Yet another couple has realized their goal of retiring in their 30s. In his blog, Root of Good, Justin McCurry discusses how he and his wife Kaisorn afforded such an early retirement, despite raising 3 kids, by saving 70% of their income (congrats to them on that feat) because the 4% rule supposedly said they could. To the McCurry’s…good luck; you’re going to need it. Take a look at these three reasons why relying on rules of thumb for such an abnormal retirement situation is a terrible idea.
- The 4% Rule is made for 30 years of retirement, not 55+.
- William Bengen’s 4% Rule is out-of-date and isn’t applicable to today’s investment environment.
- Unexpected and unavoidable expenses can quickly erode wealth.
- The 4% Rule isn’t Suited for 55+ Years of Retirement.
In William Bengen’s original article, he notes that a 4% asset withdrawal should be sustainable over 30 years. Beyond 30 years, however, that’s not true. Assuming Justin and Kaisorn are both 37 years old, their joint life expectancy is over 55 years, effectively meaning we can expect at least one of them to live past age 92!
In Justin’s defense, he does mention in one comment that Bengen found a 3% withdrawal rate (which is closer to what they’re withdrawing) to be sufficient for 50+ years. However, as mentioned below, that’s not applicable to today’s investment environment, and it’s far from a perfect calculation. Furthermore, the McCurry’s won’t be receiving much of a Social Security check even once they reach eligibility since they’ve worked so few years. This means they’re stretching their investments without much of a backup plan.
- The 4% Rule is out-of-date.
William Bengen’s Four Percent Rule was published in October of 1994. Though it was much better than the leading research at the time, today’s environment isn’t the same. In fact, retirement researchers Wade Pfau and Wade Dokken put a more relevant withdrawal rate at 1.26%, and that’s for only 40 years!
The 1.26% withdrawal rate assumes a 5% failure rate and a 60/40 stock/bond allocation. As risk level rises and percent of one’s portfolio invested in stocks rises, the sustainable withdrawal rate rises but never nearly as high as 3%.
- Unexpected and Unavoidable Expenses can Quickly Erode Wealth.
The research upon which the McCurry’s based their retirement strategy doesn’t say anything about expenses; it focuses solely on account balance. Let’s say (God forbid) a family medical emergency forces large expenditures over a few years. The silver level ACA plan they elected may not prevent them from dishing out some large sums. The McCurry’s also have three kids—what about college? Suppose a client of Justin sues over bad advice he received—what then? Rules of thumb don’t account for any of these.
Finally, healthcare is expensive. Justin mentions the 94% “discount” the family will receive on their healthcare premium, but that could all change within the next four years. Even once Medicare hits, out-of-pocket costs, MediGap or Medicare Advantage plans can quickly get expensive.
The savings strategies the McCurry’s follow may be good advice, but following a rule of thumb to retire in one’s early 30s certainly isn’t.