Stocks — Part XIII: The 4% Rule, Withdrawal Rates and How Much Can I Spend Anyway?

4%. Maybe more.

So, you’ve followed the jlcollinsnh big three:

You’ve avoided debt.

You’ve spent less than you’ve earned.

You’ve invested the surplus.



by Sergey Gusev

Now you’re sitting on your stash and wondering just how much you can spend each year and not run out. This could be stressful, but it really should be fun. You might even be cheeky enough to ask, “What percent of his own stash does jlcollinsnh spend?” We’ll get to that.

You don’t have to have read far in the retirement literature to have come across the “4% rule.” Unlike most common advice, this one holds up to our beady-eyed scrutiny pretty well, even though it is really very little understood.

Back in 1998 three professors from Trinity University sat down and ran a bunch of numbers. Basically they asked what would happen at various withdrawal percentage rates to various portfolios, each with a different mix of stocks and bonds, over 30 year periods depending on what year the withdrawals were started. Oh, and both with adjusting withdrawals for inflation and with not adjusting withdrawals. Whew. Then they updated it in 2009.

Out of the scores of options, the financial media seized on just one of these models: The 4% withdrawal rate, 50/50 stock/bond portfolio, adjusted for inflation. Turns out, 96% of the time, at the end of 30 years such a portfolio remained intact. Put another way, there was just a 4% chance of this strategy failing and leaving you destitute in your old age. In fact, it failed in only two of the 55 starting years measured: 1965 & 1966. Other than those two years, not only did it work, many times the remaining money in the portfolio had grown to spectacular levels.

Think about that for a moment.

What that last line means is that in most cases the people owning these portfolios could have taken out 5, 6, 7% per year and done just fine. In fact, if you gave up the inflationary increases and took 7% each year you would have done just fine 85% of the time. Most of the time taking only 4% meant at the end of your days you left buckets of money on the table for your (all too often ungrateful) heirs. Great news were that your goal. Also great news if you anticipate living on your portfolio for longer than 30 years.

But the financial media knows that most people don’t like to think too hard. By reporting the results at 4% they could report on just about a sure thing. Roll it down to 3% and we have as sure a thing as we’ll ever see short of death and taxes. Oh, and that’s giving yourself annual inflation increases.

While 1965 & 1966 were the last and only two years where 4% failed, remember that more recent start years have not yet had their own 30 year measurable runs. My guess is that if you began your own withdrawals in 2007 and the early part of 2008 just prior to the collapse, you will have hit upon two more years in which the 4% plan is destined to fail. You’ll want to scale back. On the other hand, if you started with 4% of your portfolio’s value as of the March 2009 bottom, you’re very likely golden.

Here’s the Trinity Study Update. The prose is a bit dry, it is written by PhDs after all, but don’t feel you need to read it closely. What you should take a close look at are the very cool charts showing how differing scenarios play out. If you want a detailed answer to the question of what percent works for you and your own unique situation and attitudes, you can figure it out here. Plus, you’ll need to refer to those charts to follow along in the rest of this post. So go ahead. Take a look. I’ll wait.

Here’s the Cliff Notes version:

    • 3% or less is a near sure bet as anything in this life can be.
    • Stray much further out than 7% and your future might include dining on dog food.
    • Stocks are critical to a portfolio’s survival rate.
    • If you absolutely, positively want a sure thing, and your yearly inflation raises, keep it under 4%. Oh, and hold 75% stocks/25% bonds.
    • Give up those yearly inflation raises and you can push up towards 6% with a 50% stock/50% bond mix.
    • In fact, the authors of the study suggest you can withdraw up to 7% as long as you remain alert and flexible. That is, if the market takes a huge dive, cut back on your percent and spending until it recovers.

When you look at the article you’ll see it has four charts. The first two look at how various portfolios performed over time and at various withdrawal rates. The difference is the second one assumes you increase your dollar withdrawal amount each year to account for inflation. So if you look at Chart #1 and at the 50/50 mix with a 4% withdrawal rate, you see you have a 100% chance of your portfolio surviving 30 years. Chart #2 tells you that if you take those same parameters but give yourself inflation raises, your portfolio’s chance of survival drops to 96%. Makes sense, no?

Charts 3 & 4 tell us how much money remains in the portfolios after the 30 years have passed and this, to me, is really compelling stuff. Again, Chart 3 assumes a straight percentage withdrawal and Chart 4 assumes giving yourself inflation raises. Let’s take a look at some examples.

Assume a 4% withdrawal rate on a portfolio with an initial value of $1,000,000. Here’s what you’d have left (median ending value) after 30 years:

Chart 3:

  • 100% stocks = $15,610,000
  • 75% stocks/25% bonds =  $10,743,000
  • 50% stocks/50% bonds= $7,100,000

Chart 4:

  • 100% stocks = $10,075,000
  • 75% stocks/25% bonds =  $5,968,000
  • 50% stocks/50% bonds = $2,971,000

Very powerful stuff and it should give you a lot to feel warm and fuzzy about as you follow The Simple Path to Wealth.

As you look over these charts, one thing that should become very clear to you is just how powerful and necessary stocks are in building and preserving your wealth. This is why they hold center stage in my Portfolio Ideas.

What is likely less obvious, but every bit as important, is the critical importance of using low-cost index funds to build your portfolio. When you start paying 1-2% or more to active mutual fund managers and/or investment advisors all these cheerful assumptions wind up in the trash heap. Wade Pfau says it best:

“For an example of this, the 50-50 portfolio over 30 years with 4% inflation-adjusted withdrawals had a 96% success rate without fees, 84% success rate with 1% fees, and 65% success rate with 2% fees.”

In other words, using the Trinity Study projections with portfolios built from anything other than low-cost index funds is invalid.

So, now to answer that question: What withdrawal percent do I personally use in my retirement? I confess I pay so little attention it took a few moments to figure it out and even then it’s not exact. But this year my best guess is it is running somewhere north of 5%. If you are a regular reader, this casualness probably surprises you. But there are mitigating circumstances:

1. I have a kid in college. That is a huge annual expense, but in 1.5 years it goes away. The money for it is figured into my net worth, but it is also earmarked as “spent.”

2. Since my retirement, my wife and I have accelerated our travels and the related spending has spiked sharply. Not to be morbid, but at my age I am more worried about running out of time than money. If the market were to tank in a major way, this is an easy expense to adjust.

3. Sometime in the next few years we will have two nice new income streams coming online in the form of Social Security.

4. Most importantly, I know I’m well under the 6-7% level that requires close attention.

Within that 3-7% range, the key to choosing your own rate has less to do with the numbers than with your personal flexibility. If as needed you can readily adjust your living expenses, find work to supplement your passive income and/or are willing and able to comfortably relocate to less expensive places, you will have a far more secure retirement no matter what rate you choose. Happier too I’d guess.

If you are locked into certain income needs, unwilling or unable to ever work again and your roots go too deep to ever seek out greener pastures, you’ll need to be much more careful. Personally, I’d work on adjusting those attitudes. But that’s just me.

My pal, Mr. Money Mustache, did a fine piece on this a while back. It is as good an explanation/defense of the 4% rule I’ve yet to read. Nothing, of course, is guaranteed. That why we all need to remain flexible, alert and, well, Mustachian.

Last Spring I dealt with a lengthy comment from reader “ddrem” describing the disastrous position the world is in today and calling into question my portfolio recommendations accordingly. (See: Portfolio ideas to build and keep your wealth)

No worries.

sea by Gusev


by Sergey Gusev

Not only will we muddle through, it is my belief we are on the verge of another great bull market. For lots of reasons, not the least of which is simply these things go in cycles and the drumbeat of pessimism (always a bullish sign) seems unusually high. People seem to believe the world will end on their watch. But it never does. It is the dark that sets the stage for the dawn.

If I’m wrong and the dawn is still a ways off, that’s OK too. There are lots of adjustments I can make and options to explore.

4% is only a guide. Sensible flexibility is what provides security.


Addendum 1: For another way to look at this, consider The Rule of 300, courtesy of Johnny Moneyseed (*blog no longer live):

“Pretty much every retirement calculator on the Internet is useless because the only two numbers that you need to look at are the amount of money that you spend during an average month — and the number 300. After you figure out how much money you typically spend each month (You should already know this!) OR estimate the amount that you’ll need every month in retirement, multiply that number by 300. This is the amount of money you need in order to retire. It’s that simple.”

Addendum 2:  Vanguard Retirement Nest Egg Calculator

Addendum 3: How to pull the 4%

Addendum 4: What is your retirement number — The 4% Rule, and extraordinarily good post on the subject from Go Curry Cracker.

Addendum 5: Also excellent, and laugh-out-loud funny, is this one by Mr. 1500: Why the 4% Rule Won’t Steal Your Spouse

Addendum 6: Safe Withdrawal Rate for Early Retirees another first class post from the Mad Fientist and a close look at how critical real returns during the first decade of retirement are.

