The 4% Rule - A Monte Cristo Sandwich Ep. 4

[00:00:11] Welcome to CoastFI Couple, a podcast where love meets financial independence. I'm Matt.

[00:00:16] And I'm Jana. Join us every other week as we dive into the world of CoastFI and share smart money tips for couples.

[00:00:21] We're going to be talking all about how to strengthen your bond and your relationship and bringing closer to financial independence.

[00:00:26] One episode at a time.

[00:00:28] Welcome back to CoastFI Couple.

[00:00:31] Yes, this is a bi-weekly, hopefully, podcast about money, relationships, and financial independence.

[00:00:39] Love and money.

[00:00:40] Yes, love and money.

[00:00:42] And today we are going to talk about one of my favorite things, and that is the 4% Rule.

[00:00:50] So, the 4% Rule has a very big following in the FIRE community.

[00:00:57] What is the 4% Rule?

[00:00:59] 4% Rule is a projection strategy for what your withdrawal should be from your portfolio upon retirement.

[00:01:10] Right?

[00:01:10] Right.

[00:01:11] So, you don't want to, when you do retire, you want to maintain your portfolio over time.

[00:01:19] You don't want to deplete your portfolio over the course of your retirement.

[00:01:22] So, you want to ensure that you're only taking enough to where it can still maintain or grow.

[00:01:28] Right.

[00:01:29] So, the S&P 500, which is low-cost index funds, a lot of people in the FIRE community will invest in that because it's sort of a safe bet.

[00:01:36] We can talk about that a little bit later.

[00:01:38] But you can count kind of on the S&P 500 averaging out to make you roughly 10% on your investments over time.

[00:01:48] It will average out to roughly 10% over time.

[00:01:51] Adjust it for inflation.

[00:01:53] You want to be kind of conservative and plan for 7%, right?

[00:01:57] So, yes, it grows at 10% over time, but $2 million now is not going to be worth the same as $2 million in 30 years.

[00:02:03] So, you kind of want to adjust that down for inflation.

[00:02:06] So, in that case, we plan for 7% returns in low-cost index funds like the S&P 500.

[00:02:14] And when you do finally hit your FIRE number, whatever that is and whatever age you are, most people say the 4% rule is going to sustain your portfolio.

[00:02:23] You'll be able to take from your portfolio 4% annually of the amount of your portfolio.

[00:02:31] Without touching the principal.

[00:02:34] Right.

[00:02:35] And it will not deplete your portfolio.

[00:02:38] Which is great for FIRE couples, right?

[00:02:42] It's great.

[00:02:42] Because then you're able to essentially build your own passive income.

[00:02:47] Yes.

[00:02:47] Basically, it's treating your investments, part of your investment returns as passive income.

[00:02:53] But one of the things I've been reading about a little bit is that the 4% rule isn't necessarily a withdrawal strategy.

[00:03:00] It's a projection model.

[00:03:02] And I'm still learning a little bit about this.

[00:03:05] So, bear with me.

[00:03:07] But in actuality, when you do actually get to the point where you're starting to withdraw from your portfolio, people don't really live by the 4% rule.

[00:03:15] Sometimes the market is up.

[00:03:16] Sometimes the market is down.

[00:03:17] It's not that you're always going to take 4%.

[00:03:19] It's a projection model for when you're building your savings.

[00:03:23] And you're looking to see, okay, when can I retire, right?

[00:03:26] And of course, you'll make those adjustments post-retirement as needed.

[00:03:29] But one of the things that I find really interesting when it comes to the concept of the 4% rule is how it applies to traditional retirement versus early retirement.

[00:03:41] Because...

[00:03:41] That's a good point.

[00:03:43] So, just to add on to kind of a little bit more background on the 4% rule.

[00:03:46] Yeah.

[00:03:48] It was made by an analyst, essentially, that evaluated the past 30 years of the stock market and identified that if you withdraw 4% of your portfolio over those 30 years, you would be able to enjoy the growth without touching the principle.

[00:04:07] Right.

[00:04:07] By looking at the...

