folks, inflation and interest rates were much higher and pensions
00:08:44.980 | were very common then.
00:08:46.740 | Pensions now, I think it's like under 16% of Americans are eligible for pensions.
00:08:51.540 | And even if you're eligible for a pension, that pension amount is not going to pay enough
00:08:56.820 | to fund a normal retirement.
00:08:59.060 | It's just going to be a small portion of it and it's just going to be cobbled together
00:09:02.300 | by a pension, your after-tax portfolio, and so forth.
00:09:07.540 | So today is different from 1998, folks.
00:09:09.780 | This is point number one.
00:09:11.780 | The 4% rule is the most common safe retirement withdrawal rate cited, but it is outdated.
00:09:18.140 | It is obsolete.
00:09:20.660 | And the main reason why is this.
00:09:22.360 | And we're going to go back to the 10-year bond yield, which I think is the most important
00:09:26.540 | financial figure to track.
00:09:28.180 | It tells you everything, folks.
00:09:31.620 | Lots of things because everything is intertwined in finance.
00:09:36.020 | Back in 1998, the 10-year bond yield, also known as the risk-free rate of return, ranged
00:09:41.700 | between 4.41% to 5.6%.
00:09:46.880 | So the average, let's say, was around 5%.
00:09:49.820 | Therefore, of course, you'd likely never run out of money in retirement following the 4%
00:09:55.820 | rule because back then you could earn 1% more on average risk-free.
00:10:00.780 | Let me say that in a different way.
00:10:02.960 | If you withdraw 4%, hey, don't sweat it because you can earn 5% risk-free and replenish a
00:10:10.340 | portion of your retirement portfolio.
00:10:14.100 | And not only that, you probably had a pension that was guaranteed for life.
00:10:19.540 | And not only that, Social Security was not as underfunded as it is today.
00:10:25.780 | Following a 4% rate, no sweat because not only was the 10-year bond yield at 5%, you
00:10:33.240 | had dividend yields at 4% to 5%.
00:10:37.680 | You had bond yields from treasury bonds to corporate bonds to municipal bonds.
00:10:43.400 | Many of them were generating over 4%.
00:10:46.400 | Municipal bonds, one of my favorite passive income sources, they're double tax-free.
00:10:52.400 | Back then, getting 4% plus double tax-free was highly feasible.
00:10:57.400 | Today, not so much at all.
00:10:59.440 | It is a different time, folks.
00:11:01.840 | Therefore, using the 4% rule that was created in 1998 for 2020 and beyond doesn't make any
00:11:09.160 | sense.
00:11:10.200 | And what's more interesting is that despite this logic, that the risk-free rate of return
00:11:15.720 | was 25% higher than the 4% rule at the time it was created, I've received probably 70%
00:11:21.960 | of the comments in my post were negative.
00:11:24.520 | It's as if people cannot adapt, understand, and change.
00:11:28.000 | And if you cannot understand, adapt, and change, you're going to get left behind.
00:11:32.600 | Or you're going to put your finances at risk.
00:11:35.440 | Or you might just go extinct like the dinosaurs.
00:11:38.440 | You've got to understand the economics of today and adapt.
00:11:42.320 | It's like being stuck on the fact that having a million-dollar net worth means that you
00:11:47.200 | are a true millionaire and you get all the spoils of what being a millionaire has historically
00:11:53.320 | been written about and talked about.
00:11:55.440 | But think about it this way.
00:11:57.120 | Inflation.
00:11:58.120 | Inflation, inflation, inflation.
00:11:59.800 | If you were a millionaire in 1945, yes, you were rich.
00:12:05.000 | Today, not so much due to the loss of purchasing power due to inflation.
00:12:10.200 | So if you put a compound growth rate just based on inflation from 1945 to 2020, a million
00:12:17.060 | dollars back in 1945 is worth closer to about 14 million dollars today, folks.
00:12:23.960 | I've written in an article that 3 million is the new 1 million.