Addendum 7: The many faces of the 4% rule from Justin at the Root of Good is a great overview of the Rule along with some variations on implementing it. Plus, it has a great picture of Justin not stressing over it.

Addendum 8: Fixed percentage approach, a discussion from the comments on another post regarding the idea of drawing a fixed percentage each year on whatever the balance in the portfolio is.

Addendum 9:  The Mad Fientist interviews Michael Kitces, who is one of the great researchers on the 4% rule and retirement strategy.

Addendum 10: Bigger Pockets — Early Retirement: Asset Allocation and Safe Withdrawal Rates with Michael Kitces


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  1. Michael Crosby says

    Enjoyed this post Jim. It gives me a lot of confidence my wife and I are doing the right thing. Wife is a bigger spender than I am, but more conservative on the withdrawal end. She wants to draw 0% and live off of other monies.

  2. Another Investor says

    My problem with the Trinity study and FIREcalc is they are based on returns in a rapidly growing economy. I’m not convinced these returns will be repeated in a more mature US economy with a lot of competition from outside. Current and future taxes are also an issue.

    I prefer a mix of dividend yielding stocks and real estate for the income portfolio. I limit myself to only considering the net income from my assets as my potential income – I do not decumulate and spend principal. I worry less about the vicissitudes of the market and keep less of a wary eye on inflation this way. Better tax treatment as well.

    • MathematicalInvestor says

      I agree. The Trinity study (and others) were based upon a much different economic environment:inflation and interest rates were much higher, economic growth was faster. No one knows what the future will hold. The best thing to do is to develop a spending and investing system during your working years and stick to it during retirement. It should include multiple income streams (pensions, SS, dividends, interest, part time work, and withdrawals).

    • Mr. Hobo Millionaire says

      I’m of the belief that the economy will always “grow” due to inflation if nothing else. I put grow in quotes, because some of the growth is real and some is forced (inflation). The government also needs inflation to go higher and the economy to “grow”, because it makes government debt less expensive, so inflation will always be a key part of the equation. As long as the US remains a strong piece of the world economy, prices and profit will always go up. People will be paid more and prices will go up which leads to more profit which leads to stock going up, because stock prices always stay relevant to profit.

  3. Naomi says

    Wow, this is great information. I’m curious – have you ever seen studies that go beyond 30 years? With the increases in both life expectancy and “extreme” early retirements it seems that people will need their portfolios to last longer than 30 years.

    • jlcollinsnh says

      Thanks Naomi…

      That’s a great question and I’ll probably edit the post to address it.

      The Mr. Money Mustache article I linked to talks about this and he claims that the math is much the same for periods beyond 30 years. That is, if it works for 30 it very likely works for 60. I believe he uses FIRECalc in arriving at this conclusion. Since I am unfamiliar with that tool I can’t vouch for it.

      Since 1989 I’ve “retired” several times for periods lasting from 3 months to 5 years. (See:
      Always got drawn back into work, but never because the money was running out. In fact, much as the Trinity Study would have predicted (although I had yet to hear of it at the time) my net worth actually increased during these periods.

      For those years I withdrew around 3-5% and paid close attention to my portfolio. Had it begun to drift down, I would have adjusted my lifestyle and spending. Problem solved.

      Were I about to embark on a 60+ year retirement (and even at my advanced age who’s to say I haven’t?) I’d do much the same. In fact, that’s exactly what I am doing. It is about the flexibility I discussed in the post.

      Trying to select a “set it and forget it” percentage, especially with annual inflation raises, that will last in every circumstance over multiple decades of time seems a fool’s errand. And unnecessary.

      The beauty of the Trinity Study is that it tells you exactly what has happened across multiple scenarios over multiple decades. Examining that data provides a great framework to assess your personal situation and what might work for you. It also points the way should the market move dramatically for or against you in the early years.

      Or just use 3% on a 75% stocks/25% bonds portfolio with no inflation adjustments. Very conservative and all your surprises will very likely be extremely pleasant.

  4. Shilpan says

    Just curious Jim as to why you decided to receive Social Security payment at age 62? It’s a nice post idea to explore different age vs monthly SS income… and, of course, tax implications.

    • jlcollinsnh says

      Actually my wife and I were just discussing this over dinner (and a nice bottle of wine) this evening.

      I haven’t taken SS as yet and probably won’t until I’m 70. Mine will be larger than my wife’s. Since she is very likely to outlive me by a couple of decades, this will give her more security and a bigger check once I’m gone. We plan to have her begin with hers at age 66.

      So not yet for either of us. But for planning purposes, we know it’s coming and if needed we could always take it sooner.

      We are not the least bit concerned about it being there and, in my opinion, nobody 55 or over needs to be.

      It would be a very interesting post, but I’m not qualified to write it. I’m still trying to figure it out. If I ever get to the point where I feel I can, I’ll put one together.

      I try to write only about stuff I actually know about. Yes. I know. That’s not always apparent. 🙂

      • chronicrants says

        Do you have any opinion on planning for social security for those under 55? I’d like to think there will be at least some SS when I’m ready for it in about 30 years, but there are days when I think it’s unlikely. Ideally I’d like to plan as if there won’t be any SS and then if it’s there it’ll just be a nice extra, but I’m not sure that I’ll be able to manage that. Either way, I’m curious as to your perspective.

        • jlcollinsnh says

          Hi CC….

          Do I have an opinion??? 🙂

          Actually, I’ve been meaning to write a post about SS and your comment might just be the motivation I need. For now:

          Your intention to plan as if it won’t be there is a good one. In fact this is what we did and surprise, it’s here for us.

          I think it will be there for you, too, but in a less generous form.

          I expect that retirement ages will be increased, payment reduced and the income ceiling (currently around 108k per year) that’s taxed will be raised. But it will be there.


          1. SS is backed by the most powerful lobby in history: AARP.
          2. Geezers are an increasing proportion of the population.
          3. Geezers vote.
          4. Politicians rarely try to take anything away from a large population that votes.
          5. This is why all the possible solutions being suggested will effect only those 55 and under.

          Hope this helps!

          • chronicrants says

            Thanks for sharing your thoughts! I think you’re right about politicians being unwilling to take a benefit away from such a large voting block, but at the same time, that can’t change the math. I’m also thinking there will be something, but will be smaller. You make a good point about them raising the retirement age even more. I wonder how high they’d let it go? Longevity runs in my family, so I’m planning a long retirement anyway, but I wonder if they would be able to get away with starting it at 70+ or if they’d hit too much resistance. Oh, where’s that crystal ball when we need it?

      • jcw says

        Here’s the strategy my wife and I will be following wrt drawing SS. I’ll be 64 this coming Nov and she’ll be 63 this coming July. I plan on applying for and then suspending my SS at 66+7months (the month my wife turns 66). Suspending my payments allows my benefit to continue to grow (at ~8% per year) until I’m 70. Applying for mine at 66+7 months allows my wife to apply for spousal benefits (50% of my 66+7mo rate). At 70 I’ll start taking my 100% benefits and then, 7 months later my wife will switch over to her 100% benefits. Then, assuming I die first (a good bet), she will begin to collect 100% of my benefit. This strategy results in the most return on our investment in SS over all those working years of putting in. It’s the best plan to maximize our benefit.

        • JC Webber III says

          UPDATE: What we actually ended up doing…
          Since the rules changed about filing and suspending, we changed our plans. I filed at 66.8 yrs and my wife filed at 66 yrs (we are 8 months apart in age). She gets half my FRA rate (not the extra 8 months I waited for until she reached 66). Her’s will continue to accumulate 8% a year until she reaches 70. Then she will file for her own SS and collect ~$900 more per month. The big difference between this plan and what we originally intended is that I started collecting at 66.8 instead of suspending until I was 70. The gross is less than if she had filed for her own and I filed for spousal on her ‘dime’, letting mine grow at 8% until I was 70, but we decided that we would rather front-load our SS checks now when we can enjoy the money (and leave more funds in the portfolio to continue to grow at our CAGR of 11% over the last 11 years). It’s been a couple of years since we implemented this plan and, so far, we are happy with this decision. BTW, our SWR has dropped from ~7% to between 2.5 and 3% now that we are collecting SS. 8^)

  5. Prob8 says

    Wow, any time I want to feel better about the crappy returns I’ve had over the last 7 years I just need to read this blog to realize that over the long run things will get better. Couple questions . . . it looks like the study focuses on large companies for the stock allocation and a certain type of bonds. No mention of real estate. Give that the main fund in the Simpler Path is a total market fund and a reit plays a significant role, does that have an impact on the results? Also, is rebalancing necessary? I suppose the key is to remain flexible and adjust the withdrawal rate based on market conditions.

    • jlcollinsnh says

      great question.

      yep, my simple path calls for 50% VTSAX (total stock market), 25% bonds and 25% REITS. For reasons I discuss elsewhere on the blog I think this is the most powerful combo for wealth building and preservation.

