Fear of the unknown is powerful. We all know it is impossible to predict the future with absolute certainty, and the farther out you try and predict the less certain your conclusions.

If you retire at 35, how can you be certain you won’t be in poverty when you are 80? Luckily the academic world has come up with a benchmark that makes your predictions easier.

The Trinity Study

The idea is simple: Given a bucket of assets, how much can you withdraw each year and not run out of money? For the gory details, read the original paper.

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 pro- tecting 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.

Be flexible to increase your success

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.

Do the math

Need $40K a year to live on? $40,000 / .04 = $1,000,000

Reduced your expenses to $30k? $30,000 / .04 = $750,000

Ninja like frugality run in your blood? Can you live on $20K a year? $20,000 * .04 = $500,000

Again, this is assuming **no other income** for the rest of your life.

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  1. Notice the incredible positive effect that reducing your expenses has on the size stash required to retire. In my case, after some concerted and creative effort, I managed to reduce my annual basic living expenses from $26,000 to $15,000. That reduced the required size of my retirement stash by $275,000. And that got me to earlier retirement 9 years sooner.

    The math works like magic.

    1. It’s a virtuous cycle. Spending less means you need less AND are saving faster. Magic is a good way to think about it 🙂

  2. Hi there – I fantasize about a similar plan. I am wondering if you have a plan for health care. Excuse me if you have already posted about that…I have not read every bit of your blog. Thanks and good luck!

    1. On the Healthcare point, if you do retire at 33 you won’t qualify for Medicare for another 32 years. Are you thinking you can take advantage of healthcare programs for the economically disadvantaged because your draw rate will keep you below the poverty line? It seems if you’re run rate is less than $20K, you could qualify for Medicaid.

      On the 4% rule – There’s quite of bit of evidence that the 4% rule is bogus and frighteningly risky:

      By the way, have you considered that you came of “Investment Age” so to speak during the 3rd longest bull market in history? It’s all sunshine and rainbows so far, watching your 401K and other portfolios trend upward year after year. Did you have any exposure in 2008? I would like to hear about your contingency plans.

      1. I almost never comment on these things but I just had to mention that Medicaid has both an income and an asset component. The only way to qualify for Medicaid is if you have a very low income and an extraordinarily low asset level. Now, it will depend on your state but all states require such a low amount that even a second old car could put you over. And yes, it does count retirement accounts. >_<
        *Sorry for butting in on an old comment!*

  3. If you really had to have as much money to retire as articles say, most people would die on the job. We retired earlier than planned. My husband got Parkinson’s and I lost my last job in the recession. Our home was paid for, he had both a pension and a 401k with a company match. There are ways that expenses go down in retirement, if you are simple people who enjoy being at home. Living in a state with relatively low cost of living helps. I believe in the traditional “three legged stool” of retirement finances—part social security, part pension, part savings. Unfortunately, a lot of the corporations people are working for no longer believe in that pension leg of the stool. I always say we could have done better and we could have done worse. We have everything we need and feel fortunate, despite not having the huge amount of money people say is necessary.

  4. Some additional factors to consider to make the 4% rule really “work” as it intended.
    1. Look at your current annual spending (don’t gross up monthly because there are a lot of annual expenses) but subtract debt payments. (car loans, mortgages, etc…) You should have zero debt before entering retirement (and ideally, well before!)
    2. Bump that annual expense number up by 10%. This provides an adjustment for changes you make to your lifestyle in retirement, such as money you spend on a hobby you now have lots of time for.
    3. Don’t rely solely on the investment account. Have a plan in place to activate supplemental income if needed, for example, a side hustle that’s fairly easy to enter and exit (e.g. Uber driver). Or it could be that dream job you’ve always wanted, but avoid untested ventures like starting a business if you’ve never done it before.
    4. Consider the health care situation which was noted above. In fact, when looking at your annual spending noted above, add in the cost of insurance you pay now, including any portion your employer covers for you.
    5. Think about income taxes. If you’ve got a paycheck now, any withholding all takes place in the background, so you may not think to take it into account. But also be aware your income/tax situation will look very different in early retirement and then formal retirement. (Roth accounts simplify this greatly, but have disbursement rules.)
    6. Talk to a financial advisor. Most think FIRE is crazy so find one who’s on board and can provide you good advice. Don’t just rely on blogs, because you will bias yourself into reading only what you want to hear.
    7. Be flexible in retirement. The 4% rule is a good rule of thumb, but if you are talking about 40+ years in retirement, you need to be ready to adapt to change. It’s inevitable.

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