How Much Money Would You Need to NEVER Work Again? (Four Percent Rule Explained)
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- เผยแพร่เมื่อ 27 ก.ค. 2024
- Wanna retire early? The basic math behind the 4% rule isn't hard, but it's the details that most people struggle with. This guide to early retirement will show you how much money you need to retire early, but it will ALSO show you how to deal with inflation, withdrawal penalties, stock market crashes, and taxes in early retirement, so you can quit your job forever - without fear.
Further reading:
- Financial independence and early retirement (FIRE): www.tripofalifestyle.com/mone...
- Stock market index funds: www.tripofalifestyle.com/mone...
- Our own investment portfolio: www.tripofalifestyle.com/mone...
00:00 - How Much Money Do You Need To Retire Early?
01:21 - The 4% Rule
02:08 - How Inflation Affects Early Retirement
03:00 - Investments to Retire Early
05:11 - Withdrawing Continuously Without Running Out
06:12 - What If A Stock Market Crash Happens?
07:26 - How To Access Retirement Accounts Early
08:28 - Avoiding Taxes During Early Retirement
09:25 - Why We Don't Use the 4% Rule
#financialindependence #investing #retirement
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We're Lauren and Steven, and we followed some simple financial guidelines that allowed us to quit our full-time jobs forever by age 29. We created Trip Of A Lifestyle to share the knowledge that changed our lives for the better. All of our content is free.
Get rich. Work less. Travel whenever.
www.tripofalifestyle.com
There it is. Should be tought in high school 💰
Totally agree.
Great video!
Thanks!
Great content, just subscribed. About 2 years into my corporate job journey, trying not to obsess over retirement but want to build best foundation I can.
Thanks! There's no need to obsess, but having money in the bank is certainly very freeing when you eventually get tired of your job - even if it just allows you to take a break for a bit. Here's an example of a break we took way before retirement: www.tripofalifestyle.com/money/zero-dollar-hawaii-honeymoon/
the secret to early retirement and low cost is noy having kids too early lol
Honestly, that's a huge pro tip. If you want kids, just delaying them by 5 years and saving hard in the interim can make all the difference in the world.
Hi! Really enjoy your content ! Two questions…the advice I read online preaches holding the bond portion of one’s portfolio in a tax deferred acct for tax efficiency purposes. However, if I’m aiming to retire in my mid 40’s, do I buck that tax efficiency advice and instead hold a portion of VBTLX in my taxable brokerage acct so that I could draw from it (particularly during stock market downturns) before traditional retirement age, making it easier to access than my tax deferred accts.? On a related note, if I’m aiming for a somewhat more conservative 2.75 %to 3 % max withdrawal rate do you think it might (I understand no guarantees obviously) sound reasonable, or completely nuts 🤪 to forgo bonds entirely and stick to the Wild Wild West 🤠 ride of a portfolio comprised of 100% VTSAX / VTIAX ? I’d also hold approx. 5yrs expenses in cash (online savings accts.) when I first leave my full time job to mitigate against the possibility of a dreadful sequence of return risk in the beginning. Thanks so much !
Thanks for the kind words! Let's take the questions one at a time...
1) You have correctly identified a tradeoff: Tax efficiency vs. flexibility during a down market. It's really just a personal choice whether to hold bonds in your taxable account (which is tax-inefficient, but adds flexibility during a down market). Personally, we do hold SOME small amount of bonds in our taxable brokerage account, just in case.
2) You should play around with different asset allocations and withdrawal rates using a simulator like cfiresim.com to help with your decision, but personally, we'd rather mix stocks and bonds than stocks and cash. Also, rather than working longer and planning for a 2.75 - 3% withdrawal rate which will likely result in lost time and a bunch of extra money you don't need, we'd much rather retire sooner and simply make a little extra money with easy and fun side gigs in the unlikely event that the market didn't cooperate in the first few years of retirement.
Regardless of what you choose, it sounds like you're on a great path though! Congrats!
So the percentages based on income tax brackets are 0, 15, and 20. So anyone with an income above 44,625 would have to pay at least 15% on the capital gains. Wouldn't that pretty much destroy the 4% rule and isn't 15% kind of high? So there are not really low taxes besides the 0%?
Fortunately no, that is not correct. 🙂
1) That limit is doubled for married couples. Many retirees are married.
2) During retirement, you will often have 0 earned income, leaving the full range of the 0% capital gains bracket for portfolio withdrawals.
3) You can withdraw much MORE than the capital gains tax bracket limit at a 0% tax rate, because only the GAINS count as "capital gains" - not the entire amount you withdraw.
4) Even if you had to pay 15% taxes on every penny you withdrew from your portfolio (which is not the case), the 4% rule would not be "destroyed." You'd just need to save about 17-18% more money before retiring, or ~29 times your annual expenses instead of 25. But again, that is not actually the case.
Hope that helps!
@@TripOfALifestyle It did. Thank you 😊
Hey quick question surely the 4% rule only applies if you plan on keeping the money invested and growing? How does that change if you have no intention of having money to pass on when you die?
This is a really interesting question to explore, and the answer is, "sorta, but not really..."
Remember that the studies done to determine the validity of the 4% rule consider a "failure" to be when you RUN OUT of money before dying, while following the plan. That is unlikely, but it is a possibility. Most of those failures (or near-failures) occur when a retiree experiences a large crash right near the BEGINNING of their retirement, while they continue to take withdrawals and a recovery doesn't happen fast enough.
The other (success) cases mostly wind up being WAY RICHER than they ever intended to, and as you pointed out, they die with a bunch of extra money.
But, if you increase your withdrawal rate to avoid the "too much money" cases, then you also increase the chances of the "run out of money" cases. So, just saving less and using a higher withdrawal rate isn't a very safe strategy.
If you want to "die with zero," there are some more complicated withdrawal methods you can implement, but the easiest thing to do is probably to start using (or giving away) a bit more money than you'd planned if you notice your portfolio is doing unexpectedly well 10+ years into retirement, or if you suspect you are nearing death.
It's not an easy problem to solve, but then again...is having too much money really such a big problem? ;-)