What Is The Ideal Retirement Withdrawal Rate For FIRE

This post is mostly for those of you who wish to achieve F.I.R.E. (Financial Independence Retire Early). Have you heard of the SWR? It’s an acronym for Safe Withdrawal Rate. It’s a common ratio that is discussed in regards to the topic of retirement. There are many articles online trying to determine what the safest or best SWR is for retirement based on historic returns of stocks and bonds.

Although there are no definite answers to what the right rate is, the risks of determining your retirement based solely on the SWR carry significant risks. Particularly for those who seek to retire early and have 30 to 50 years in retirement. As for myself, I estimate I may live past 100 which may give me over 60 years in retirement. 60 years… holy cow… Let me take a deep breath…

 

Why I Don’t Consider The SWR

Here are 3 big reasons.

1. The factor of life expectancy. If you follow and invest in any of the biotech or pharmaceutical companies working on solutions for cancer, you may be more optimistic on future human life expectancy growth. Scientists discovered the specific genes responsible for aging and are making breakthroughs in research using DNA editing technology called CRISPR. Stem cell research is also making big progress from growing replacement body parts of all sorts! Vastly more effective and promising cancer treatment therapies are in the pipelines of many companies. The advancements and innovations in the healthcare industry in the last decade alone make it hard to think life expectancy will stay stagnant in the near future.

2. Risks of unusual market performance. I like to weight all potential worst case scenarios. Let’s say you retired in the year 2000 at the age of 35 with a nest egg in total of $1,000,000 invested in the S&P index. At the widely popular SWR rate of 4%, that 1 million in 10 years will have lost 51% of its value by year 2010. That is $529,952.12 by the age of 45! That would have me worried.

3. Fluctuation in withdrawals. As you can see in the chart above, when markets take a hit, your income takes a hit. The large drop in income may not be enough to sustain your lifestyle creating a scenario where you may be forced to withdrawal more than planned. In 2008, your withdrawal amount dropped by 51% in comparison to the first year! This is not financial freedom but more like financial uncertainty!

One bad decade can potentially put a huge dent in your retirement nest egg.

 

The Ideal Withdrawal Rate

Here is a thought. How about a retirement where you never have to draw down on your principal regardless of how the market performs. A withdrawal rate of 0% from your principal. Living off the yield your investments generate.

If you don’t touch your principal, your total in this scenario would be down -16.2% by 2010. Far better than the -47% when planning with the 4% SWR. On top of that, your investment income should be more predictable and less volatile.

The Most Ideal Retirement for FIRE

The better scenario is one where you continue to save and reinvest a portion of your income. If you reinvest $12,000 per year, that would have you in 10 years at -1.9% by 2010. A tough decade can easily be put behind you! Best of all, your income should grow nicely along with your additional investments. Note, the potential higher yields you may gain in down markets as well as any dividend increases you may encounter are not factored into the calculation below. Just a straight forward 3% yield which should be fairly reasonable to achieve considering the longer term averages of the S&P yields and 10 year Treasury bond notes.

So, the ideal retirement is one where your free cash flow has one direction, up. A perpetual income generating portfolio/machine that provides more options as your wealth, snowballs bigger with time.

If you FIRE in your 30’s or even 40’s and estimate you will live for another 50 plus years, wouldn’t you want a life with expanding options? I think this is something you should consider thinking deeper into. 50 years is quite a long time…

Why Die With So Much Money?

Some common objections to this method of retirement I have come across are ones such as:

“It’s stupid to die with so much money when you can live a much fuller life.”

“It’s foolish to pass down your wealth to your heirs who will likely waste it away in one generation.”

“They didn’t earn it so they won’t understand the value of it.”

I have heard them all and many are true and valid points! All I can say is the topic of retirement is a very personal thing and how you wish to retire is absolutely up to you. After all, you earned it so you should have all the right to spend it however you wish! I have nothing against that.

 

Conclusion

Being retired for 3 years has had me contemplate many things about life. On a personal note, I’m beginning to lean on the conclusion that changing my family tree has something of high value. I’m still figuring things out in my mind. The thought of using wealth to provide education funding for my heirs kids and their kids down the line, forever, has a big appeal to me.

For those of you who are worried about the future generations carelessly burning through your hard-earned wealth, don’t worry. That’s where estates and endowment funds come in to help mitigate such risks. I will write more about that on a separate post.

The idea you can leave this planet a little better for your loved ones by funding a noble cause such as research in cure for diseases becomes options to consider. To leave something behind with a mission to improve lives in perpetuity.

It’s a huge privilege to have the option to consider such things. If the opportunity presents itself to you, do you think you would consider? Such options are more likely possible with an ironclad retirement where principal remains protected. I consider this to be one of the ultimate blessings that come with wealth. The option to become a philanthropist. For me, Bill Gates was a huge inspiration. However, you don’t need billions to give.

I must emphasize again, that retirement planning is personal and no one way is the right way. However, if you are pursuing FIRE, just thought this may be something you may want to think about. Thank you for reading.