      As such, my bet is it should do even better than the purely stock/bond portfolios in the study.

      Yes, rebalancing is important with this approach and, indeed, any approach that uses asset allocation. Once a year is fine and I suggest on your birthday. Too much other trading and dividend/capital gains payouts happen at year end by the big firms and I prefer to avoid that time.

      If the market were to have a huge tick up or down in a short time frame, as in late ’08 & early ’09, I’d also rebalance then too.

          • Jonathan Pless says

            Jim, while reading your blog I see you’ve changed allocations a few times. (Moved out of REITs, moved from different bond funds, etc.)

            Would you mind updating what your current allocation is? (I’ll keep in mind the different stages of life that we’re in, of course. I’m just curious what your current allocation is.)

            Thank you for your time!

          • jlcollinsnh says

            Hi Jonathan…

            Since I stepped away from REITS a few years ago, my allocation has been ~75/25 stocks/bonds. Of course, that is specific to us and allocations and my recommendations regarding them vary depending on the individual.

            Ideally, I suggest using VTSAX and VBTLX.

            Currently I am experimenting with a couple of other bond funds. As I’m not sure this is a good idea, my recommendation for readers remains VBTLX for bonds. Indeed, I suspect I will also personally return to it.

            In recent years new and unexpected income streams have come our way, including Social Security, so I may cut back our bond percentage or even go to 100% stocks. But, again, this is personal to our situation and not a general recommendation.

            Finally, I occasionally fool around with individual stocks. Because this is a bad idea, I tend not to talk about it on the blog and I never discuss the specific companies I might buy and sell. Although that might be useful so others would know to avoid them. 🙂

            At the moment I don’t have any individual stocks or plans to buy any. Maybe I’m finally cured? 😉

    • jlcollinsnh says

      Thanks Keichi….

      Already planning the next one. In a couple of weeks we’re headed to France to visit our Daughter who is there for the year. 5 days in Paris and 5 days in Valencia where I’ll get to abuse still more Spanish speakers with my broken and floundering attempts at their language.

  6. MMM-JLCNH fan says

    Thanks for another great post. You mentioned MMM using FIREcalc to come to his conclusions. With FIREcalc, you can select various timelines as you mention. FIREcalc is set up to look at portfolio survival, just like the Trinity study. However, you can make it analyze the wealth accumulation phase by setting the annual portfolio spending as a negative number to reflect $ being added every year. Running it that way suggests that an all-stock portfolio (as you recommend in your Simple Path to Wealth post and elsewhere ) gives the best results during the accumulation phase and following the Trinity recommendations linked above (i.e. adding bonds to the mix) gives the best result during the retirement phase (as you have previously suggested here: ).

    • jlcollinsnh says

      Thanks, Fan, for the clarification.

      As I mentioned, I’m unfamiliar with FIRECalc, but I gather it is a useful tool. And, since it seems to confirm my portfolio ideas, they must be doing something right! 🙂

  7. Acorn says

    This was so useful, I always have had a bit of trouble understanding withdrawal rates. This post makes it so simple to understand.

  8. Mr. Everyday Dollar says

    I am a LTBH individual stock investor now, at some point in the future I’ll make a decision if I want to re-balance my portfolio to something like VTSMX/VTSAX, VGSTX/VTIAX, VBMFX/VBTLX, which is a simple and effective portfolio.

    I recently blogged about retirement calculators that some commenters mentioned ( The two I like the most are FIRECalc and RIP. The major difference between them are that FIRECalc uses actual market returns whereas RIP uses a Monte Carlo simulation model. Who’s output is right? Both. I think you’ll want to use a combination.

    The more I learn and gain experience with early retirement planning, and I’m about 9 years away, the harder the conviction that *none* of it is an exact science. But it also doesn’t have to be, as adjustments can be made to your lifestyle depending on market conditions, just as you mentioned Jim.

  9. Darrow @ CanIRetireYet? says

    Thanks for tackling a tough subject with such clarity Jim. It’s a fascinating topic that I’ve read and written on quite a bit too.

    You got my attention with your point that using the Trinity Study projections with portfolios built from anything other than low-cost index funds is invalid. Technically speaking, high-cost funds just add to expenses in retirement, but the way you phrased it gets people to sit up and pay attention to investing expenses — which is what matters!

    I’m on board with most of your conclusions, except I’m a little less confident in the 4% rate itself. Research from Wade Pfau questions whether we can assume that past U.S. history is an accurate model of future returns, and has demonstrated that the safe withdrawal rate is a function of market valuations when you retire. Jim Otar says the sequence of returns in the early years of retirement are critical: it may not be possible to recover from a “lost decade” in a mostly-stock portfolio. Todd Tresidder doesn’t believe you can draw on principal at all for retirements much past 20-25 years.

    My view is that there is no definite answer to this question, since it requires predicting far into the future. The key for me, just as you say, is more about personal flexibility than the exact numbers. Monitoring your retirement portfolio, and responding to an extended downturn with either more income (via part-time work or passive streams), and/or ratcheting lifestyle spending down, is a powerful approach to handling those scenarios where the 4% rule won’t work.

    • jlcollinsnh says

      Hi Darrow…..

      Great to see you here and glad you like the post.

      4%, and indeed all the scenarios in the Trinity study, are only guide posts as to what we can reasonably expect as we plan for our futures. But importantly, these guideposts indicate a much rosier future than most take into account, as indicated by the HUGE median balances left in most of these portfolios after 30 years.

      While I am unfamiliar with Mr. Otar, I absolutely agree with his idea that returns in the early years of retirement are critical. As I said in the post:

      “My guess is that if you began your own withdrawals in 2007 and the early part of 2008 just prior to the recent collapse, you will have hit upon two more years in which the 4% plan is destined to fail. You’ll want to scale back. On the other hand, if you started with 4% of your portfolio’s value as of the March 2009 bottom, you’re very likely golden.”

      It’s that flexibility thing. 🙂

      As to “whether we can assume that past U.S. history is an accurate model of future returns” I would say possibly not. But I cringe at the assumption they will be worse. They could be much better. Make no mistake, the past has not been some golden cakewalk. It has been a very rocky road. My guess is the future holds the same.

      Market crashes are to be expected. What happened in 2008 was not something unheard. It has happened before and it will happen again. And again. I’ve been investing for almost 40 years. In that time we’ve had:

      –The great recession of 1974-75.
      –The massive inflation of the late 1970s & early 1980.
      –Mortgage rates were pushing 20%. You could buy 10-year Treasuries paying 15%+.
      –The now infamous 1982 Business Week cover: ”The Death of Equities,” which, as it turned out marked the beginning of the greatest bull market of all time.
      –The Crash of 1987. Biggest one day drop in history. Brokers were, literally, on the window ledges and more than a couple took the leap.
      –The recession of the early ’90s.
      –The Tech Crash of the late ’90s.
      –And that little dust-up in 2008.

      Thru all those traumas the market returned an average of 12% per year. Those were many of the years the Trinity Study covers.

      The market always recovers. Always. And, if someday it really doesn’t, no investment will be safe and none of this financial stuff will matter anyway. Understanding this is the beginning of this series:

      I am also unfamiliar with Mr. Tresidder’s work. I would need to know what sort of portfolio he is thinking about if he “doesn’t believe you can draw on principal at all for retirements much past 20-25 years.” For a portfolio as described in the Trinity Study, I would suggest this is an unnecessarily conservative approach. In return for severely restricting your retirement income to only dividends and interest, you gain some security and the high likelihood of leaving a huge pile behind.

      Better, as you and I agree, to be a bit more optimistic while keeping your eyes open and being ready to adjust. 🙂

  10. John Mark Schofield says

    I’ve written further about this here:

    There’s a number of factors that call into question the 4% rule, including lower returns in our current environment, estimates of a slower-growing GDP in the future, and, most convincingly for me, the different SAFEMAX rates in different countries, ranging from under 1 for war-ravaged Japan to 2 and 3 (fairly common). 4 seems like a pretty optimistic rate.

    As a sidenote, love the blog and the series on stocks. I’ve listed this site as essential reading, because I think it is.

    • jlcollinsnh says

      Hi John…..

      Thanks for the kind words.

      There is always a pessimistic case to be made, but I confess I have little patience for it. Mostly it is based on the idea that the past 40+ years have been some sort of golden time not likely to be repeated.

      They were anything but golden. For my litany of challenges during that time, check out my reply to Darrow below. Could the next 40 years be worse? Sure. But it wouldn’t be all that hard for them to be better.

      As I try to show in the post, the data indicate that, if anything, 4% has proved to be too conservative in the vast majority of cases.

      Nobody can predict the future. Nobody, around here at least, is suggesting that 4% is an iron-clad set it and forget it guarantee. But as a reasonable guideline for planning, 4% is as good as it gets.

      Any sensible investor should keep a close eye on their stash, especially in retirement. Last year I spent 4.5% of my stash and by year end it was worth 11.4% more than when I started. This year I plan to do much the same, but should the market tank in some 2008 type fashion, of course I’ll cut back.