00:12:28.120 | But hmm, I think even 3 million is kind of like, let's just do the numbers.
00:12:33.120 | Don't get upset.
00:12:34.200 | Don't get upset at me or the reality.
00:12:36.440 | Just run the numbers and you will see that a million doesn't buy what it used to 30,
00:12:42.080 | 40, 50, let alone 55 years ago.
00:12:45.320 | OK, so let's say you agree that the 4% rule is irrelevant.
00:12:49.960 | It's obsolete.
00:12:51.600 | So what's the new safe withdrawal rate to follow?
00:12:54.560 | I think that rate is 0.5%.
00:12:58.000 | If you provide a similar 9% to 28% discount to the 10 year bond yield to come up with
00:13:03.440 | a safe withdrawal rate of 4% back in 1998, then the safe withdrawal rate in 2020 and
00:13:10.360 | beyond is equal to the 10 year bond yield times 72% to 90%.
00:13:16.640 | And you thought I was overly conservative following a withdrawal rate based on the 10
00:13:20.880 | year bond yield.
00:13:21.880 | No, if we're going to be consistent with back in 1998 and the creation of the 4% rule, we've
00:13:27.220 | also got to take a discount.
00:13:29.440 | Therefore, with a 10 year bond yield at about 0.7%, a safe withdrawal rate is actually closer
00:13:36.040 | to 0.5 to 0.63%.
00:13:40.480 | When the 10 year bond yield was at its low of 0.51%, the safe withdrawal rate was equivalent
00:13:46.240 | to 0.36% to 0.46%.
00:13:50.560 | So to make things simple and consistent, the new safe withdrawal rate equals the 10 year
00:13:54.680 | bond yield times 80%.
00:13:57.080 | We'll use an average 20% discount to the 10 year bond yield to come up with a safe withdrawal
00:14:01.440 | rate.
00:14:02.440 | This 20% can be viewed as a buffer in case of financial emergencies, bear markets, a
00:14:08.040 | lost decade, poor spending habits, and a further decline in interest rates.
00:14:13.320 | And if interest rates do decline by much greater than the 0.51% bottom we saw earlier in the
00:14:20.440 | year, then we're just going to use the formula and we're going to calculate our safe withdrawal
00:14:24.080 | rate accordingly.
00:14:26.040 | Now I know what some of you guys are thinking right now, that I'm crazy, that the 0.5% rule
00:14:34.160 | is just way, way too conservative or way, way, way too aggressive, however you want
00:14:38.720 | to look at things.
00:14:40.200 | But the reality is that's how things are today.
00:14:43.980 | Interest rates have declined.
00:14:45.120 | If you're angry, blame the Fed for bailing us out.
00:14:49.000 | Blame the central government for doing whatever.
00:14:52.160 | Don't get angry at me.
00:14:53.480 | I'm just providing you some very logical financial perspective of why we should adapt and move
00:14:59.800 | away from the 4% rule.
00:15:02.000 | Further I haven't had a job since 2012.
00:15:05.080 | So it's been more than eight years of being unemployed or quote retired.
00:15:09.640 | And I haven't told anybody I've been retired since 2013 because I felt it sounded silly.
00:15:16.080 | And instead I told people I've been teaching tennis or I'm a writer or blogger or whatnot.
00:15:21.480 | The point is I'm living this life and I'm giving you two perspectives.
00:15:26.320 | One a logical perspective based on finances and one on perspective based on eight years
00:15:31.400 | of not having a job.
00:15:33.300 | And it is very different.
00:15:34.300 | It's very different once you no longer have a job.
00:15:38.040 | All the emotions good and bad come emerging out of your body, emerging out of your soul.
00:15:44.040 | And I've written about this before in articles such as the negatives of early retirement.
00:15:49.000 | Nobody talks about it.
00:15:50.200 | Nobody likes talking about it.
00:15:51.320 | I just share it.
00:15:52.320 | I just say the good and the bad because I want you guys to make an informed decision.
