Hello everybody, it's Sam from Financial Samurai and hopefully everybody is having a wonderful, wonderful summer. It's August 16th, 2020 and the Nasdaq is up over 25%. The S&P 500 is back to all time highs and the pandemic still rages on. So frankly, it is unbelievable what's going on in the world today.

And I hope everybody's feeling better. Hopefully everybody's healthy and hopefully everybody's net worth is close to or at all time highs as well. So one of the things I've been talking about in my newsletter is how we should be more grateful to the Federal Reserve and the central government.

Because without them, without all their stimulus money, their enhanced unemployment benefits, the stimulus checks to certain folks, I think the stock market would probably go down 50, 60, 70%. The real estate market may or may not tank because the bond market would catch a bid and interest rates would go way down.

But I think overall, we'd be in a much worse place than we are right now. And so I think we should be thankful, thankful to the Fed for getting it, understanding and acting quickly that things are really, really bad. But as soon as I said, hey guys, we should be thankful, I got a number of angry responses from readers who said, you know what, the Fed is just terrible for us, for the economy and for the future.

One guy said they create debt, they print money, they weaken the dollar, and they create socialism. They also ensure there is an unhealthy power grab at the central government. We now accept that the central government is the babysitter, mother and protector of us when we stub our toes financially, physically or by other means such as a national disaster.

And so there's a lot of dissatisfaction with the Fed and the central government. And I find this response, frankly, quite interesting, because unless you think the central government manufactured this virus to unleash to the world, so we can have that power grab and control us all, I think what they're doing is very, very helpful to help stave off poverty, extended unemployment, you know, a decline in your wealth and housing and stocks and so forth.

I think they are on the ball. And without them, the world would be a much worse place. But there is one thing the central government and the Federal Reserve have done. And that is, that is they've made retiring early or retiring normally or staying retired much, much more difficult.

And the reason why is due to a record amount of stimulus being created in a shorter period of time. So interest rates have dropped faster than a cement block tied to a dead body thrown off a boat in the middle of Lake Tahoe by one of Capone's capos. And so as a result, the 10 year bond yield is at about point 7% at the time of this recording.

And it did decline to about 0.51% a couple months earlier. So at a 0.7% risk free rate of return, 1 million will only generate $7,000 a year in risk free income. And that's pre tax. So if you've got your home paid off, your health insurance covered, all your debt done and your kids are all grown up and independent, 7,000 a year plus Social Security will provide for a very simple retirement lifestyle.

Even if you got the maximum monthly Social Security payment of about $2,900 a month, that's about $35,000 a year. Add on the $7,000 a year you get risk free. Well $42,000 is not exactly living a large, large lifestyle. Unfortunately, the average Social Security payment is closer to $1,500 a month instead.

So reality, the annual Social Security average benefit is closer to $18,000. And that is if the Social Security program continues. Right now it's underfunded by about what 25 to 30%. So you might have to lop off 25 to 30% on your expected number just to be conservative. And with all this stimulus being spent, eventually our kids or ourselves or our grandchildren will have to pay back all this debt.

And I know some of you guys are saying, look, well, interest rates are down. That means that other risk assets are looking relatively more attractive because you're only getting so little in a risk free 10 year bond yield or a money market account. So therefore, why not invest in stocks and real estate?

And that's what you're seeing happening. People are investing in the stock market more and in the real estate market more across the nation because interest rates are so low. However, don't forget, if you are a retiree or you're planning on retiring in the next five years or maybe even 10 years, you are going to be more risk averse.

You're going to lower your risk profile because you don't want to rewind and go back in time and lose your money and then have to spend all that time to make up all your potential losses. We're lucky, folks. March 2020, we saw what, around a 32% decline from the peak to the trough.

I think it would have been down 60, 70% if the federal government and the Federal Reserve didn't step in. It's important to understand that the risk free rate of return, the 10 year bond yield is intertwined with risk assets and risk asset returns. For example, a company looking to raise money to fund operations isn't going to issue a bond that pays 8% unless it's in very dire straits.

Instead, a company will probably discover that adding an additional 2% or 3% interest rate premium to the 10 year bond yield will garner enough demand. Supply and demand, folks. Everything is relative. If you think about it from a dividend paying perspective, companies, they've grown in value because their operations have grown, but also there's a large attraction to dividend paying companies.