      4% is only a guide. Sensible flexibility is what provides security.

  11. Prob8 says

    Your rationale for holding the REIT fund makes sense to me – and I do hold some of that fund. Can you refer me to a study or other data that supports the concept that a REIT will react faster to inflation than VTSAX? It would be nice to have some filler reading between JLC posts. The Trinity Study was a nice review.

    Also, do you consider your home equity to be a part of your real estate allocation? In other words, if 15% of your net worth was in your house, would you only put 5-10% in the REIT? It seems to me that they are two very different types of assets. A house is a money sucker while the REIT pays me.

    • jlcollinsnh says

      Hi Prob8…

      Off the top of my head I can’t think of any studies to point you to….

      I do consider the house equity in calculating my allocations. As you point out, a home and a REITS investment are very different animals. But in terms of an inflation hedge, they both serve the purpose.

      Once we sell the house, the full real estate allocation will be in the fund and my guess is that will provide better and certainly smoother performance over the years.

  12. Mari says

    Hi there
    I came over here from MrMoneyMoustache and it is very interesting and confusing.
    I am new to investing and trying to max out my 401k. You keep mentioning index funds and my father has suggested all stocks in my 401k. It has done well the last year but looking today I see the management fees are high I think (they show costs of 3.50/1000?). The index funds show lower costs of 1.50/1000 but their performance isn’t as strong. So I am trying to understand how this all comes out 20 years from now. The options I have are all U.S. indexed funds (US TIPS, Fixed Income, Equity Index, Small Cap, and International. Ovviously no Vanguard which on Fidelity is closed to new investors. Do you have any opinion on these funds? Because of the lower management cost are they still better than individual stocks ? Sorry if this is not very clear!

    • jlcollinsnh says

      Hi Mari…

      It is a bit confusing, and I think because you don’t quite understand what’s in your 401k and so explaining it is difficult.

      I’d suggest you read (or re-read) my stock series. It should help you better understand this stuff.

      Based on what I think you are asking and assuming you are a young person with at least 20 years ahead:

      I agree with your dad that all stocks in your 401k is a sound choice.
      The way to own these stocks is with an Index Fund.
      The specific Index Funds should be either an S&P 500 Index Fund or a Total Stock Market index fund.
      It sounds like your 401k offers Fidelity Funds and if it does it very likely offers their version of one of these. That’s what you want.

      Hope this helps.

  13. Joe says

    When I first heard of the 4% rule, I thought it meant “withdraw 4% of your investments every year” (i.e. the actual amount will differ from year to year).

    But it sounds like the Trinity study defines the rule as “withdraw 4% of your investments on day 1 of retirement” and then either “withdraw that same amount every year till you die” (Chart 3) or “withdraw that same amount plus inflation every year till you die” (Chart 4).

    I have two questions:

    1. Am I understanding the Trinity definition of the 4% rule correctly?
    2. Does my (mistaken) definition of the 4% rule have any merit to it, compared to the real definition?

    Seems like it would be a simple way to codify your advice to “stay flexible” yet still have a formula for yearly withdrawals.

    • jlcollinsnh says

      1. Yes.

      2. Your “withdraw 4% of your investments every year — the actual amount will differ from year to year” concept would work very well indeed. Effectively you are trading the risk of running out of money for the risk of having your income vary year-to-year.

      As long as you have the flexibility to absorb these yearly income variations, it is a fine idea. It is, in fact, pretty much what I actually do as described in the post.

  14. Darrel says

    Hi JCollins

    I’ve been reading your blog for a while. I think I got sent over here from the Mr Money Mustache blog. In fact, I just read the interview with you, MMM, and your daughter. I really enjoyed it. I noted that you said something to the effect of “When you have your savings to where you can live off of 4%, “retire” even if you keep working and just send your paycheck to savings.” I like this idea.

    My question: I always see this 4% thing, and I understand the concept. What I don’t really get is the mechanics of employing it. Do you pull up your stock holdings every month multiply by .04 and divide by 12 then sell that quantity of VTSAX shares to pay yourself each month?

    (stock holdings X .04) / 12

    I hope that makes sense. I just don’t totally understand the mechanics. Thanks!

    • jlcollinsnh says

      Thanks Darrel….

      Glad you found your way over here.

      I’ve moved your comment to this post as it is a better fit and more people will get to share in our conversation here.

      As to the mechanics of withdrawing the 4%, you’ve basically got it.

      If your investments are in tax advantaged accounts, since your dividends and capital gains are not taxed, the easiest way is to have them reinvested and then just pull out whatever percentage you choose. Just like you said. For example:

      Suppose you have 100k in VTSAX and you want to draw 4% ($4000) per year from it. You could have Vanguard sell $4000 worth of shares and send the money to your bank. Or you can divide by 12 and instruct them to send $333.33 to your bank each month. Easy-peasy!

      If your investment are in a taxable account, since you have to take and pay tax on your dividends and capital gains, you could just have the fund pay these to you. In the case of VTSAX, about 2%. You’d get the other 2% as above. Make sense?

  15. Darrel says

    Hi JCollinsH

    I’ve been following your blog for a while now. I found you through the Mr. Money Mustache blog. When I was reading the interview you did with MMM and your daughter (can’t think of the blog it was on now), I was reminded of a question that constantly comes up for me.

    You mentioned that when you reach enough in savings to be able to live off of 4%, you can “retire” whether you keep working or not. Just, from that point on send all income from work or other sources to savings. I love this idea (I also have seen plenty of back and forth talk about the 4% rule not being perfect, but I’m all for it).

    How do the mechanics of this work? I mean, since you aren’t earning 4% dividends you are actually selling off some of your shares to pay yourself right? I’m not the best at this, but here is how my brain says it would work:

    Month 1 of retirement: I have 1.5 million in my stock accounts and I need to pay myself so I:
    (1,500,000 X .04) / 12 = 5,000 and I pay myself 5,000 dollars

    Month X of retirement stocks have been taking a bit of a hit: I have 1.3 million in my stock accounts:
    (1,300,000 X .04) / 12 = 4333.33 and I pay myself 4,333.33 for the month.

    Is this how it works? Do you maybe take out 3 months or 6 months or whatever at a time?



    • jlcollinsnh says

      Hi Darrel…

      Interestingly I’ve gotten just this question a couple of times now in recent weeks. Maybe I should do a post on it.

      But in short, it really is pretty simple and there are a couple of ways you could do it.

      The classic 4% rule says you can pull 4% of your assets each year, and increase this year-to-year to account for inflation, from a stock/bond portfolio without ever having to change a thing. As described in the post above, depending on the stock/bond mix this approach has up to a 96% chance of surviving 30 years. But like you, I prefer better odds.

      What you described would work just fine and, yes, you could set it up monthly, 3, 6 or 12 months.

      If your investments are in tax advantaged accounts, since your dividends and capital gains are not taxed, the easiest way is to have them reinvested and then just pull out whatever percentage you choose. For example:

      Suppose you have your 1.5m in VTSAX and you want to draw 4% ($60,000) per year from it. You could have Vanguard sell $60,000 worth of shares each year and send the money to your bank. Or you can divide by 12 and instruct them to send $5000 to your bank each month. Easy-peasy!

      If your investments are in a taxable account, since you have to pay tax on your dividends and capital gains distributions, you could just have the fund pay these to you. In the case of VTSAX, dividends are around 2%. You’d get the other 2% as above. Make sense?

      The 4% rule is designed to be able to survive most stock downturns, so you don’t have to worry about monthly market fluctuations. Although changing your 4% pull each month to reflect your actual stash value is certainly a safer way to play this out. You could also set aside a portion of the monthly 6k to build a cash reserve to draw on in down times with your approach. That is, spend only 5.5k each month and bank $500. Then when the time comes that you need to cut your pull to 4k, you can make up the balance with this cash. In fact I use a variation of this.

      Personally, I draw a set amount each month that is actually around 5% because the market has been so strong. But I also hold about 5% of my stash in cash for lean time and I am prepared to make serious cuts when the inevitable downturn comes.

      It is all about being flexible.

      Hope that helps!

  16. Woodreaux says

    “Not only will we muddle thru, it is my belief we are on the verge of another great bull market. ”
    Written in December 2012 and now I’m reading it on the last day of 2013!
    I believe I heard on the radio that the S&P finished up nearly 30% since you posted this.
    Congrats on a great year.
    One of the reasons i enjoy reading your stuff.
    Keep up the great work thru the New Year!

  17. Elisabeth says

    Hi Jim. I’ve spent the past week reading almost all your blogs and it’s been wonderful! A friend helped me find MMM and he lead me to you. I thank all of you for posting all this great advice to help me achieve freedom as soon as possible! And for free!