00:15:57.000 | Conversely it is very easy to pontificate about what your safe withdrawal rate should
00:16:02.920 | be in retirement.
00:16:04.680 | How much you should have in your net worth so you can retire comfortably while you still
00:16:09.880 | have a day job when you have never experienced not having that safety net of health care
00:16:15.040 | benefits and a steady paycheck and a network of people who can provide you job opportunities.
00:16:21.800 | It's very different folks.
00:16:23.000 | I'm telling you right now you can only experience the true feeling of retirement once you have
00:16:28.800 | burned your bridges.
00:16:29.800 | Right.
00:16:30.800 | You don't have a paycheck.
00:16:32.520 | Nothing.
00:16:33.520 | Even the Trinity study back in 1998.
00:16:37.000 | This was done by professors.
00:16:38.400 | Three professors who probably were all tenured professors who all had nice incomes and probably
00:16:44.280 | pensions so they were also pontificating.
00:16:47.760 | What is the probability that you won't run out of money over a 30 year time period in
00:16:51.720 | retirement when they were still actively working and doing what they love to do.
00:16:56.720 | So the reason why I'm not angry or pissed off about the 0.5 percent rule is that it's
00:17:02.800 | just a guide.
00:17:04.200 | It's a guide.
00:17:05.200 | It's not the end all be all rule for how much net worth you should have or what you should
00:17:09.440 | really withdraw while you're in retirement.
00:17:12.120 | I'm not pissed off at the federal government or the central government.
00:17:15.000 | I'm happy that they're saving all of us.
00:17:17.440 | The thing is 0.5 percent rule is still a higher withdrawal rate than I have withdrawn since
00:17:24.360 | 2012.
00:17:25.360 | And I'm telling you this because when I left in 2012 I felt like we were kind of at the
00:17:30.440 | bottom of the market.
00:17:31.820 | So the last thing I wanted to do with withdraw my retirement income because I had already
00:17:36.920 | lost a multiple six figure job income.
00:17:40.160 | So instead I made it a point to just live off my severance and try to make active income
00:17:46.720 | through things that I enjoy doing.
00:17:48.240 | And the two things I enjoy doing most are teaching tennis and playing tennis and writing.
00:17:54.320 | So I focus my attention on financial samurai and on teaching tennis and I also did some
00:17:58.560 | Uber driving here and there and so forth.
00:18:00.760 | And what I did was I tried to make enough money to still save at least 50 percent of
00:18:06.480 | my active income while in retirement.
00:18:09.280 | And here's a point a lot of people who talk about retirement who aren't retired cannot
00:18:13.960 | understand.
00:18:15.560 | It's that if you've been saving a lot of money let's say it's 30 percent 50 percent 70 percent
00:18:20.720 | of your after tax income for let's say a decade or two decades.
00:18:24.960 | It is very hard.
00:18:26.180 | It is almost impossible for you to flip the switch and reverse and start drawing down
00:18:30.800 | principle.
00:18:32.420 | And therefore once you do retire or reach financial independence you will see that the
00:18:37.400 | zero point five percent rule is really not that onerous because it could still be too
00:18:43.560 | high for you because you will refuse or you may refuse not to withdraw anything.
00:18:48.720 | So you'll have a zero percent withdrawal rule.
00:18:51.640 | Since 2012 I don't think I've met anybody who retired before the age of 60.
00:18:57.520 | Stop trying to make some supplemental retirement income.
00:19:01.360 | You know long gone are the days where you just retire and do nothing.
00:19:05.280 | Nobody wants to do that anymore.
00:19:07.160 | Because we're all interconnected.
00:19:08.320 | We've got the Internet.
00:19:09.640 | We've got a lot more freedom.
00:19:11.260 | We've got a lot more productivity.
00:19:13.240 | The natural tendency is for you to go and do things you enjoy.
00:19:18.120 | And a lot of times those things you enjoy can pay an extra amount of money.
