Safe Withdrawal Rate: Why We Are Kidding Ourselves

Safe Withdrawal Rate

Safe Withdrawal Rate

Any personal finance blog worth its salt does at least one post on the Safe Withdrawal Rate.  The concept of the Safe Withdrawal Rate is nothing new to the financially savvy readers of this blog.  Briefly, it is the percentage of your portfolio you can spend every year and not go broke by the end of retirement.  The general consensus is that the number hovers somewhere around 4%.  For example, if your net worth is a million dollars, you can withdraw $40,000/ year adjusted for inflation.  As you know, there are many variables that can affect this number including inflation, sequence of returns, etc. There is much research on this subject, and I would gladly refer you to either Michael Kitces or Big ERN for a more in-depth analysis.

I did a deep dive into safe withdrawal rates at the beginning of my financial independence journey.  I came to one conclusion, and one conclusion only.

We are totally kidding ourselves.

A comment by one of my readers, steveark, really drove the point home:

We had much more money than we’d ever spend especially since my side gigs keep us at a zero withdrawal rate.

The Safest Withdrawal Rate

How many debates have we seen about the Safe Withdrawal Rate?  Is it 4%?  3.5%?  We discuss and argue as if it really matters.  But it doesn’t.  Because most of us are still making money.  We might have “retired”,  but the majority have side gigs, real estate income, or consulting fees.

I would argue that we should take the suspense out of the Safe Withdrawal Rate discussion.  If you are anything like most of us personal finance bloggers, there is no way you are going to ever run out of money.  I repeat, no way.  Because year after year, whether you mean to or not, you likely make money.  Probably enough to even cover your yearly costs.  Your effective safe withdrawal rate is actually 0%!

Maybe you consult for fun.  Perhaps you have become a financial coach.  Unlike me, your blog could spontaneously start to make a profit.  Like me, there are aspects of your work that you enjoy and happen to produce income.

If you savvy enough to become FIRE, making money is in your bones.  It is highly unlikely that you are going to stop, even if you  don’t need it.  It is just who you are.  It makes you happy.

The Path To destruction

There is, however, one road that most certainly will lead to failure.  That’s right, the old hedonic treadmill.   If you decide to rapidly accelerate your spending and simultaneously crank down on your income, you are stumbling towards disaster.  You may survive a few years, but money doesn’t last forever.

But again, I would be highly surprised if any FIRE oriented reader, or writer of finance blogs, would have the stomach to do this.

You’re safe!  I repeat, You’re safe!

So what are you going to do with your life?

Doc G

A doctor who discovered the FI community but still struggling with RE.

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3 Responses

  1. JoeHx says:

    * you’re safe

    I shouldn’t point it out, since I make that mistake all the time. But if I don’t, someone will. 🙂

    I feel you though. If I have enough “passive” income outside of investments, or semi-passive income, and I never have to withdrawal from my investments, and if enough people never live off the 4% rule… Then that rule never gets tested to see how accurate a number it really is.

    I feel like 4 is a low enough number that is sounds reasonable. If it was a 50% rule I’d be more suspicious. It also allows for some more conservation strategies – 3.5%, 2%, 1%, etc – without getting too ridiculous.

  2. That is exactly how it happened for us. I quit 7 years ago and my husband quit 5 years ago. I had been tracking our net worth and we had a bit of “one more year” fear. I ended up buying a foreclosure home just after I quit and we did a lot of the work ourselves to revamp it. As a result, we don’t even touch our portfolio and live off of 2 rental incomes and a small pension. Part of that is because we are able to get the Obamacare subsidy if we keep our income low enough.

    I would have never guessed this before we quit. I tracked our investments for years and projected our FI date, always expecting certain withdrawals. Now our biggest issue is trying to figure out how we are going to deal with RMDs when we hit 70. Tough problems to have!

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