• Skip to main content
  • Skip to primary sidebar

One More Million

Early Retirement, Financial Independence, Passive Income, Blogging Tips

  • Home
  • Passive Income
  • Financial freedom
  • Recommended Products
  • About Jay Sharma
You are here: Home / Make More Money / Passive Income / Is 4% rule a myth?

Last Modified: January 4, 2020 Jay Sharma 1 Comment

Is 4% rule a myth?

4% rule has been established as a golden rule over the last many decades but does it still work? If you have been looking for your magic number which would set you free from the daily routine of going to work to earn a paycheck, I am sure you have heard about the 4% withdrawal rule. Don’t worry I will lay it out for what it is and why you should and shouldn’t care about it.

Let’s start with what this rule is about

The 4 percent rule is a rule of thumb used to determine how much a retiree should withdraw from a retirement account each year. This rule seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing through retirement. Experts consider the 4 percent withdrawal rate safe, as the withdrawals will consist primarily of interest and dividends. – Source: Investopedia

Why does 4% rule not work?

There are a couple of pitfalls with this rule:

  1. In most cases, this rule assumes retirement life of 30 years which may have been true for earlier generations but Gen-Y and millennials are planning to retire early and they are healthier and will live longer than their parents as shown in the chart below
  2.  4% Rule ignores market volatility i.e. one big dip in markets or a recession can derail your entire plan. Keep in mind the big drop in the portfolio requires even bigger gains to just break even. Assume a $10,000 portfolio gets hit by 50% decline to $5,000. This portfolio will need a 100% gain to be back to $10,000 and it can take years to just recover from a step loss. I think it would be sheer stupidity to assume markets will continue to rise and ignore recessions from your financial planning.

What can you do, Instead?

So you understand 4% rule will probably not work if you are planning to retire early. The next obvious question – What can you do instead? Let’s walk through a bunch of scenarios that you can think about and choose from:

  1. Setup a target number that is high enough
    • to sustain the worst market crash that you anticipate (in my case I assume 50%)
    • Keep pace with inflation, to say the least, better can grow 2-3% above inflation
    • Can support you forever (in case you live longer than average American). You don’t want to run out of money when you need it the most.
      For this reason, I prefer to think of an perpetuity – it can support me forever. After me, my heirs can get a lump sum amount of money. If you don’t get the idea don’t worry, I will write a followup post on this topic and walk you through my personal calculations
  2. Setup a passive stream of income
  3. Semi-Retire: follow your dream or reduce working hours
    • Accumulate a certain amount of money which can enable you to say no to your boss. I call it FU money
    • Reduce your working hours, start freelancing or take the risk and follow your dreams.
  4. Say bye to your dream of Retire early. I don’t prefer this but sometimes, its the best option.

I am passionately working towards setting up multiple passive streams of income so I can retire early.

Share your thoughts in comments.!!

Related Articles

Tweet
Share
Share
Pin
Share
0 Shares

Written by Jay Sharma · Categorized: Passive Income

Disclosure: I have partnered with several merchants including Amazon and some of the links are referral links for which I may get a referral fee . Opinions, reviews, analyses & recommendations are mine alone, and have not been reviewed, endorsed or approved by any of these merchants. You can read my full disclosure policy

About Jay Sharma

Jay is a tech geek turned into a marketing ninja and entrepreneur and is keenly passionate about educating people about financial independence and how to run a successful online business.

Reader Interactions

Comments

  1. Will says

    April 16, 2020 at 7:49 pm

    4% is more of a guideline than a rule. Statistically it’s not even a certainty. It’s more like you’re LIKELY not going to run out of money over 30 years. I try and get people to understand that it’s still just a probability and that what happens in the first few years of your retirement will make or break it. If you’re unlucky and get a down market on the first year or two, it just throws the whole thing off. Sequence of returns is the technical term for it.

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

About the Author

Hello, my name is Jay Sharma. I am a Personal Finance Enthusiast, Blogger, and Entrepreneur.

I will show you how you can save money and earn extra moneyby investing in dividend stocks, starting a money making blog, rental income, or an online business.

I love educating people about financial independence and how to run a successful online business. I am willing to share my experiences with my readers via this blog. Just bear in mind you need more than one way to make extra money to reach financial freedom and early retirement.

Read More ...

Get my newsletter

We help creative entrepreneurs build their financial freedom by focusing on 4 key elements of a successful journey — earn, save, invest and repeat.

Follow us on Social Media

Best Financial Freedom Resources

  • List of Recommended FIRE Books here
  • Manage your cashflows using free tools like Personal Capital or Mint
  • Learn How to Start your Blog

Popular Posts

How to Start a Blog That Makes Money – Start to Finish (Updated)?How to Start a Blog That Makes Money – Start to Finish (Updated)?
How to Setup Author Tracking in WordPressHow to Setup Author Tracking in WordPress
Passive Income Streams – What, Why and HowPassive Income Streams – What, Why and How

Latest Posts

  • Don’t Bust Your Budget – Best Ways to Save Money on Groceries
  • How Much Money Do I Need to Retire in India
  • 31 Best Side Hustle Ideas to Make Money ($1000+) – Easy Side Income Guide
  • 7 Best Financial Decisions So Far
  • Don’t Cut Your Credit Card Before You Read This
Early Retirement, Financial Independence, Passive Income, Blogging Tips
  • Privacy Policy
  • Affiliate Disclosure Policy
  • Terms and Conditions
  • Contact Jay Sharma