00:19:22.280 | So for example one year I taught tennis as private lessons.
00:19:26.080 | I think it was eighty dollars an hour for an hour and a half.
00:19:28.760 | I wanted to do an hour and a half because those warm ups and so forth and I wanted to
00:19:32.360 | get a good amount of cardio exercise as well.
00:19:35.560 | So if I did that let's say 10 hours a week that's not a lot of hours.
00:19:39.760 | 10 hours a week a couple lessons a day during the weekdays.
00:19:43.760 | That is eight hundred dollars in cash.
00:19:46.400 | Eight hundred dollars in cash is a great amount of supplemental retirement income.
00:19:50.920 | And if you don't like tennis you probably have something else you like where you can
00:19:54.400 | make a little bit of money as well.
00:19:56.600 | All right enough perspective.
00:19:58.760 | Let's use the 0.5 percent rule to help figure things out.
00:20:04.160 | You can use it as a net worth stretch target.
00:20:07.480 | So with the 4 percent rule you multiply your annual expenses by 25 to get a target net
00:20:12.520 | worth with a 0.5 percent rule.
00:20:15.460 | You multiply your annual expenses by 200 to get a target net worth.
00:20:21.000 | OK wow 200.
00:20:22.720 | That is ridiculous.
00:20:24.000 | That is so much.
00:20:26.020 | For example our family let's say we want to live off 200 thousand dollars a year because
00:20:31.000 | this family of four and we live in an expensive city and we'll probably continue to live in
00:20:35.320 | an expensive city for the rest of our lives.
00:20:37.800 | So 200 thousand dollars in annual expenses times 200 is 40 million dollars.
00:20:44.520 | So wow that is a crap load of money.
00:20:47.760 | As two unemployed parents amassing 40 million dollars.
00:20:52.520 | It's going to be really difficult.
00:20:53.920 | We've only got financial samurai to help us generate active income at the moment.
00:20:58.100 | You know I got to decide and my wife has to decide do we want to try to shoot for 40 million
00:21:03.480 | to say that we're financially independent by going back to work for 10 hours a day for
00:21:08.360 | the next five to 10 years and then not seeing our children grow up as much.
00:21:13.560 | I don't think so.
00:21:14.920 | But again I'm just using the 0.5 percent rule as a way to come up with a stretch net worth
00:21:21.920 | target in this low interest rate environment.
00:21:24.120 | And so should you.
00:21:25.700 | All you got to do is divide your annual expenses by 0.5 percent to come up with your net worth
00:21:30.760 | stretch goal or more easily you can multiply your desired annual expenses and retirement
00:21:36.100 | by 200 to get to the same amount.
00:21:39.720 | Now you've got a net worth stretch goal you can look at and say this is ridiculous or
00:21:43.200 | hmm maybe I will find a way to achieve those numbers.
00:21:48.600 | Maybe I bet you're going to be more proactive in trying to figure out how to accumulate
00:21:52.080 | more wealth.
00:21:53.080 | And even if you don't get to that stretch goal that's fine it's a stretch goal.
00:21:57.040 | What you've done is you've created more wealth than otherwise.
00:22:01.160 | Now if you feel the stretch goal is too onerous based on the 0.5 percent rule you can generate
00:22:07.960 | supplemental retirement income to fill your income shortfall.
00:22:12.120 | That is what every single person I know has done and is doing right now including myself.
00:22:18.160 | For example let's say you want to live off 100000 a year in retirement.
00:22:22.760 | Well according to the 0.5 percent rule this would equate to having a 20 million net worth.
00:22:29.120 | Unfortunately you've been blindly following the 4 percent safe withdrawal rule therefore
00:22:34.280 | you thought accumulating 2.5 million was enough right 2.5 million that's 100000 times 25.
00:22:41.780 | So you now realize after listening to this podcast and reading the Financial Samurai
00:22:45.760 | article the 4 percent rule was developed in 1998 when the 10 year bond yield averaged
00:22:51.240 | 5 percent.
