My journey of becoming financial independence by 35 years old
“For stock-dominated portfolios, withdrawal rates of 3% and 4% represent exceedingly conservative behavior. At these rates, retirees who wish to bequeath large estates to their heirs will likely be successful. Ironically, even those retirees who adopt higher withdrawal rates and who have little or no desire to leave large estates may end up doing so if they act reasonably prudent in protecting themselves from prematurely exhausting their portfolio.”
The simple answer is 4% a year from a portfolio of 75% stocks and 25% bonds.
How did they come to this? The authors ran simulations on historical data from 1926 – 1995, looking at 30 year periods and following the results of pulling out 3% to 12% of funds annually.
One of the often cited limitations to the trinity study is that the formula was applied in a rigid manner. If you slightly reduce your spending in down market years your odds of success are much higher.
A 4% Safe Withdrawal Rate (SWR) also doesn’t take into account any sort of side income. Again, being flexible could be key. Maybe after a down market year you hustle a bit, which means you don’t need to take as much from your savings. Small adjustments like this can make a major difference in the long term.
Take your monthly expense x 12 = yearly expense. if you need around $3,333/mo x 12 = $40,000
Need $40K a year to live on? $40,000 / 0.04 = $1,000,000
Reduced your expenses to $30k? $30,000 / 0.04 = $750,000
If you are really frugal? Can you live on $20K a year? $20,000 / 0.04 = $500,000
The nuns and monks at Plum Village could live on $6000 a year. $6000 / 0.04 = $150,000.
I considered doing the 5-years program at plum village for awhile. Life was very nice and peaceful, no worries. It was cool to be there.
Method 2 – 300 rule
Retirement number = monthly expense x 300
Retirement number = $3333 x 300 = $999,900 (1 millions)
So on and so forth.
Again, this is assuming **no other income** for the rest of your life.