Can the 4% Rule Survive 60 Years of FIRE?

What happens if you live too long?

Photo by Lucas Santos on Unsplash

People in general are often way too pessimistic when it comes to the survivability of an investment portfolio or estimating future spending.

Interestingly, when we need to estimate how long we’re going to live, we switch to a very optimistic mindset. I hear people say there’s a chance they’ll live to 90, or sometimes even 100 years old.

I call this “pessimism-driven optimism”. If we live very long, planning for FIRE (Financial Independence, Retire Early) becomes much more difficult.

The cornerstone of early retirement is the 4% rule.

If you spend 4% of your initial liquid net worth, and increase that amount with inflation, it’s unlikely that you’ll run out of money. Assuming your money is invested in a well-diversified portfolio that generates meaningful real returns over the years.

This means that if you have accumulated 25 times (100 / 4 = 25) your annual spending, you’re good to go.

But this rule does not say that your money will last forever. Studies have backtested it over 30-year periods.

What if you retire at 40 and live until 100? That’s a 60-year retirement, twice as long as the 30 years used by most simulations. Do you need twice as much money?

The good news is that you don’t. According to simulations by Karsten Jeske, the fail-safe withdrawal rate for a 60-year period was around 3.25%.

A fail-safe withdrawal rate means there was a zero percent chance of running out of money during the tested time periods.

For a 30-year period, the fail-safe withdrawal rate is 3.82%. Slightly lower than the classic 4% rule, where some failures are expected.

For a 60-year period, it drops to 3.25%.

The fail-safe withdrawal for different time periods:

• 30 Years: 3.82%
• 40 Years: 3.58%
• 50 Years: 3.35%
• 60 Years: 3.25%

Source: choosefi.com

You can see that the withdrawal rate keeps dropping as the time horizon increases, but it never goes below 3%. A longer retirement does not require proportionally more money.

So if you have 30 times your annual spending invested well enough, then it’ll likely last for a very long time.

This is great news for anyone who is very optimistic about how long they’re going to live, while being pessimistic about everything else.

So basically, for everyone in the FIRE community. :)

There are some caveats, of course. For example, fees and taxes are not factored in, so you should treat them like normal expenses.

Additionally, these simulations use the US stock market as a reference. Some people invest in all-world ETFs, which have historically provided lower returns.

However, many things can compensate for this, such as variable spending, relying on a state pension, or having additional income.

Statistics also show that after a certain age, as we get older, we tend to spend less and less each year. This happens despite the additional healthcare costs.

The biggest challenge in early retirement is knowing when to pull the trigger and estimating how much is enough. There are many individual factors to consider, but in the end, this will always be an estimate, not an exact calculation.

I hope this article helps you make a better estimate.

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Disclaimer

This article is intended for informational purposes only, and should not be considered financial, investment, business, tax, or legal advice. You should consult a relevant professional before making any major decisions.

— Aleena