    I understand the principles of 4% and calculating what I need my net worth to be but I’m struggling with details. Based on our current spending I’d like our retirement expenses to be about $40k. That means I need to save $1m before we are free. But, how is inflation calculated? I understand I need $1m in today dollars but if we can get there in 10 years do I keep tracking to $1m, or will this number go up as the years go by? Because in 10 years we will need more than $40k due to inflation.

    My husband and I are in our early 30s and while we have saved a lot over the past 10 years it all hasn’t been invested, earning maximum returns for us. We’ve stepped up the rate and I hope to get there in 10 years I’m just struggling with the details of calculating what my “freedom fund” needs to be.

    Thanks for the help!!!

    • jlcollinsnh says

      Welcome Elisabeth…

      Glad you found your way here.

      There are a couple of ways to approach your question.

      You could estimate the rate of inflation and plug it into one of the many on-line calculators and let it figure how much you’ll need to replicate the spending power of 40k when you retire. The problem, of course, is that inflation will likely not unfold as you predict.

      Better, it seems to me, to simply aggressively build your freedom fund and track how much it can throw off at 4% each year as it grows. At the same time you can assess each year how much you’ll need/want when you retire.

      Over the years, those numbers will come together. When they intersect, you’re there!

      That’s what I did anyway! 🙂

      Eric Bahn also just put up a nice post on this subject you might find helpful:

      Good luck!

      • Elisabeth says

        Jim – thanks for your insight and link to that article. Another well articulated explanation of the 4% concept. I was reading along, understanding everything until I saw he wanted me to multiply my annual expenses by 1.5 to account for taxes and other expenses!!! 1.5 really changed things. I fortunately live in a state with no income tax and as long as we plan to stay here or go to another income tax free state, my only taxes should be from capital gains on my invesents and income tax on my 401k withdrawals. Capital gains are 20% from what I understand and I keep my effective fed tax rate around 15%. So I’m figuring I’ll use 20% as a conservative tax estimate in my calculations. Would you recommend the same?

        Also I think I understand better that I am chasing a moving target trying to figure out how much my total stash of money needs to be. I realize I’m working on a very fine detail. Using my number 40k, I would need 1M to retire today. If I retire in 10 years I’ll need almost 54k per year (if I assume an average inflation of 3% per year) so that means I need 1.35M. Unfortunately that is a bigger number which means more time. But, I think I understand it better and can better plan! Since nothing can be planned, I now believe your statement of watching it year to year and when the intersection point hits when your fund can throw out 4%, you’re done!

        It’s so helpful to have you and others out there to help people like me plan and end the working phase of my life as quickly as possible!!! THANK YOU!


        • jlcollinsnh says

          Hi Elisabeth…

          Yes, I think 20% should work fine for your “what if” analysis.
          One thing to keep in mind is that once you reach age 70 you will be faced with Required Minimum Distributions (RMDs).

          If you have been a successful saver/investor over the decades you could see those push you into a higher tax bracket. A “first world” problem, as they say, and not a bad one at that. But something to be aware of.

          As for your total stash, your thinking is correct.

          One thing that might help is that a bit of inflation, say 3%, is actually very healthy. It allows companies pricing power and helps them grow. That equals better results for your investments.

          Of course, if it gets out of hand as it did in the 70s, that’s a problem.

          But the key thing is you’ll get there and watching the progress will be fun.

          Remember, too, when the market drops (as it surely will) and your stash takes a few ugly steps back, the stage is just being set for a stronger rebound. Kinda like how a broken bone heals stronger. 🙂

          • ladyaurora says

            “your stash takes a few ugly steps back the stage is being set for a stronger rebound” i see it as a bush prunned back, grows back bigger and better.
            im working my way through reading all this great info.

  18. Dom says

    Hi Jim,
    New reader here! Found this blog from the Mad Fientist. I gotta say, between you, Mad FI, and MMM I have learned an incredible amount. Reminds me of one of my favorite quotes from Socrates: “Employ your time in improving yourself by other men’s writings, so that you shall gain easily what others have labored hard for.”
    Anyways, great article but I think the link to the updated trinity study is no longer valid? I am having trouble finding it on google, do you know where else it might be available?

    • jlcollinsnh says

      Welcome Dom…

      Glad you found your way here.

      You’re right, that link wasn’t working and it was a pain trying to find it again on Google. But I think I got it if you want to give it another try.

      Thanks for letting me know!

    • jlcollinsnh says

      Welcome Jorge…

      and thanks for the link.

      Like most things coming out of Vanguard, this is well reasoned and well worth reading.

      That said, I think it is also a bit more complex than needed.

      As they say in the conclusion, flexibility is key and ” Because circumstances constantly
      change, investors and their financial counselors
      need to review portfolio performance and strategy regularly to assess the status of their spending plans.”

      That’s really all you need to do: Target around 4% and pay a bit of attention.

      If the market takes a major hit, cut back spending to give it a chance to recover. This is the same thing we’d all do if during our working years we had to take a pay cut.

  19. John Mark says

    Dear Mr. Collins,

    To echo many others, I can’t tell you how much of a lifesaver it is to find your site at this crux in life. I wish I would have found this years ago. I’ll try to keep my question simple yet detailed.

    My wife and I are 33. We have advanced degrees, but live “mustache” style simple in the US; she’s from Ecuador (which I see you have visited! Cool!) Our little house in Tennessee is now paid in full, with only $500/year prop. taxes. Our expenses, including giving, are about 15K per year.

    In investments, we have:
    $40K in cash in the bank, losing value
    $60K in a ROTH IRA with LPL, managed at 1% by an advisor
    $30K in a matched employer ROTH 401K
    2 rental properties

    Our take home income (after tax) is:

    Me ($40K) per year
    Wife ($10K) per year
    Rentals ($20K) per year

    70K income – 15K exp = 55K potential savings/per year

    We’d like the freedom in the next 5-7 years to be able go back and forth to Ecuador, to have financial independence/work part time/not be tied to 9-5. I’m weary from rentals and don’t feel this is the way forward for passive income/financial independence. I’m a little scared to take the reigns in my own hands, but from your advice and others, I think I need to:

    1. Stick that $40K cash in VTSAX with Vanguard, (maybe just $35K to keep some liquidity)
    2. Roll my$60K ROTH IRA to a lower cost Vanguard ROTH IRA Lifestrategy Growth (set aggressively at 80/20? 90/10? 95/5?) Or roll it to a ROTH IRA that invests only in VTSAX?
    3. Change allocations on my $30K in a matched employer ROTH 401K to some blend of Schwab S&P Index and Vanguard Mid-Cap Index Fund (Adm), and/or MFS International Value Fund (R4). What do you recommend?

    In my head, we’d continue to live simply and dump at least $50K in savings per year into #1 and #2. After 5-7 years, we could begin the 4% freedom withdrawls.

    How do we invest the 50K savings each year? Do we continue to max out the $5500/yr Vanguard ROTH IRA (#2) and put the rest in VTSAX fund (#1) each year? Or do you have another suggestion entirely?

    Please tell me exactly what you’d do in my situation. I’m all ears.

    John Mark

    • jlcollinsnh says

      Hi John…

      ..and welcome!

      I have been to Ecuador several times now and in fact am returning in October/November for the two Chautauquas and to visit some friends there. Always a great time!

      Interestingly, you have asked me to ” tell me exactly what you’d do in my situation.” So that’s exactly what I’ll do. 🙂

      Remember, this is what would work for me. You have to decide if it works for you, and to what degree.

      1. I love your low spending rate and the mortgage free house. I don’t like owning houses, so I’d sell it. But it sounds like you are very content with it and that’s just fine.

      2. I’d unload the rentals. There is money to be made in rentals, but it is too much like work for my tastes. The proceeds would go into VTSAX.

      3. The 40k would go 35k into VTSAX and 5k into cash for emergencies. Once the rentals were gone, I’d trim that more.

      4. I’d immediately pull my Roth from the advisor and put it with Vanguard in VTSAX:

      5. Life strategy funds are fine: but I prefer VTSAX. Simpler and cheaper.

      6. I’d max out my 401k and put it in the S&P 500 index fund. Once I left the job, I’d roll it to an IRA at Vanguard and put it in — surprise!– VTSAX

      7. After fully funding my (and my wife’s) IRA and 401k, I’d open a taxable account for the rest at Vanguard in VTSAX.

      8. I’d maintain that awesome 50k+ savings rate going forward.

      9. Once I hit FI and hung up the daily job, I’d add some bonds to the mix. I use VFIDX (VBTLX is also good) and hold about 25% in bonds.

      For more on allocations:

      For more on what we hold and how we use it:

      Notice that this puts you entirely in stocks thru VTSAX and the S&P 500 index fund in the 401k. This is very aggressive and you can expect a very volatile ride. Be sure you are truly ready for it and won’t panic sell when the tough times come.

      Please carefully read the full Stock Series to understand the thinking behind this approach and to be sure you are comfortable with it, before doing anything.

      But, this is what I’d do and, other than we are at different stages in our investing lives, it is what I am doing.