Now, in the past, maybe a dividend payout ratio was 80% and the yield would be somewhere around 3% to 4%. But now with the 10 year bond yield at under 1%, senior management of the company is going to rationally think, "Okay, what is the lowest dividend payout ratio and the lowest dividend yield we can have so that investors still invest in our stocks, still hold our stocks, while the company also retains the most amount of operating capital to fund operations, expansion, and so forth?" So logically, any rational management will start thinking, "Okay, let's cut the dividend payout ratio, let's lower the dividend yield because we don't have to pay as much.

Everything is relative because if they don't want us, well, the alternative is only earning 0.7% in a 10 year bond yield or maybe other companies are paying 2.7% to 3.7%. Now because our company is in a stronger financial position, I think we're going to be good enough with a 2.5% yield or a 2% yield from a 3.5% to 4%.

This is how management thinks. This is how companies are run. They need to find the optimal balance between attracting investors, attracting capital, and running their operations and keeping capital to expand and maybe plan for a rainy day. It is my belief that using the 10 year bond yield as a barometer for retirement income generation is conservative, but I also believe the ideal withdrawal rate in retirement doesn't touch principles as long as your estate is below the estate tax threshold.

In other words, if your estate is above $11.58 million per person, feel free to increase your withdrawal rate to whatever you want. 5%, 6%, 8%, 10%. You got to do the math because paying a 40% death tax on every dollar above the estate tax threshold is a crying shame and nobody should do that.

If you die with too much money, you lose. It's a waste of resources, a waste of time. Might as well spend it on your children and charitable organizations now while you're still alive because it feels better and you can see the results of your giving. Alright, so now we've come to the heart of the issue.

Why the 4% rule is outdated. The 4% rule is based on the Trinity University study conducted by three Trinity University professors back in 1998. So more than 22 years ago, folks, inflation and interest rates were much higher and pensions were very common then. Pensions now, I think it's like under 16% of Americans are eligible for pensions.

And even if you're eligible for a pension, that pension amount is not going to pay enough to fund a normal retirement. It's just going to be a small portion of it and it's just going to be cobbled together by a pension, your after-tax portfolio, and so forth. So today is different from 1998, folks.

This is point number one. The 4% rule is the most common safe retirement withdrawal rate cited, but it is outdated. It is obsolete. And the main reason why is this. And we're going to go back to the 10-year bond yield, which I think is the most important financial figure to track.

It tells you everything, folks. Lots of things because everything is intertwined in finance. Back in 1998, the 10-year bond yield, also known as the risk-free rate of return, ranged between 4.41% to 5.6%. So the average, let's say, was around 5%. Therefore, of course, you'd likely never run out of money in retirement following the 4% rule because back then you could earn 1% more on average risk-free.

Let me say that in a different way. If you withdraw 4%, hey, don't sweat it because you can earn 5% risk-free and replenish a portion of your retirement portfolio. And not only that, you probably had a pension that was guaranteed for life. And not only that, Social Security was not as underfunded as it is today.

Following a 4% rate, no sweat because not only was the 10-year bond yield at 5%, you had dividend yields at 4% to 5%. You had bond yields from treasury bonds to corporate bonds to municipal bonds. Many of them were generating over 4%. Municipal bonds, one of my favorite passive income sources, they're double tax-free.

Back then, getting 4% plus double tax-free was highly feasible. Today, not so much at all. It is a different time, folks. Therefore, using the 4% rule that was created in 1998 for 2020 and beyond doesn't make any sense. And what's more interesting is that despite this logic, that the risk-free rate of return was 25% higher than the 4% rule at the time it was created, I've received probably 70% of the comments in my post were negative.

It's as if people cannot adapt, understand, and change. And if you cannot understand, adapt, and change, you're going to get left behind. Or you're going to put your finances at risk. Or you might just go extinct like the dinosaurs. You've got to understand the economics of today and adapt.

It's like being stuck on the fact that having a million-dollar net worth means that you are a true millionaire and you get all the spoils of what being a millionaire has historically been written about and talked about. But think about it this way. Inflation. Inflation, inflation, inflation. If you were a millionaire in 1945, yes, you were rich.

Today, not so much due to the loss of purchasing power due to inflation. So if you put a compound growth rate just based on inflation from 1945 to 2020, a million dollars back in 1945 is worth closer to about 14 million dollars today, folks. I've written in an article that 3 million is the new 1 million.

