Safe Withdrawal Rate: Why We Are Kidding Ourselves
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?
* 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.
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!
Funny. For many of us SWR is 0%.
I’ve been estimating that I need about 50k a year based on our average expenses in my home. I’m really hoping that number goes down as all the projects of getting our “modestly priced” property to where we want it over time start to drop off, but then we’d like to be able to do some travel too, so money will go up there since right now the travel budget is zero. Either way, I’m guessing around 50k.
Net worth, not including the paid off house is about 400k. I’ve been calculating we need at least that 600k more before I would feel comfortable moving to a per diem work schedule.
I too, hadn’t really planned to just retire.
But aside from investments, all I would have is work. So far real estate hasn’t really worked out as a good option IN MY AREA, and I’m afraid to blow the growing nest egg on real estate too. Consulting wouldn’t really work for my line of work. Basically, I’m left with standard income or investments. Of course I keep hoping I’ll find some passive income streams, but, not working out so far.
But you bring up a good point, even if I could retire, I’m still not totally going to. And though I hate to use the term bored because “only boring people are boring” says my husband, well, frankly I think I’d get bored! And fat! I need to discover a love of exercise and then maybe I won’t worry so much. 😂
Back to the topic at hand … So, not accounting for taxes I would need to work about 2 days a week thought the year to meet my goal. Yeah, that’s probably do able and still a nice amount of time off. But, then the nest egg doesn’t continue to grow and I can’t save in the tax deferred accounts. So if I’m going to work more I might as well keep working almost full time for a fair while.
I go through these kinds of calculations quite regularly. I *think* when I hit that magic number of 1mil in monetary assets, I will fee comfortably stepping back.
My other worry is, since I’m planning to be stuck with an actual job not other income streams, my field is getting more and more saturated. Right now I might be able to find 2 days of work a week.. But they may not always be the case. Of course, when I become more flexible in that I don’t have a minimum wrk requirement, then I become even more valuable to a company who can have someone with no monthly commitment of giving me hours and relative access to me at anytime. That would make me someone they might want to keep around.
I’ll keep slogging away for a while. Here’s hoping my online networking leads to some more ideas of passive income from my family. Über and Airbnb are out!
I don’t know pharmacy as well but is there pharmacy expert work for malpractice? Pharmaceutical company consulting, medical writing or editing? Teaching English over skype ($15-$20/hr no experience needed)? Become a virtual assistant part time?
We focus on it because we are thinkers and planners and we need a goal. Most of us work the numbers and rework and rework and rework them, that’s the type of people we are. I agree though many of us turn it into the holy grail when really it’s just a guideline. I’d like to “let go” a little and trust more money will come but that’s a big leap.
It’s is a big leap to let go…but it does allow more for living where you are as opposed to always shooting for the future!
You’re spot on, it’s not in most people’s bones to just make zero in a year, underlying skills will still generate something.
This was my biggest debate in figure out do I retire this June or wait for one more big payday. Ultimately I’ve resigned to working slightly longer, but mainly for charitable and family support goals
Congrats Mr. Shirts on the impending retirement! I can’t imagine ever making zero dollars. We will see what happens if I ever slow down.
I love this…but I also like the SWR discussion, too. The SWR crutch is one of the mind games I play on myself regularly. Like, “Hey, honey, if we both stopped working or lost our jobs and could not find new ones, what kind of lifestyle could we afford?”
I do see a future where we are working less and saving less (or maybe saving nothing) and even drawing from our resources. I am hard pressed to see a future where calculating the SWR to three decimal places influences our decision to make pasta at home vs. go out for pizza.
The SWR is a mind game. It’s fun at times but not sure if it is reality.