      Good luck!

      • John Mark says

        Dear Mr. Collins,

        This advice confirms what I’ve been thinking as I read your posts, sir. Thanks again so much. I just have a couple of follow-up questions for you:

        First, about #7. You said: After fully funding my (and my wife’s) IRA and 401k, I’d open a taxable account for the rest at Vanguard in VTSAX.

        When you say fully funding, do you mean $5500 per year per spouse ($11,000) to Vanguard ROTH IRA (100% invested in VTSAX) and then accepting the 3% ROTH 401K match with my employer (100% invested in S&P 500 index fund)? Then, the remainder of the cash I have leftover in a taxable retirement account with Vanguard in VTSAX (which I understand can be added to and subtracted from at anytime without penalty, is that right?).

        Is this what you mean, or does fully funding mean I should be putting more in the employer ROTH 401K?

        Secondly, I have a question about your advice at building both a tax advantaged and taxable account simultaneously. Just to play devil’s advocate, why wouldn’t I put all of my eggs in the taxable account basket, creating the largest snowball possible in one place with which to start drawing 4% as early as possible? I’d appreciate your perspective.

        Lastly, sir, I failed to mention that we have $14,000 sitting in an HSA, and just read your insightful article on how to pay medical expenses with your own cash and let your HSA take the wild ride in stocks and work harder for you, then later withdrawing to pay yourself back for medical expenses. Brilliant. My HSA offers these funds. How would you allocate the money (I’m sure in the ones that most resemble VTSAX, if I had to guess!) 🙂 Which are best?

        American Funds Capital World*
        Blackrock Equity Dividend
        Goldman Sachs Balanced Strat
        Goldman Sachs Gr & Inc Strat
        Goldman Sachs Growth Strategy
        John Hancock High Yield A
        John Hancock Large Equity Fund
        JP Morgan Prime Money Market
        Keeley Small Cap Value
        Neuberger Berman Genesis Fund
        Neuberger Berman Real Estate
        Oppenheimer Developing Markets
        PIMCO All Asset
        PIMCO Commodity Real Return Strategy
        PIMCO GNMA
        PIMCO Low Duration
        PIMCO Real Return Fund
        PIMCO Small Cap Stocks Plus
        Vanguard Equity-Income*
        Vanguard Global Equity *
        Vanguard Mid Cap Index*
        Vanguard S&P 500 Index*
        Vanguard Small Cap Index*
        Vanguard Wellington Fund*
        Victory Munder Mid Cap Core Growth

        My wife and I appreciate you so much! Enjoy Ecuador! We’re heading down next week to Ambato/Baños de Agua Santa where our family lives. Have a great trip yourself!
        John Mark

      • jlcollinsnh says

        Hi John…

        Yes, fully funding your IRA means $11,000 = $5500 for each of you.

        Here is my basic hierarchy for deploying investment money:
        1. Fund 401k type plans to the full match.
        2. Fully fund a deductible IRA, rather than the Roth if your income is high enough that you are paying Federal income taxes. The reason is the money you don’t pay in taxes will compound for you over the decades.
        3. Finish funding the 401K to the max.
        4. Fund your taxable account with any money left.

        Yes you can add and withdraw money in your taxable account anytime and in any amount. If you have a capital gain, you might owe captial gains taxes, depending on your tax bracket:

        –15% bracket or less, the tax on capital gains is 0%
        –25, 28, 33 or 35% bracket or less, the tax on captial gains is 15%
        –39.6% bracket the tax on capital gains is 20%

        If you have a capital loss it is deductible against any gain and up to $3000 of your earned income in any given year. If you losses are larger than that, you can carry them forward to use in future years.

        You want to fund your tax-advataged accounts first for the tax deduction and because the earnings in them grow tax free.

        When determining if you have enough to retire using the 4% rule, you’ll add all of your accounts together. Then, to start and if you are under 59.5, you simply draw down on the taxable accounts first.

        For your HSA, from the list you provided, I’d go with Vanguard S&P 500 Index.

        As I said in my first reply…

        Please carefully read the full Stock Series to understand the thinking behind this approach and to be sure you are comfortable with it, before doing anything.

        Your questions indicate you haven’t done this as yet. 😉

        Good luck!

  20. mike says

    Mr. Collins,
    Thanks for all your work on this website, it really is VERY helpful!!! I’m new to investing and was recently advised by a friend that is retiring soon to invest my savings into SSO instead of VTSAX. He’s had great returns, but I would really appreciate your thoughts on this idea.


    • jlcollinsnh says

      Thanks Mike…

      Glad you like it!

      I’m sure your friend has had spectacular returns with SSO, at least anytime between 2009 and now.

      I wouldn’t go near it.

      SSO is a leveraged fund, which means they invest borrowed money to enhance results. Their stated goal is to see 2x the results of the S&P 500. That’s great when the results are up and you are seeing 2x the gains. But when the results are down, you’ll also see 2x the losses.

      At the bottom of the last bear market that ended in 2009, the S&P 500 lost ~45%. SSO lost ~75%.

      What SSO is doing is called buying stocks on margin. Buying stocks on margin is exactly what made the stock market plunge in 1929 so hard, fast and deep. It is why many, many investors were completely wiped out:

      Your friend is taking enormous risks to enjoy those fat returns. Unless he can time the market and get out before the next plunge, he is very likely to give all those returns back and then some. And since no one can time the market….

      It is like going out further and further on an ice covered pond. But the further out you go, the thinner the ice is. Right now he’s saying, “Look at me and how much further I can go than you.” Next it will be, “How did I get all wet and this hypothermia??” 🙂

      Oh, and SSO has an ugly expense ratio of .89%

      • Mike says

        I appreciate the prompt response and analogy 🙂

        Perhaps I should tell him to cash out some of those gains now for a life raft and warm socks 😉

        I’m curious where you were able to find all that information about SSO; I was having a hard time finding details online. Since I’ve been working my way through your life saving stock series (currently on part 8a), I knew you’d be the man to ask!

        My friend did mention that he typically checks the stock once a week and sells immediately if it falls below the 200 day moving average. Do you think his odds of maintaining gains over time are really much better using this method?

        There seems to be infinite strategies for playing the the market, most of which just seem overwhelming. Like a beautiful math equation, your approach seems simple and efficient.

    • jlcollinsnh says

      That’s a sweeping question, Jaime. 😉

      Is there ANY merit? Sure. Do I agree with all his doom and gloom? If you’ve read the 12 posts in this Series leading up to this one, you know I don’t.

      I do note Mr. Paul has been predicting this disaster since the early 1970s.

      Further, the clip you sent is a fear-mongering attempt to sell an investment plan. In short, an informercial disguised as real information. Plus, they set it up so you can’t tell how long it is or how much more time is left to get to the point. I wish you had warned me.

      Here’s another perspective not trying to sell anything:

  21. 27 says


    You mentioned paying for college tuition. I currently don’t have kids but my wife and I plan to. Just as we are interested in getting ahead of the game for retirement, we want to get ahead of college tuition. What strategy do you like for tuition? 529? Draw from post tax vanguard accounts? What about starting to save before kids are born and how?

    Really been enjoying the posts. Six weeks ago I new very little on the subject. I picked up a couple books ehich helped. But this serious has given me a great deal of confidence and renewed positivity. Thanks.

      • Matt Mecham says

        This a late reply, but just in case somebody reads down this far . . .

        My kids knew from an early age that we would not be footing their tuition. We also strongly discouraged student loans, while at the same time strongly encouraging working through school, getting scholarships, applying for grants, and even considering military service (and the attached G.I. Bill).

        I don’t want to sound like a grouch, but I have seen too many kids squander their time in school (partying too much, etc.), prolong it by changing majors midstream, or even just getting bored and dropping out! Of course, not all kids throw it away; I believe that most take it seriously.

        Regarding my oldest daughter: she has paid cash for her first two semesters by working part time, and she has already saved up enough for a 3rd semester. My wife and I were so impressed with Morgan’s work ethic, that we paid for her books and I am letting her use my car while I ride my bike to work (she pays for the gas, though). We are also giving her room and board. I think that’s a pretty good compromise!

        My son joined the National Guard, which will pay for a Bachelors Degree if he plays his cards right.

        To be clear, there is absolutely nothing wrong with helping your kids through college; I just want them to do most of the heavy lifting. 🙂

  22. Žiga says

    Great blog, really awesome writings! It has opened my investing knowledge to a new level – exactly what I’ve been looking (hoping) for. Great job, keep going! 🙂

    I’ve one question concerning 4% withdrawn rate. What if, let’s say, crash comes just after your retirement and therefore your net value decreases significantly (20,30,40%) and therefore 4% rule doesn’t work anymore, so you should withdraw maximum ~2% since the net present value is lower? Most likely dividens would be lower as well? Or am I wrong?

    Sorry if the question was already asked (I didn’t read all the comments from blog in detail (but almost all:)).
    Thank you very much!

