Is FIRE at 4% Safe Withdrawal rate (SWR) realistic ? - Part 1
TLDR: 4% withdrawal rate based on 25x annual expenses, viability for FIRE retirees at 40, illustrated with some scenarios.
One of the maxims that you see around retirement (not early retirement mind you) is this notion of 4% withdrawal rate.
Let us take a step back and tackle another maxim which is that your retirement portfolio should be 25x annual expenses.
Retirement corpus = 25 times your annual expenses
Instead of discussing this in abstract terms let us use some numbers to review these claims.
Scenario 1: Retire at 60.
Assumptions
Retirement Corpus = 1,000,000
Equity portion of portfolio = 50%
Debt portion of portfolio = 50%
Annual return on equity = 5%
Annual return on Debt = 2%
Annual rate of inflation = 2%
Annual withdrawal rate = 4% or 40,000
Life expectancy: 85
Figure 1: Retire at 60
For someone retiring at 60, they are doing quite well and will be comfortable until they reach 85 the assumed life expectancy.
Scenario 2: Retire at 40
Assumptions
Same assumptions as the above scenario expect retirement age is 40.
Figure 2: FIRE at 40 with a corpus of 1 million dollars
Given that the portfolio needs to last longer by 20 years than for someone who retires by 60. The money runs out when they hit 70.. What else can be done that can help?
Scenario 3: Retire at 40 - prioritising withdrawal from debt portion of portfolio first
Assumptions
Prioritising withdrawal from debt first instead of withdrawing equally between debt and equity.
Figure 3: FIRE at 40 withdrawal prioritised from Debt first
Now, we are talking. Withdrawing from debt first allows the equity to grow for another 10+ years extending the life of the portfolio by 6 years. Still the money runs out when they hit 76.
Scenario 4: Retire at 40 - with a 30% market correction during year 1 of FIRE
Assumptions
Same assumptions as Scenario 3 but with a 30% equity correction during year 1 of FIRE
How do they fare with this added assumption?
Figure 4: FIRE at 40, withdrawal prioritised from Debt first but with a 30% market correction during the first year of FIRE
A 30% market correction puts a significant dent in the portfolio. The money runs out when they hit 66.
Given that all of these scenarios pretty much assume ideal cases with no emergencies, unexpected expenses, boom/bust cycles etc.
Scenario 5: Retire at 40 - at a SWR of 2.75%
Assumptions
Same assumptions as scenario 4 except
A safe withdrawal rate (SWR) of 2.75% instead of 4%
Retirement corpus of close to 1.5 million instead of 1 million
Retire at 40 - with a SWR of 2.75%
Money has run out when they reach 87. This assumes a serious market correction of 30% during year 1 of FIRE. But with adequate planning, this would work and is definitely a better option with a Safe Withdrawal Rate (SWR) of 2.75%.
Some might think - “Of course it is, captain obvious. Retirement corpus has gone by almost 50%” But the problem is, it is not obvious for a lot of people and many financial blogs are doing a disservice to potential FIRE retirees with this 4% SWR mantra.
Nothing is worse than deciding to FIRE at 40 with a SWR of 4% but realising at 55 that your money is not going to last through retirement and having to go back to work again.
So how does this translate into the Indian context, look out for part 2 coming up tomorrow.
Happy investing - #MyFatFIRE
Disclaimer : I am not a financial planner or fiduciary. Do not use this as trading advice. Research and invest at your own risk.
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