“I’d need 5 million to retire”, and other wrong assumptions on market performance

As I’m progressing through my path to reach FI, I’m learning new stuff pretty much every day. About myself (and the fact that this turns out to be more about understanding what true happiness really is, rather than making huge piles of money as quickly as possible), about others, and about our perception of how much money is required to reach financial independence.

I’ve myself gone through several phases, and I’m still not sure I really know my “number” (the amount I’ll need invested in stock and bonds to consider myself Financially independent), but I’m getting a better idea every day.

What’s interesting me today is how that number has evolved in my mind, and how, when talking to other people, the “financially independent” number varies a lot from person to person.

1. The 4% rule: financial bloggers

The basic rule on financial blogs is the 4% rule. It states that you can generally consider yourself financially independent when 4% of your investments cover for 1 year expenses. With that rule, a household that needs $60’000 a year to live will be financially independent with 1.5 million dollars. Anecdotal evidence suggests that this is more than you need to retire early. $60’000 a year is after all above the median household income in the US.

Alright, the 4% rule is fairly well known here, and it turns out to be the one that’s the closest to reality. so let’s move on to some more interesting things. Keep in mind that all the “ways of thinking” mentioned below are things I’ve encountered or experienced first hand.

2. The 10% rule: financial advisers

When I started accumulating a significant share of my monthly paycheck, I had to find a way to invest that money. I made the mistake of going to a financial adviser who sold me a rotten insurance.

That company’s graph was showing me returns of up to 12% a year, with their “average” at 10% a year. The adviser sold me on the idea that someone who needs $60’000 a year only needs to invest a total of $600’000 in order to be financially independent. Plus, at that kind of insane return rate, you’ll get there faster! (Yup, that’s totally, overly optimistic, and clearly was an obvious sales pitch)

These guys sold me a dream, hid the crazy fees of their product, but they did get me seriously started on the idea that I could take my retirement into my own hands. After talking with them, I was convinced I could retire earlier than the average, maybe by 55 or something. This got me to talking to friends:

3. The 0~1% rule: your friends

I started discussing with friends about my investments, and my dreams that maybe I wouldn’t need to work my entire life. I approached friends who made significant amounts of money, some of them more than me. My intent was to talk with other people who could see this as a possibility for themselves (you don’t go to a friend who makes half what you do, and start saying “wouldn’t you love to retire early?”).

I went to several friends with a simple question: “How much do you think you’d need so you could retire now?”

Interestingly, the initial answers I got were not numbers, but rather excuses as to how this would not be possible. Answers looked like this:

“I’ve heard of people retiring early, but the life sacrifices to achieve that are not things I’m willing to do myself”.

I like this answer actually, because it was given to me by a good friend of mine who has carefully considered the possibility. He is in a situation where spending piles of money has become a requirement to keep his marriage happy, which sucks from a financial perspective but he is making the choice consciously.

The other answer I got was:

“It’s pretty much impossible, because by the time you make enough to save significant amounts of money, your lifestyle increases and so you end up spending more, meaning you’d need to save more to accommodate”.

I hated this answer (an answer from a very dear friend) because it was a self conscious answer about the hedonic treadmill. An answer from someone who loves their job, and don’t see the point in escaping the rat race, because why would you want to ever escape it? But after pressing that friend for an actual number, assuming he would stop inflating his lifestyle, he answered:

“I’d need 5 million dollars”.

To get things in perspective, 5 million dollars ensures you’ll get $100’000 a year for 50 years, even at a 0% rate*.

This is what I basically told him. I then told him: “If you had an investment that gave you back 5% every year in interest, wouldn’t you need much less”

“Sure, but no such investment exists without significant risk”, he replied.

He was kind of right, but mostly wrong. I was still on the drug that had been sold to me by the adviser, that 12% was a perfectly achievable number, and, although I didn’t trust that number, I felt that 5% was a great conservative estimate. Turns out 4% was closer to reality, but still. In my friend’s mind, a “normal” return rate is somewhere between 0 and 2%.

It’s worth mentioning at this point that this friend’s father works for a bank. He’s not denying the existence of high return numbers such as what can be seen on the market, but he is locked in the idea that this is not a “safe” investment. Just like most people (including me at the time), he is confusing short term volatility with long term risk. Most people would rather store their money in a “1% guaranteed” investment than the market, even if long term data suggests the stock market is a better investment.

And as a conclusion, my friend thought that 5 million was what he needed, to ensure a comfy $100’000 every year of his life for the next 50 years. Investments would help cover for inflation, nothing more.

With my friend’s rule, someone willing to live on $60’000 a year for 50 years would need 3 million dollars in the bank.

4. The 7% rule: the noob on his path to financial independence


This is me, at the beginning on my quest to reach FI. After reading a bunch of things, stumbling on a few random blogs, and looking at the historical stock market data, I ended up thinking I could withdraw 7% from my stach every year in an infinite loop.

This was not taking into account historical data or inflation. Although 7% is a good average of how much the stock market has been performing (numbers vary from 7% to 11% depending at how far ago in the past you look back), averages do not tell the whole story: If you retire at the wrong time (just before a market dip), taking 7% of your total investment every year will lead to disaster.

The whole logic is much easier to understand for me today, but it was not, one year ago. If you meet a guy who’s got his retirement numbers completely messed up, please be kind and guide them to the usual financial blogs: most of us started with absolutely not financial literacy whatsoever đŸ™‚

In my “holy crap this early retirement thing is super easy” dream world from a year ago, someone willing to live on $60’000 a year would need to accumulate “only” $850’000.

5. The 3% rule: The over-conservative financial blogger

After discovering the “harsh” truth of the 4% rule, I thought things couldn’t get worse for me. But then I started  reading about new things: the 4% rule is not working any more, many people say. Including some of the people who contributed to making that rule popular in the first place.

Out of the 4%, you need to take out fees that your brokerage account is taking from you. and 4% isn’t that safe anyway, so many financial experts decide to aim for something more conservative, often close to a 3% rule.

With the 3% rule, you’d need 2 million dollars invested in order to generate $60’000 every year.

6. The “nah, you’re fine with 4%” rule: the optimistic and realistic financial blogosphere

As a counter attack to the overly conservative movement, financial bloggers have talked a lot and concluded that 4% is still a fine rule. Except it’s a “fluid” 4%, which assumes that humans can make good decisions to downscale their expenses when the market is having a bad time, or, holy cow, even maybe take a job once in a while to get additional income when the needs come.

The principle here is that 4% is fine, because the 4% rule assumes you’ll never have any other source of income, or you’ll never adapt to big market changes and spend less. The experimental truth, however, is that people do adapt, end up doing a few additional paid things throughout early retirement, get social security checks they actually didn’t factor in their spreadsheets, and or are able to reduce spending when it makes sense.

For people able to adapt, the 4% rule still makes perfect sense. People much more clever than me have stated it in a more convincing way. Check the madfientist blog for a great example!

*If you factor in inflation, things are not so rosy of course, but keep in mind that I was living in Japan at the time, where inflation had pretty much been 0 for 20 years (it’s getting better but still)


  1. Financial Velociraptor
  2. RetireJapan

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