But hmm, I think even 3 million is kind of like, let's just do the numbers. Don't get upset. Don't get upset at me or the reality. Just run the numbers and you will see that a million doesn't buy what it used to 30, 40, 50, let alone 55 years ago.

OK, so let's say you agree that the 4% rule is irrelevant. It's obsolete. So what's the new safe withdrawal rate to follow? I think that rate is 0.5%. If you provide a similar 9% to 28% discount to the 10 year bond yield to come up with a safe withdrawal rate of 4% back in 1998, then the safe withdrawal rate in 2020 and beyond is equal to the 10 year bond yield times 72% to 90%.

And you thought I was overly conservative following a withdrawal rate based on the 10 year bond yield. No, if we're going to be consistent with back in 1998 and the creation of the 4% rule, we've also got to take a discount. Therefore, with a 10 year bond yield at about 0.7%, a safe withdrawal rate is actually closer to 0.5 to 0.63%.

When the 10 year bond yield was at its low of 0.51%, the safe withdrawal rate was equivalent to 0.36% to 0.46%. So to make things simple and consistent, the new safe withdrawal rate equals the 10 year bond yield times 80%. We'll use an average 20% discount to the 10 year bond yield to come up with a safe withdrawal rate.

This 20% can be viewed as a buffer in case of financial emergencies, bear markets, a lost decade, poor spending habits, and a further decline in interest rates. And if interest rates do decline by much greater than the 0.51% bottom we saw earlier in the year, then we're just going to use the formula and we're going to calculate our safe withdrawal rate accordingly.

Now I know what some of you guys are thinking right now, that I'm crazy, that the 0.5% rule is just way, way too conservative or way, way, way too aggressive, however you want to look at things. But the reality is that's how things are today. Interest rates have declined.

If you're angry, blame the Fed for bailing us out. Blame the central government for doing whatever. Don't get angry at me. I'm just providing you some very logical financial perspective of why we should adapt and move away from the 4% rule. Further I haven't had a job since 2012.

So it's been more than eight years of being unemployed or quote retired. And I haven't told anybody I've been retired since 2013 because I felt it sounded silly. And instead I told people I've been teaching tennis or I'm a writer or blogger or whatnot. The point is I'm living this life and I'm giving you two perspectives.

One a logical perspective based on finances and one on perspective based on eight years of not having a job. And it is very different. It's very different once you no longer have a job. All the emotions good and bad come emerging out of your body, emerging out of your soul.

And I've written about this before in articles such as the negatives of early retirement. Nobody talks about it. Nobody likes talking about it. I just share it. I just say the good and the bad because I want you guys to make an informed decision. Conversely it is very easy to pontificate about what your safe withdrawal rate should be in retirement.

How much you should have in your net worth so you can retire comfortably while you still have a day job when you have never experienced not having that safety net of health care benefits and a steady paycheck and a network of people who can provide you job opportunities. It's very different folks.

I'm telling you right now you can only experience the true feeling of retirement once you have burned your bridges. Right. You don't have a paycheck. Nothing. Even the Trinity study back in 1998. This was done by professors. Three professors who probably were all tenured professors who all had nice incomes and probably pensions so they were also pontificating.

What is the probability that you won't run out of money over a 30 year time period in retirement when they were still actively working and doing what they love to do. So the reason why I'm not angry or pissed off about the 0.5 percent rule is that it's just a guide.

It's a guide. It's not the end all be all rule for how much net worth you should have or what you should really withdraw while you're in retirement. I'm not pissed off at the federal government or the central government. I'm happy that they're saving all of us. The thing is 0.5 percent rule is still a higher withdrawal rate than I have withdrawn since 2012.

And I'm telling you this because when I left in 2012 I felt like we were kind of at the bottom of the market. So the last thing I wanted to do with withdraw my retirement income because I had already lost a multiple six figure job income. So instead I made it a point to just live off my severance and try to make active income through things that I enjoy doing.

And the two things I enjoy doing most are teaching tennis and playing tennis and writing. So I focus my attention on financial samurai and on teaching tennis and I also did some Uber driving here and there and so forth. And what I did was I tried to make enough money to still save at least 50 percent of my active income while in retirement.

