Question 1

Does the 4% rule still work in today's economic environment?

Accepted Answer

Yes, but with vital caveats. The 4% rule was established using historical data that included the Great Depression, stagflation in the 1970s, and massive world wars. It is highly resilient. However, the original study was based on a 30-year retirement horizon. If you are retiring at 35 and need your money to last 55 years, a 4% withdrawal rate carries an unacceptably high risk of failure. Furthermore, the rule assumes a portfolio heavily weighted in equities (at least 50%). If you hold your money in cash or low-yield bonds, inflation will destroy your purchasing power, and the 4% rule will mathematically fail.

Question 2

How exactly should I factor Social Security into my calculations?

Accepted Answer

Social Security is best factored in by subtracting the expected annual benefit from your projected annual expenses, thereby lowering the total portfolio size required. For example, if you need $80,000 a year to live, and the Social Security administration guarantees you $30,000 a year starting at age 67, your portfolio only needs to generate the remaining $50,000. At a 4% withdrawal rate, your required FI number drops from $2,000,000 to just $1,250,000. For early retirees, the calculation is staggered: you must fully fund your lifestyle from your portfolio until age 62 or 67, at which point your required withdrawal rate dramatically drops.

Question 3

What happens if the stock market crashes the year I plan to retire?

Accepted Answer

If the market crashes the year you retire, you are experiencing the absolute worst-case scenario known as Sequence of Returns Risk. If your portfolio drops 30%, and you still withdraw your fixed 4% living expenses, you are locking in massive losses. To survive this, you must have a mitigation strategy in place beforehand, such as a "Bond Tent" (holding 3-5 years of living expenses in cash or bonds) so you can live off safe assets without selling stocks at a loss. Alternatively, you must be willing to dynamically reduce your spending or pick up part-time work until the market recovers.

Question 4

Should I pay off my mortgage before my target retirement age?

Accepted Answer

Mathematically, if your mortgage interest rate is very low (e.g., 3%), you are technically better off keeping the mortgage and leaving your capital invested in the stock market earning 7% to 10%. However, from a cash-flow and risk-mitigation perspective, paying off the mortgage is highly recommended by experts. Eliminating your largest monthly expense drastically lowers your required annual income in retirement. A lower annual income requirement mathematically reduces your target FI Number and lowers the amount of money you must withdraw during a market downturn, making your entire retirement plan significantly safer and less stressful.

Question 5

Do I use my gross income or my net income when calculating my savings rate?

Accepted Answer

For the most accurate calculation, you should use your net income (after taxes) but add back in any taxes you deferred through retirement contributions. Your savings rate is a measure of how much of your available resources you are keeping. If you make $100,000, pay $20,000 in taxes, spend $60,000, and invest $20,000, your savings rate is best calculated as $20,000 / $80,000 (net available income), giving you a 25% savings rate. The higher your savings rate, the shorter the time until you reach your target retirement age, because every dollar saved is a dollar that does not need to be supported by your future portfolio.

Question 6

What is the difference between nominal returns and real returns in these calculations?

Accepted Answer

Nominal returns represent the actual percentage your investments grow on paper; if the stock market goes up 10%, your nominal return is 10%. Real returns represent your growth after subtracting the wealth-destroying effects of inflation. If the market grows 10%, but inflation is 3%, your real return is 7%. When calculating a retirement age decades into the future, you absolutely must use real returns. By using a 7% real return instead of a 10% nominal return, your final calculated portfolio size will automatically be represented in today's purchasing power, saving you from the complex task of inflating your future living expenses year by year.

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