00:22:52.880 | After you finish cursing me out privately but really you should be cursing out the Federal
00:22:57.800 | Reserve and the central government you calm down you think things through you listen to
00:23:02.640 | my voice and you figure out the gap.
00:23:06.000 | So your 2.5 million can only safely generate 12500 a year right 2.5 million times 0.5 percent.
00:23:15.600 | Therefore your retirement income shortfall is 87500.
00:23:19.920 | How did I get that well it's 100000 which is your desired retirement income minus 12500
00:23:27.560 | which is your true retirement income.
00:23:30.360 | Since you don't think you'll ever get to a 20 million net worth you need to find a way
00:23:34.320 | to make 87500 a year in supplemental retirement income.
00:23:39.960 | Thankfully there are many ways to make money from the comfort of your own home online or
00:23:44.960 | you can be a consultant a teacher whatever it is you're not nothing folks you have some
00:23:51.800 | type of interest you have some type of skill that you've built up over a 20 plus year period
00:23:56.560 | that is valuable that someone is willing to pay you for your skills.
00:24:00.600 | So don't sell yourself short.
00:24:02.800 | Your experience has value.
00:24:05.800 | You can always try and live on less or you can do a combination of both.
00:24:09.520 | It's up to you to decide what's your ultimate combination.
00:24:13.480 | And here's another way to use the 0.5 percent rule.
00:24:16.920 | I'd like you to add up how much retirement income you already have and subtract it from
00:24:22.240 | your desired retirement income.
00:24:24.920 | Just know that there is always a risk of existing retirement income declining especially with
00:24:29.320 | a decline in interest rates.
00:24:30.720 | Again we talked about everything being intertwined.
00:24:32.920 | So for example my current retirement income is about 250000 a year.
00:24:37.480 | My goal is to have a retirement income of 300000 a year.
00:24:41.160 | So I'm 50000 dollars short.
00:24:43.660 | So no problem.
00:24:45.080 | Let's use the 0.5 percent rule.
00:24:47.320 | I would need to amass an additional 10 million in net worth because 10 million comes from
00:24:52.360 | dividing 50000 by 0.5 percent or multiplying 50000 by 200.
00:24:58.760 | Or I can simply find a way to make an additional 50000 a year in active income to live the
00:25:03.480 | life that I want.
00:25:05.440 | Ideally you want to create active income after your career in an enjoyable way.
00:25:10.860 | So if it wasn't for Finance Samurai I would try to make 50000 dollars a year teaching
00:25:15.080 | tennis and if it wasn't tennis I'd probably try to self publish another book.
00:25:19.400 | And I've been saying this for years because it's such a no brainer way to make money from
00:25:24.160 | home and it's a passive income source but I'm just lazy.
00:25:27.140 | So I need that kind of pain to jolt me into action.
00:25:30.340 | And another way is to try to get a book deal with a traditional publisher and I might have
00:25:34.800 | some news there.
00:25:35.800 | So stay tuned.
00:25:37.640 | Bottom line your goal is to try and make income from things you enjoy doing because you can.
00:25:43.180 | You have the freedom and ability to do so.
00:25:46.280 | So you will.
00:25:47.280 | All right.
00:25:48.280 | Let's say you are still flummoxed flabbergasted annoyed pissed off angry at the 0.5 percent
00:25:55.280 | rule.
00:25:56.280 | Well just think about it differently again.
00:25:58.480 | Use the rule only as a net worth target.
00:26:00.840 | Once you've reached your net worth target based on the 0.5 percent rule then you can
00:26:04.760 | change your safe withdrawal rate as you see fit.
00:26:08.240 | For example let's say you are happy living off 50,000 a year in retirement.
00:26:12.620 | You don't have a pension nor do you have any passive income.
00:26:16.120 | Aha.
00:26:17.120 | That's tough.
00:26:18.120 | The 0.5 percent rule says that you'll need to amass a 10 million dollar net worth.