    P.S.: One more question just arise: what would happen if dollar losses its value significantly – let’s say in 20,30 years?

    • Mr W says

      Žiga, I Have the same sort of worries. That’s why I’ve built my financial independence on other things and only invest the surplus money in index funds /ETFs….

      • Žiga says

        Mr W, thanks for your reply. I see I’m not alone with such worries.
        If it’s not a secret, what are the other investments with which you’re financially independent?
        I’m kind of thinking to invest into real estate since there’s possible to get under value properties and therefore (sometimes) get quite good returns on investment.

        • Mr W says

          Hi Žiga, we bought some (5) rental property at good prices (we think…time will show). They allready appreciated in value (by a lot). When these are paid off, the rental income covers all our expenses and leaves a buffer for repairs and other unforseeable costs. Apart from that I started a (mostly passive) only business that in 2 years got to the stage where it pays by itself for all our expenses. So in fact we’re double FI.
          I don’t trust real estate 100% as I don’t trust ANYTHING 100%. We might also sell some of the properties at some point if we don’t want to deal with them. We don’t know. We’ll adapt.
          but the lesson I’ve learned over the year, that your business (i prefer online) is the best thing you can do. low or no investments (aprt from your time) and the cance of catapulting you into FI in a very short time. I’m not a very smart person, nor did I do any programming at my website. I just built up a community and got 30-40 customers that pay for edvertising each month.
          All the money we save will go into index funds though but I wait for the next crash….might be silly, but that’s what I am. I am foolishly trying to sort-of time the market 🙂

          So: my advice: investing is cool, but starting your own machine that shits money is a LOT cooler and safer. We shared our story on our blog if you want to read more:

    • jlcollinsnh says

      Hi Ziga…

      Glad you are enjoying it!

      As I say at the end of the post above, flexibility is the only true security.

      The 4% rule is a useful tool, but you want to pay attention to how things unfold in your retirement years. Not only to be sure your money lasts, but also be be sure you fully enjoy your wealth in the far more likely case that it grows substantially.

      The early years are most critical and the Mad Fientist has an excellent post on exactly this:
      It is also Addendum #6 above.

      As for dividends, while they tend to hold up better than stock prices during drops, during a major crash these too will be cut.

      As for the dollar, unless we enter a deflationary depression it will almost certainly lose value over the next 20-30 years. This is the very definition of inflation, which the central bank is trying to raise to ~3%.

      This is why you want to hold inflation hedge investments, one of the reasons I like stock index funds:

  23. Batyam says

    Hi Jim,

    I have been contributing to 529 since child birth and have around 40K. Will carry on with contributions ($200 a month) and would need this money in 6 years to use for college tuition. At the moment it is invested in 80%/20% stock/bond. What are your thoughts to moving this to cash as I get closer to the graduation date? I am having hard time coming up with the schedule.


    • jlcollinsnh says

      Hi Batyam…

      Basically, short-term money – < 5-years - should typically be held in cash. That said, in my mind it also depends on your risk tolerance and need. If you absolutely need this cash in six years, you'll want to move it to cash soon. But it you don't, perhaps you have other sources of money to meet the need, and you want to take the risk you could more slowly move to the cash position over time. It really depends on your situation and temperament.

  24. grbkeb says

    This is my first post here, but I’ve read nearly all of your blog entries, they are fantastic! Even though I’ve been a extremely prodigious earner and saver, there is no doubt I’d be even farther ahead than if had followed this simple advice. I do have a question though and I suppose I already know the answer but I’ll ask anyway.

    Background: Without trying sounding like to much of a jerk, I earned a lot and saved 60-70% of my income during the good years. Made some calculated investments that I was personally involved in making successful, well 15 years of hard work later I was an overnight success. With that being said, I am currently working on retirement #1, have a net worth approaching 8 figures (85% in taxable accts), zero debt, single, no kids, and spend maybe $10-12k month. Admittedly life is pretty good. So I guess the question comes in, if you have already “won the game” why still play? Meaning why risk a 50% catastrophic drop, reality is I’ll most likely be donating most of the money one day anyway. I understand I have maybe 50 years of retirement to fund if I am very lucky, I probably will do some consulting or venture of some sorts in the future as well like you’ve discussed. Have you walked through this type of scenario somewhere in your blog? I realize this is a first world problem, but if your young readers follow your advice they will have high net worth’s as well someday. Thanks for your work on this blog!

    • jlcollinsnh says

      Great question, grekbe…

      And congratulations on your success!

      Thanks, too, for your kind words on the blog.

      OK, first thing as you are single and have no kids: Adopt me, add me to your will and start my hefty monthly allowance. 😉

      More seriously, your idea of having “won the game why still play?” is very much in line with most conventional thinking. No less than Jack Bogle would second this idea. Indeed, his asset allocation is something like 70/80% bonds to 20/30% stocks for this very reason.

      So, were you to do the same you’d be in very good company.

      But my thinking is a bit different. In the same way you no longer have to play, your net worth means you can play with virtually no risk to your lifestyle. And if you continue to play, when the game is over years from now you will very likely leave behind a far larger legacy for whomever you choose.

      You mention your net worth is approaching 8- figures. Let’s call it 10 million for this exercise and let’s say the market has one of its rare but possible 50% collapses. You are now left with only 5 million.

      Your monthly spend rate is 12k, annually 144k. That’s a very nice income and lifestyle for a single guy and you sound perfectly happy with it.

      Using our 4% rule, you need 3.6 million to generate 144k per year. So even with a 50% drop, you still have 1.4 million more than you need. Indeed, the market could drop 60% and you’d still have 400k more than needed.

      Now, while a 50% drop is certainly possible, these events are very rare. It is far more likely that the market will continue it’s relentless march upward, interrupted only be the far more common 10-20% corrections.

      So, from my point of view, 20 years down the line my net worth (and my heirs/charities) will be far better off and the risk to my lifestyle will have been zero.

      From a purely financial point of view, my approach is mostly likely to produce the best end result. But in terms of your lifestyle, either will work just fine.

      The choice really comes down to your temperament. A wonderful 1st world choice to have! 🙂

      • grbkeb says

        Thank you for the thoughtful response! It pretty much goes along with what I am thinking…short of developing a hooker or blow habit I should be in good shape. My nature has been to be very conservative in investments I don’t control (the stock market), but swing for the fences in those that I do. If I do ratchet up the risk level, it would probably be in investing in another company…but at that point it would be actively managed & I guess I really wouldn’t be retired anymore lol. Keep up the good work, I have been forwarding that Gambler scene to people since it came out (absolute classic!) when they ask me for financial advice, now I’m just forwarding them to your site & the better version!

  25. Syed says

    I’ve had some cursory knowledge of the 4% rule for a while, but this post really opened up my eyes and made me realize The Simple Path is definitely the way to go. The idea that you can withdraw a percentage if your portfolio every year and possibly end up with significantly more than what you started with is incredibly exciting. I greatly appreciate the clear explanation.

  26. Craig says

    Great information! New to the website. Am a current Fidelity customer and recently sold some old American Century funds and am reading about VTSAX/VTI funds. Now if I would purchase any Vanguard thru Fidelity, they of course charge the $7.95 buy/sell. Wanting to switch to the total stock index way, but is there a real difference between Fidelity/Vanguards index funds? I realize that Vanguard is less expensive, but after reading the posts above, I question paying the $7.95 each time I sell whether it be annually or quarterly… Many many thanks!!

  27. Billy Shaks says

    Hi. I feel caught in a jamb. I am 57, currently retired on disability drawing 2100 a month. Have a rental that brings in 700 a month. Spend about 4500 a month. I used to have a managed account at Morgan Stanley with killer fees. I liquidated Feb of 2015 and have pretty much been in cash earning zip since then. The funds are now at Schwab. Its 1,700,000. I’m wanting to get back into the market with a lazy low fee 3 etf portfolio from Schwab with a 50 50 allocation. Thinking 35% SCHB, 15% SCHF and 50% SCHZ. I guess my question is how would you re deploy the funds? Wait for a pullback and plow in? Just start averaging back in? My concern is that we are near all time highs. I know timing is a fools game but your thoughts on this would be greatly appreciated.

  28. aj says

    Question, do you use average cost or specific ID on your VTSAX in Taxable account? Second, you mentioned you reinvest all dividends, any reason why you wouldn’t spend in cash and then sell the additional 2% of shares to make up difference, trying to figure out if you end up paying more in tax by reinvesting and then turning around and selling. I am thinking it would depend on your cost basis method, thoughts?