And here's a point a lot of people who talk about retirement who aren't retired cannot understand. It's that if you've been saving a lot of money let's say it's 30 percent 50 percent 70 percent of your after tax income for let's say a decade or two decades. It is very hard.

It is almost impossible for you to flip the switch and reverse and start drawing down principle. And therefore once you do retire or reach financial independence you will see that the zero point five percent rule is really not that onerous because it could still be too high for you because you will refuse or you may refuse not to withdraw anything.

So you'll have a zero percent withdrawal rule. Since 2012 I don't think I've met anybody who retired before the age of 60. Stop trying to make some supplemental retirement income. You know long gone are the days where you just retire and do nothing. Nobody wants to do that anymore.

Because we're all interconnected. We've got the Internet. We've got a lot more freedom. We've got a lot more productivity. The natural tendency is for you to go and do things you enjoy. And a lot of times those things you enjoy can pay an extra amount of money. So for example one year I taught tennis as private lessons.

I think it was eighty dollars an hour for an hour and a half. I wanted to do an hour and a half because those warm ups and so forth and I wanted to get a good amount of cardio exercise as well. So if I did that let's say 10 hours a week that's not a lot of hours.

10 hours a week a couple lessons a day during the weekdays. That is eight hundred dollars in cash. Eight hundred dollars in cash is a great amount of supplemental retirement income. And if you don't like tennis you probably have something else you like where you can make a little bit of money as well.

All right enough perspective. Let's use the 0.5 percent rule to help figure things out. You can use it as a net worth stretch target. So with the 4 percent rule you multiply your annual expenses by 25 to get a target net worth with a 0.5 percent rule. You multiply your annual expenses by 200 to get a target net worth.

OK wow 200. That is ridiculous. That is so much. For example our family let's say we want to live off 200 thousand dollars a year because this family of four and we live in an expensive city and we'll probably continue to live in an expensive city for the rest of our lives.

So 200 thousand dollars in annual expenses times 200 is 40 million dollars. So wow that is a crap load of money. As two unemployed parents amassing 40 million dollars. It's going to be really difficult. We've only got financial samurai to help us generate active income at the moment. You know I got to decide and my wife has to decide do we want to try to shoot for 40 million to say that we're financially independent by going back to work for 10 hours a day for the next five to 10 years and then not seeing our children grow up as much.

I don't think so. But again I'm just using the 0.5 percent rule as a way to come up with a stretch net worth target in this low interest rate environment. And so should you. All you got to do is divide your annual expenses by 0.5 percent to come up with your net worth stretch goal or more easily you can multiply your desired annual expenses and retirement by 200 to get to the same amount.

Now you've got a net worth stretch goal you can look at and say this is ridiculous or hmm maybe I will find a way to achieve those numbers. Maybe I bet you're going to be more proactive in trying to figure out how to accumulate more wealth. And even if you don't get to that stretch goal that's fine it's a stretch goal.

What you've done is you've created more wealth than otherwise. Now if you feel the stretch goal is too onerous based on the 0.5 percent rule you can generate supplemental retirement income to fill your income shortfall. That is what every single person I know has done and is doing right now including myself.

For example let's say you want to live off 100000 a year in retirement. Well according to the 0.5 percent rule this would equate to having a 20 million net worth. Unfortunately you've been blindly following the 4 percent safe withdrawal rule therefore you thought accumulating 2.5 million was enough right 2.5 million that's 100000 times 25.

So you now realize after listening to this podcast and reading the Financial Samurai article the 4 percent rule was developed in 1998 when the 10 year bond yield averaged 5 percent. After you finish cursing me out privately but really you should be cursing out the Federal Reserve and the central government you calm down you think things through you listen to my voice and you figure out the gap.

So your 2.5 million can only safely generate 12500 a year right 2.5 million times 0.5 percent. Therefore your retirement income shortfall is 87500. How did I get that well it's 100000 which is your desired retirement income minus 12500 which is your true retirement income. Since you don't think you'll ever get to a 20 million net worth you need to find a way to make 87500 a year in supplemental retirement income.

Thankfully there are many ways to make money from the comfort of your own home online or you can be a consultant a teacher whatever it is you're not nothing folks you have some type of interest you have some type of skill that you've built up over a 20 plus year period that is valuable that someone is willing to pay you for your skills.

