I’m planning to be ‘4% flexible’ in retirement – will re-evaluating my safe withdrawal annually help me avoid running out of money?

For most people in the FIRE world, the concept of the 4% safe withdrawal rate is considered set in stone. Knowing that this is the amount of money you can live on every year as a retiree is a fundamental tenet of the entire retire early movement. The challenge is that most people aren’t entirely aware that this rule comes with several caveats. 

Because the 4% rule is so well known, it shouldn’t come as a surprise that one Redditor, posting in r/ChubbyFIRE, is taking it very much to heart. However, they are also wondering exactly how the 4% rule is applied and whether they can earn money annually from their investments, allowing them to recalculate their SWR every year. 

The 4% Rule

After listening to a podcast explain the 4% rule, the Redditor has become very interested in this philosophy. The good news is that the 4% rule is relatively straightforward, but it can often be confusing for most people. In other words, most people believe the 4% rule is the amount of money you take out every year. 

However, the 4% rule essentially states that this is the amount you withdraw in your first year, and then you adjust this percentage for however many more years you need to withdraw. 

For the Redditor, the question is whether they have a starting portfolio of $1 million, which would result in a $40,000 withdrawal in year one. They then wonder if, in year two, assuming the portfolio has earned $100,000 or a 10% return, they would take out $46,080, or 4% of $1.1 million. The same applies to year three, and the amount withdrawn is based on the portfolio’s value at the time. 

Ultimately, the Redditor is wondering if this strategy can and will work. They recognize they would need to work with a volatile market, but their research hasn’t indicated if this strategy is good or bad. 

Understanding the 4% Rule

There is no question that anyone retiring early and using the 4% rule as a means to live should re-evaluate their spending annually. This is especially true as you get older and costs increase, especially when it comes to medical expenses. There are other considerations to take into account as well, such as home repairs or any other costs that would not be included in the 4% safe withdrawal annually. 

What this Redditor is likely missing is that you don’t take 4% out every year, you only take it out in the first year. After the first year, you then need to consider how to account for 4% plus any necessary inflation. This means that you are likely pulling out more than 4% every year, which is why the original individual who created the 4% rule now recommends planning for 4.5% instead. 

The current hope is that you can take a 4% withdrawal every year and “never” run out of money, or at least not have to worry about money for the next 30 years. The caveat is that you can’t account for inflation, which means what your 4% buys you today won’t buy you in 10 years, hence the need for more money. 

Variable Percentage Strategy

This Redditor is an ideal candidate to learn more about the variable percentage withdrawal strategy. Instead of just focusing on 4% as the rule, this strategy focuses more on what the Redditor is thinking when taking money out based on market performance. 

Unlike the 4% rule, the VPW strategy allows you to be dynamic in how much you take out each year. Under this rule, with a $1 million portfolio at age 45, as the Redditor suggests, your initial annual withdrawal would be $46,000. In the second year, if the Redditor’s asset allocation remains the same, they would have 4.7% to account for increased expenses due to inflation. 

Using this strategy, you could set up a table that extends to 100 years of age, but you still want to try to account for increasing earnings. This is arguably the biggest X factor that’s hard to predict, as an invested portfolio can grow or shrink every year, making it a bit of a roll of the dice to determine how long it will truly last.