The depressing 4% rule

I’m a noob when it comes to finance, and this is one of the reasons I set up this blog: to share my journey, my mistakes, and hopefully, ultimately, my success at becoming financially independent and retire before 40.

Somehow I had been lured into believing that my brokerage account would net me an average of 7 to 8% a year, and that it meant it was safe for me to withdraw 7% of it every year. With this basic math, I reached the conclusion that I could retire very, very soon.

But I read about the 4% rule of thumb on Mr Money Mustache’s blog, and I kinda got crushed. Not only did that step me back several years, there are detractors to this rule who say 4% isn’t even so safe, because it is based on data that only took US stocks into account (all other countries have a much lower “safemax” value). I’m not super worried about that last point, because most of my investments are in the US today, but I am not an American citizen (I do not even live in the US – yet – and do not plan to be there for a very long time when I get there), so this complicates things for me.

What this means is that instead of 15 times my yearly expenses, I should have an egg nest of 25 times my yearly expenses. Ouch, I’m getting further from my goal, just because of a stupid assumption (by the way, I did not make the 7% number up, I think I just got mistaken and did not take inflation into account).

Frugal people will tell you it’s only a matter of reducing one’s expenses to easily get closer to the goal. I’ve started to discuss this with my wife but we don’t have a concrete plan yet. With a newborn in our life I’m only seeing things getting even more expensive in the years to come.

The 4% article on Mustache’s blog points to a very interesting site, that lets you experiment with how much you plan to use, how much you have, and tells you about your chances of success, assuming your money is stored in a 50% stock / 50% bond plan. This is called FIRECalc, and has become a very useful tool for me over the past few days (I’m happy I found this before I made the mistake of retiring way too early)


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