The Four Backstops to the Four Percent Rule
One of the recent additions to CountAbout was the FIRE widget. The FIRE widget uses your net worth to predict your income based in retirement (or early retirement) based off of your assets that are tracked in CountAbout and a safe withdrawal rate. While CountAbout allows you to select a wide range of withdrawal rates, a 4% withdrawal rate is the most commonly talked about withdrawal rate discussed in the FIRE movement. The so-called “4% rule” comes from the Trinity Study which showed that most portfolios could support a withdrawal of 4% of the initial balance adjusted for inflation each year for the next 30 years.
Obviously, we have no idea what the next 30 years will bring. Some people believe that a 4% withdrawal rate may be too aggressive for the next 30 years. However, Sean Mullaney, the “FI Tax Guy” points out that early retirees have 4 “backstops” to the 4% rule that could help them if their portfolio takes an unexpected downturn.
As a result of these risks, and stock market highs in late 2021, some are worried that the 4% Rule is too generous for many retirees. Christine Benz discussed her concerns on a recent episode of the Earn and Invest podcast.
This post adds a wrinkle to the discussion: the four backstops to the 4% Rule for early retirees. What if worries about the adequacy of the 4% Rule for early retirees can be addressed by factors outside of the 4% Rule safe withdrawal rate? And what if those factors quite naturally occur for early retirees? ~FI Tax Guy
The first and most obvious backstop to the 4% rule is that you can always reduce spending in retirement or early retirement. While we all need to eat, most retirees/early retirees can make changes to discretionary spending to help them weather downturns in their portfolio. Maybe you decide to not replace your car for a few years or scale back a tropical vacation.
What to Do During a Recession: A Timeless Strategy
Are we headed for a recession? Do you even remember what a recession feels like? It’s been more than a decade since our last recession that started with the 2008 housing crisis. If you are having problems remembering that far back, a recession means a decline in economic activity such as GDP, real income, or employment. Currently, our unemployment numbers are low, but inflation is high. It doesn’t take an economic expert on TV to tell us that inflation is high, just try to fill up your car with gas or go grocery shopping. Darius Foroux is quick to point out that while inflation hasn’t caused every recession, a recession has ended every inflationary period. That is to say, now that we have high inflation, we should expect a recession before things get better. So- while the economy looks great now, we may very well be heading for a recession. If that’s the case, it makes sense to prepare for a potential downturn.
Since the probability of a recession this year is getting higher, I’d rather expect it. That helps me to do well when it happens. And if it doesn’t happen, I will still do well. Preparing for a recession is a no-lose situation. ~Darius Foroux
This article walks through several steps you can take today to help you prepare for a recession. First and foremost, it is important to not stop investing during the recession. If you are able to continue buying stocks during a recession, you can buy these assets at a big discount. When the economy recovers, these stocks can deliver a massive return. You can also help yourself survive a recession by giving yourself options. While most people are dependent on their job for 100% of their income, developing a second stream of income can help you in case you lose your job during a recession. You may also prepare for a recession by updating your skill set to make you indispensable to your current employer or more attractive to a new employer. If you think a recession is likely in the future, check out the article for even more great tips.
Investing styles, if they were animals
We all know there are different investment strategies and investment vehicles. Stocks, Bonds, Real Estate, Dogecoin. In fact, there may be as many different portfolios as there are investors in the world. But despite this diversity, it is often hard to get excited or visualize different strategies. What’s the difference between a growth portfolio and an income portfolio? This fun, illustrated article by The Woke Salaryman describes different portfolios as different animals.
Your goal is to carry your hard earned money as far as you can so they’re safe from the Eternal Sandstorm of Inflation… Your investments? They’re beasts of burden that will carry your money through the passage of time. ~The Woke Salaryman
If you’re wondering what portfolios and animals have in common, I’ll tell you. The authors describe growing wealth as an epic journey. If you had to walk all of the way to retirement on your own two feet (by not investing) you’d never make it. Riding on an animal can help you travel farther and faster. You may choose an a fast animal (like an ostrich, who can complete a marathon in under an hour) by investing in speculative assets. But there’s also a chance that the ostrich may buck you and your speculative assets may crash. If this analogy spoke to you, you may wish to check out other animal portfolios and decide which animals you feel most comfortable partnering with on your journey to retirement.