So don't sell yourself short. Your experience has value. You can always try and live on less or you can do a combination of both. It's up to you to decide what's your ultimate combination. And here's another way to use the 0.5 percent rule. I'd like you to add up how much retirement income you already have and subtract it from your desired retirement income.

Just know that there is always a risk of existing retirement income declining especially with a decline in interest rates. Again we talked about everything being intertwined. So for example my current retirement income is about 250000 a year. My goal is to have a retirement income of 300000 a year.

So I'm 50000 dollars short. So no problem. Let's use the 0.5 percent rule. I would need to amass an additional 10 million in net worth because 10 million comes from dividing 50000 by 0.5 percent or multiplying 50000 by 200. Or I can simply find a way to make an additional 50000 a year in active income to live the life that I want.

Ideally you want to create active income after your career in an enjoyable way. So if it wasn't for Finance Samurai I would try to make 50000 dollars a year teaching tennis and if it wasn't tennis I'd probably try to self publish another book. And I've been saying this for years because it's such a no brainer way to make money from home and it's a passive income source but I'm just lazy.

So I need that kind of pain to jolt me into action. And another way is to try to get a book deal with a traditional publisher and I might have some news there. So stay tuned. Bottom line your goal is to try and make income from things you enjoy doing because you can.

You have the freedom and ability to do so. So you will. All right. Let's say you are still flummoxed flabbergasted annoyed pissed off angry at the 0.5 percent rule. Well just think about it differently again. Use the rule only as a net worth target. Once you've reached your net worth target based on the 0.5 percent rule then you can change your safe withdrawal rate as you see fit.

For example let's say you are happy living off 50,000 a year in retirement. You don't have a pension nor do you have any passive income. Aha. That's tough. The 0.5 percent rule says that you'll need to amass a 10 million dollar net worth. Let's say you succeed in getting to 10 million by the age of 70 and expect to live until age 90.

With an expected 20 years left to live you could divide your 10 million by 20 and safely withdraw 500,000 a year. Withdrawing 500,000 dollars a year is now equivalent to a 5 percent withdrawal rate. Even higher than the 4 percent rule folks. And if there's a bear market or a big unexpected expense during this time you can adjust your withdrawal rate accordingly.

None of us are zombies. We can all adjust. And none of us should look at the 0.5 percent rule as a rule. We want to look at it as a guide folks. As a guide to help you think. The interest rate environment is entirely different from back in 1998.

The economic environment, the information environment, it's all very very different. So you must adapt. Depending on how much of your wealth you want to pass on the 0.5 percent rule may be too aggressive or too conservative. Only you can decide. At the minimum I hope most of you will at least agree that the 4 percent rule is obsolete.

If you hear someone really pitching the 4 percent rule and he or she is not retired or jobless then I would look at it with a grain of salt. Ask him or her how do you know? What is your experience with early retirement or retirement in general? How have you withdrawn your money?

What have you done to make supplemental retirement income? If they don't have the answers then I don't think you should listen to them. The clear alternative is to learn to live happily on less. Living happily on less is a great way to feel much richer and it feels much lighter.

Sometimes we just accumulate too much stuff, we buy too many things and it just becomes a burden. The stuff that we own ends up owning us. One of the riskiest things about personal finance is that there's no rewind button. It's much better to retire or reach your financial independence age with a little too much than a little too little.

As you age time gets more and more valuable because you have less of it. The last thing you want to do is rewind time to try to make more money or make up for those losses. We're absolutely spoiled here in this stock market and real estate environment. Don't think you can't lose because as soon as you start thinking that way your risk exposure gets out of whack and you could lose very very big.

I want you guys to think about the 0.5% rule when coming up with a net worth target and a safe withdrawal rate. You can choose 4% if you want. I think probably 2.5% is probably the highest I would go in this environment because remember stocks and real estate and other risk assets can go down folks.

We could have a lost decade on our hands. So I hope everyone appreciated this ad free podcast. It's 30 minutes long. It's a long one and it took hours to write the proper safe withdrawal rate post as well. I really appreciate all positive reviews on iTunes, Google Podcasts, Spotify and so forth.

It keeps me going because goodness knows I've got a lot to deal with and manage with two young kids at home. Stay safe everyone. Keep thinking. Keep commenting. Keep sharing your thoughts and hopefully everyone has an open mind.