      • aj says

        So if you use average cost and reinvest dividends, while also taking withdrawals, you are paying tax twice. You get taxed on the dividends either way as you said, but if you reinvest and then turn around and sale, your cost basis is the average of all shares, which wouldn’t be increased much by a reinvested dividend, so you are paying tax on your dividends plus long term capital gains tax by doing it this way. This is from bogleheads wiki “If you are planning to use average cost basis, and you might want to sell some of the fund soon (to rebalance, for example), reinvesting dividends will cost you in extra taxes on the sale, because you will not have any shares to sell at the price you paid for the shares you bought with the reinvested dividend If you are planning to use average cost basis and know that you will continue to add to the fund, it doesn’t matter whether you reinvest distributions.” Food for thought…

        • jlcollinsnh says

          As I discuss in the link I provided, once you start withdrawals you will no longer want to reinvest dividends.

          You take your dividends as cash and use them to reduce the amount of shares you sell to pull your 4%.

          • jlcollinsnh says

            That’s true for the funds in IRAs as that money all comes out as taxable income.

            In my comment I am referring to funds not in tax-advantaged accounts.

  29. Felipe says

    Hi Mr. Collins,

    I notice you quote Wade Pfau and found that he mentioned the 4% rule may be an anomaly for 20th century US and in the 21st century, it may not hold out as well. Below is the article and while I don’t fully believe everything there and plan on using 3% wr, I’m very curious about your opinion here. It’s also entirely possible that swr will be even higher or that technology and automation will eventually make meeting our needs so cheap that this issue will become irrelevant but in the mean time..

    • jlcollinsnh says

      Hi Felipe…

      The truth is that none of us can predict the future and the 4% rule is only a guide.

      When the dust settles and the research is done on the 30 years from now to 2046, perhaps it will be called the 3% rule. Or 2%. Or 5%.

      “Rule” is likely a misnomer. “Guide” is a better way to think about it.

      As always the key will be to plan and remain flexible.

  30. FI Girl says

    My husband and I are in our mid 30’s and are working our way to FIRE. We have been contemplating what would be enough for us to pull that trigger and now believe we are just about 18 months away.

    We are both extremely financially conservative and are hoping to one day live purely off of dividends and never have to draw down on the principal.

    We know we can’t time the market but we’re trying to safeguard ourselves from this possibility as much as possible. Right now we feel it is highly probable that there could be a market correction if we were to retire in the next couple of years and are not completely comfortable going with 4% and so we are targeting a 2.5% withdrawal which equals out to the yield of our index fund portfolio.

    We might need to work a bit longer to make our target number, but we’re hoping this will keep us going for the rest of our days (and then some).

  31. Mike and Nancy says

    Hi jim,

    My wife and I are fairly new on our FIRE journey and we had a quick question. Although I think I may have the answer, I thought I would ask you or any one of the smart readers of this blog 🙂 :

    Our goal is to accumulate and save a $1,000,000 portfolio, Once we have reached that goal, we intend to stop saving and work part time for a number of years without dipping into our portfolio. The expenses would be hopefully covered by the part time income.

    The question then becomes, if our portfolio has now amassed $1,500,000, by the time we are ready to withdraw from our portfolio, would the 4% entail the initial $1,000,000 or from the $1,500,000?


    • jlcollinsnh says

      Hi M&N…

      The 4% would be based on the portfolio once you begin withdrawing.

      BTW, I like your “step approach” to this — shifting to part-time work you presumably enjoy more to cover the bills while letting your stash grow.

  32. JE- says

    Hi James,

    Good work on the blog I always come back to it to find some wisdom

    I am after some advice from a more sensible head than my a few months time provides a certain few things work out the way I want them to..I will be ready to start aggressively investing around 40-45% of my after tax and after pension contributions to an index fund…this should get me to FI within 12 years and a safety net of a pension pot that 19% of my income goes into as a reserve or if I want to give my myself a pay rise.

    What % of my split should be in stocks and what % should be in bonds considering the timeframe …I think the most reserved I would be as default is 75% stocks and 25% unless I became so rich I will not care about the highest returns anymore.

    Is this a good starting point or should I be more reserved 60/40 so I don’t get a nasty surprise in 10 years time just 2, years before I possibly plan to quit my job?

    Let me know your thoughts

  33. Christopher Cerny says

    Am I right to worry about a 100% stock portfolio when used in combination with the 4% rule? I totally see how the research concludes that success is almost certain when using the 4% rule with a 100% stock portfolio and how having a 100% stock portfolio also gives me the greatest chance of having the largest amount of money remaining to bequeath. What worries me though is how the volatility of a 100% portfolio could put a huge dent in the starting value of the portfolio that I plan to withdraw the 4% from when I do retire. In other words, 4% of a portfolio that is valued at $1 million the day of retirement because I was allocated 50/50 is a lot more than 4% of a $600k 100% stock portfolio that tanked hard because of a big bear in the hypothetical 18 months. Is there any way to eliminate that fear and still be at 100% stock, other than to tell yourself “well…bummer, you gotta keep working and wait for the market to come back before you retire now”?

    • jlcollinsnh says

      The concern you are expressing is called “sequence of return risk” which simply refers to the unfortunate situation of the early stages of a bear market matching the moment you chose to retire and live off your portfolio.

      Certainly, if this happens, a 50/50 allocation will better serve than 100% stocks. Problem is, bear markets are rarer than bulls so more commonly that 50/50 will be a drag. More importantly, holding less that 50% stocks leads the 4% rule to frequently fail as the portfolio fails to pace inflation with too many bonds.

      You could, as some advise, look to something less than 4%, but that means a longer working/accumulation phase.

      Either way, you are going to have to pay attention. As I said in the post:

      “4% is only a guide. Sensible flexibility is what provides security.”

  34. Elina says

    Hi Jim,

    Thanks so much for your hard work in educating the public about investing, and really making it easy to digest. I am fortunate to be earning 100k+ at the age of 24, and squirreling away 50+% into a company 401K, my Roth IRA, a small Wealthfront account, and a savings account.

    A few questions for you:
    1. It looks like post-bonus, my income might be too high to be deductible for a regular IRA. Am I right to stick with the Roth, and figure out the backdoor option?
    2. My current 401K and IRA are Target Date funds (retirement date 2060), and are currently aggressively stock-heavy. Given that I have a long runway to retirement, I feel okay with a more risky portfolio. That said, at what point would you recommend pooling all that money into your recommended 50% stocks, 25% REITS (do you still recommend that, or should I just do 75% stocks instead?), 25% bonds allocation?

  35. Aaron says

    Wow, what a great article. Those numbers really put things into perspective. Between initially reading MMM’s 4% withdrawal posting, then following up with this post it makes one feel very confident. I’ve probably got a 12-15 year timeframe before retirement so I’m no where close, but it sure leaves me warm and fuzzy planning ahead anyway!

    Thanks as always for your great material. I’ll be using your amazon affiliate link so I can at least give back to you in some way.

  36. dawn says

    mr collins
    ive asked MMM this question but its not appearing on his site, [ im from UK] may i ask you?
    with regards to his recent article how to live off your stache of money
    if i was to choose the 3% swr and my index investments suddenly took a dive , would i take the 3% from the new lower total or take the 3% from what the investments had been before they plummeted?
    i think i read on your site somewhere that you would go to the bond allocation if this were the case, but MMM is on about a 100% stock index portfolio, so what would you do?

    • jlcollinsnh says

      I see, Dawn…

      …so I am your second choice? 🙂

      If you read the post above you will find charts from the Trinity study that show how different portfolios performed over 30 years with different withdrawal rates. Each assumes the withdrawal rate remains the same regardless of what the market does during those 30 years.

  37. Olivier Künzler says

    Dear JL

    I am living in Liechtenstein and like your blog and bought your book as well – very inspiring!

    Question: Someone is flexible and ready to adapt his cost of living annually and intends to withdraw 4%/yr from the CURRENT value of the portfolio (i.e. yr 1: 1 mln/40k; yr 2: 900k/36k; yr 3: 1.1 mln/44k etc). Is this safe? What is your opinion on this? Would even 5, 6% be possible?

    Best, Oli

  38. Dawn says

    I would say read everything you can on 4% rule . Use firecal and online withdrawal calculators. It’s a personal decision, it’s what you feel comfortable withdrawing. They say 3% your overwhelming sure you wont ever run out of money .do you have other income sources? 4% you’ve a very good chance you wont run out of money. I’ll probably go for 3.5% .if state pension is guaranteed I’d take the 4% but if I’m nervous it may be cut I’ll go for 3.5%.

  39. Caitlin says

    Hi Jim!

    I’m trying to get a better idea of the bigger picture. Would you be able to talk us through your numbers since you started investing in this way?
    For example:
    – Each year I would do a maximum 401k company match totaling $20k.
    – Each month I would contribute another $1000.
    – The dividends for each year were the following: 1992 $x, 1993 $x etc. I kept re-investing dividends until year x which amounted to $x.
    – Since year x, I have contributed a total of $x.
    – Counting all of my contributions – I ended up with $x portfolio amount.
    – I started withdrawing $x amount in year x of my investment which constituted x% of my total fund.
    – The average growth of my fund not including my contributions was x% a year.
    – I’ve saved $x in taxes investing in this way.

    Thank you 🙂

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