{"id":57,"date":"2022-02-27T16:14:57","date_gmt":"2022-02-27T16:14:57","guid":{"rendered":"https:\/\/engineeringfinancialindependence.com\/?p=57"},"modified":"2022-03-07T20:53:13","modified_gmt":"2022-03-07T20:53:13","slug":"the-4-rule","status":"publish","type":"post","link":"https:\/\/www.1engineeronfire.com\/?p=57","title":{"rendered":"The 4% Rule"},"content":{"rendered":"\n

The 4% Rule<\/strong><\/p>\n\n\n\n

It only seems right for 1 Engineer On Fire <\/strong>to start with the 4% rule.\u00a0 Why you ask?\u00a0 Because an engineer developed the rule!\u00a0 In 1994 Bill Bengen, a former aeronautics engineer turned financial planner, published an article describing his 4% rule.\u00a0 He used historical stock market data to estimate a \u201cworst case safe withdrawal rate\u201d.\u00a0 Safe meaning a high probability of success of not exhausting a portfolio over 30 years.<\/p>\n\n\n\n

The Trinity Study<\/strong><\/p>\n\n\n\n

If you really want to dive into the numbers, I suggest looking into the Trinity University<\/strong> study.  In this study they used historical 30 year rolling stock market data, various rates of return and various asset allocations to calculate a percentage of success!  If you are nearing your FI number and considering retirement, take a good look at the data found in the Trinity study.<\/p>\n\n\n\n

In my reading I find many financial advisors and bloggers tend to oversimplify<\/strong> the 4% rule.  Like so many numerical simulations the assumptions are critical. Variables like length of retirement, your asset allocation, rebalance frequency all play a huge role in the result.  Data analysis is an awesome tool but must be understood completely to avoid misleading conclusions.  Bengen used a 50\/50 allocation rebalanced annually but again look at the Trinity study for wider variation on the subject.<\/p>\n\n\n\n

The 4% Rule Modified<\/strong><\/p>\n\n\n\n

In 2006 Bengen<\/strong> raised the 4% rule to 4.5% and spoke of even higher average rates.  In an Oct 2020 interview, he updated the rule to 5%<\/strong> but also considered an updated portfolio allocation (30% S&P 500, 20% US small cap and 50% intermediate treasury bonds).  He warned the rule is not a law of nature it is empirical.  Meaning it is only based on the data we have available.<\/p>\n\n\n\n

What does all this mean?<\/strong> <\/p>\n\n\n\n

I believe the work done to determine the safe withdrawal rate was some of the most important for modern day investors and people seeking FIRE<\/strong>!  It\u2019s really a rule of thumb giving people a data-based benchmark to start planning.  So many variables to consider for every individual case.  If you are new to your FI journey, just use 4% and keep investing.  As you get closer (5 years) to your FI number, dig into the data and realign your goals to your comfort level.<\/p>\n\n\n\n

What did I do?<\/strong> <\/p>\n\n\n\n

In my twenties<\/strong> I just put away every penny I could spare (401-k and mutual funds) and didn\u2019t worry about it.  I tracked my progress monthly and targeted double-digit growth.<\/p>\n\n\n\n

In my thirties<\/strong> I maximized my 401-k and bought more mutual funds in IRAs.  As life turned more complicated with family and work my monthly tracking turned to quarterly.<\/p>\n\n\n\n

In my forties<\/strong> I could see the light at the end of the tunnel and began making serious projections.  I used 3% inflation, 4% withdrawal rate and no Social Security.  I ran projections with growth percentages from 5-11%.  I realized my personal and professional responsibilities took more and more of my time. I had amassed a pile of different mutual funds and began to lose focus in my portfolio.  I decided to seek the help of a professional advisor. When I had little money and plenty of time, I managed everything myself (no load mutual funds were the index fund of the era).  When I no longer had the time, I searched out the best help available.  I selected Merrill Lynch and their analysis confirmed my plan was sound. <\/p>\n\n\n\n

At age fifty<\/strong> I realized I liked my job and the people but the commute and politics were wearing on me.  I decided to work until 55 and made a shift in my planning.  I had reached a Lean FI<\/strong> number but wanted to target a lower withdrawal rate.  My wife and I started expanding our leisure activities in preparation for retirement.  I realized my focus was always on accumulation and I knew practically nothing about withdrawals!<\/p>\n\n\n\n

My brother-in-law, also an engineer, introduced me to \u201cCan I Retire Yet<\/em><\/strong>\u201d by Kirkpatrick (another engineer!) and I found \u201cYou Can Retire Sooner Than You Think<\/em><\/strong>\u201d by Moss.  Both books confirmed I was in good shape financially.  I decided I never wanted to go back to full time work so I added a buffer to my FI number.  I calculated 25 times my annual budget (4% withdrawal) and added 40%.  Why 40% you ask?  Over my investing life my worst year was -32%.  If I suffered a 40% drop in the market the day I retired, I would still have my full FI number. \ud83d\ude0a<\/p>\n\n\n\n

1 Engineer On Fire<\/strong><\/p>\n\n\n\n

What rule do you use for planning?<\/p>\n","protected":false},"excerpt":{"rendered":"

The 4% Rule It only seems right for 1 Engineer On Fire to start with the 4% rule.\u00a0 Why you ask?\u00a0 Because an engineer developed the rule!\u00a0 In 1994 Bill Bengen, a former aeronautics engineer turned financial planner, published an article describing his 4% rule.\u00a0 He used historical stock market data to estimate a \u201cworst […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","om_disable_all_campaigns":false,"WB4WB4WP_MODE":"","WB4WP_PAGE_SCRIPTS":"","WB4WP_PAGE_STYLES":"","WB4WP_PAGE_FONTS":"","WB4WP_PAGE_HEADER":"","WB4WP_PAGE_FOOTER":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[10],"tags":[13,14],"class_list":["post-57","post","type-post","status-publish","format-standard","hentry","category-pre-retirement","tag-4-rule","tag-planning"],"aioseo_notices":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=\/wp\/v2\/posts\/57","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=57"}],"version-history":[{"count":3,"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=\/wp\/v2\/posts\/57\/revisions"}],"predecessor-version":[{"id":215,"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=\/wp\/v2\/posts\/57\/revisions\/215"}],"wp:attachment":[{"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=57"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=57"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.1engineeronfire.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=57"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}