00:26:22.480 | Let's say you succeed in getting to 10 million by the age of 70 and expect to live until
00:26:27.720 | age 90.
00:26:29.400 | With an expected 20 years left to live you could divide your 10 million by 20 and safely
00:26:34.480 | withdraw 500,000 a year.
00:26:37.280 | Withdrawing 500,000 dollars a year is now equivalent to a 5 percent withdrawal rate.
00:26:42.280 | Even higher than the 4 percent rule folks.
00:26:45.400 | And if there's a bear market or a big unexpected expense during this time you can adjust your
00:26:50.200 | withdrawal rate accordingly.
00:26:52.080 | None of us are zombies.
00:26:53.600 | We can all adjust.
00:26:55.720 | And none of us should look at the 0.5 percent rule as a rule.
00:27:00.480 | We want to look at it as a guide folks.
00:27:03.560 | As a guide to help you think.
00:27:06.040 | The interest rate environment is entirely different from back in 1998.
00:27:10.760 | The economic environment, the information environment, it's all very very different.
00:27:15.120 | So you must adapt.
00:27:16.920 | Depending on how much of your wealth you want to pass on the 0.5 percent rule may be too
00:27:21.640 | aggressive or too conservative.
00:27:25.480 | Only you can decide.
00:27:27.200 | At the minimum I hope most of you will at least agree that the 4 percent rule is obsolete.
00:27:33.200 | If you hear someone really pitching the 4 percent rule and he or she is not retired
00:27:38.240 | or jobless then I would look at it with a grain of salt.
00:27:42.760 | Ask him or her how do you know?
00:27:45.820 | What is your experience with early retirement or retirement in general?
00:27:50.520 | How have you withdrawn your money?
00:27:52.760 | What have you done to make supplemental retirement income?
00:27:56.740 | If they don't have the answers then I don't think you should listen to them.
00:27:59.820 | The clear alternative is to learn to live happily on less.
00:28:04.000 | Living happily on less is a great way to feel much richer and it feels much lighter.
00:28:11.600 | Sometimes we just accumulate too much stuff, we buy too many things and it just becomes
00:28:16.380 | a burden.
00:28:17.380 | The stuff that we own ends up owning us.
00:28:20.900 | One of the riskiest things about personal finance is that there's no rewind button.
00:28:26.300 | It's much better to retire or reach your financial independence age with a little too much than
00:28:32.480 | a little too little.
00:28:34.100 | As you age time gets more and more valuable because you have less of it.
00:28:38.260 | The last thing you want to do is rewind time to try to make more money or make up for those
00:28:43.180 | losses.
00:28:44.180 | We're absolutely spoiled here in this stock market and real estate environment.
00:28:50.020 | Don't think you can't lose because as soon as you start thinking that way your risk exposure
00:28:55.440 | gets out of whack and you could lose very very big.
00:28:59.060 | I want you guys to think about the 0.5% rule when coming up with a net worth target and
00:29:05.140 | a safe withdrawal rate.
00:29:06.720 | You can choose 4% if you want.
00:29:08.700 | I think probably 2.5% is probably the highest I would go in this environment because remember
00:29:16.180 | stocks and real estate and other risk assets can go down folks.
00:29:20.740 | We could have a lost decade on our hands.
00:29:24.740 | So I hope everyone appreciated this ad free podcast.
00:29:29.180 | It's 30 minutes long.
00:29:30.460 | It's a long one and it took hours to write the proper safe withdrawal rate post as well.
00:29:36.060 | I really appreciate all positive reviews on iTunes, Google Podcasts, Spotify and so forth.
00:29:41.400 | It keeps me going because goodness knows I've got a lot to deal with and manage with two
00:29:46.900 | young kids at home.
00:29:48.140 | Stay safe everyone.
00:29:49.820 | Keep thinking.
00:29:50.820 | Keep commenting.
00:29:51.820 | Keep sharing your thoughts and hopefully everyone has an open mind.