[00:04:08] I always mess this up.

[00:04:09] It's not Monte Cristo.

[00:04:10] That's the sandwich.

[00:04:11] It's Monte Carlo simulations.

[00:04:13] Monte Carlo simulations.

[00:04:14] Exactly.

[00:04:15] Yeah.

[00:04:16] So, Michael Kitsis is the author of the 4% rule.

[00:04:19] And he's since adjusted his plan a little bit to be lower as well, just to be a little more conservative.

[00:04:25] So, sometimes you might hear the 3% rule, the 3.5%.

[00:04:29] Well, part of his strategy is that it's good for 30 years.

[00:04:31] Correct.

[00:04:32] Exactly.

[00:04:32] That you can count on the 4% rule, not depleting the principle of your investment if your retirement is 30 years or less.

[00:04:41] But for people who are going to retire early, say you want to retire at 45 or 55, you need to be adjusting that 4% rule down to 3.5% or 3%.

[00:04:52] Because not only are you retiring sooner, but probably your retirement years need to last longer.

[00:04:58] Let's talk about some examples.

[00:05:02] Okay.

[00:05:02] I do have some examples.

[00:05:05] And I think you guys have probably heard me talk before about how much I love calculators.

[00:05:13] I have a compound interest calculator on my phone.

[00:05:16] I have the Wallaburst calculator saved on my phone.

[00:05:21] I love them.

[00:05:22] They keep me up in the middle of the night.

[00:05:25] So, which is hilarious because when I first met you, this would have been so far from, I think.

[00:05:30] No, you were the one that was up all night looking at the front.

[00:05:33] Yeah, yeah.

[00:05:33] I just, I love, I love the switch.

[00:05:34] I'm all here for it.

[00:05:35] We have totally changed.

[00:05:37] We've switched shirts.

[00:05:39] Okay.

[00:05:39] So, let's share some examples for how the 4% rule and potentially the 3% rule would apply.

[00:05:46] I know we've been talking about a lot of these concepts, but sometimes it's like, okay, the concepts seem kind of high level.

[00:05:51] How would I apply these to actual numbers?

[00:05:53] So, I have some examples.

[00:05:56] Let's see.

[00:05:57] All right.

[00:05:57] So, if you are wanting to retire at a normal retirement age of 65 plus.

[00:06:03] Standard retirement.

[00:06:04] Standard retirement.

[00:06:05] You probably would want to plan for 30 years of retirement, right?

[00:06:09] I'm retiring at 65.

[00:06:10] Hopefully, I live until I'm 95.

[00:06:14] Maybe that's generous, but I have a lot of longevity in my family.

[00:06:19] I don't know if you knew that.

[00:06:21] So, in this case, you would want to use a 4% rule in theory.

[00:06:26] So, if you were going to use a 4% rule, say you want 75 years annually in retirement.

[00:06:33] I mean, $75,000.

[00:06:34] $75,000 a year annually in retirement.

[00:06:38] That's what you want to live off of.

[00:06:39] So, I'm now 65 years old and my expenses I've identified are $75,000 a year.

[00:06:45] Yes.

[00:06:46] Okay.

[00:06:46] And I want to stop working.

[00:06:48] I've been doing this until I'm 65.

[00:06:50] How much do I need to have in my nest egg to generate $75,000 a year?

[00:06:55] $1.9 million.

[00:06:57] At the time of retirement, which is adjusted for inflation.

[00:07:00] Okay.

[00:07:01] So, you need $1.9 million in investments generating $75,000 a year.

[00:07:07] Yes.

[00:07:07] To be able to stop working and finally hit retirement.

[00:07:11] Right.

[00:07:12] Okay.

[00:07:12] Now, if you want to retire early, for example, at 45.

[00:07:17] Yeah.

[00:07:17] Let's get real fun with this.

[00:07:19] Okay.

[00:07:19] Who wants to work at 65?

[00:07:20] This is the other extreme, right?

[00:07:22] Yeah.

[00:07:23] Then you'd have to plan for 50 years of retirement.

[00:07:26] Hopefully, right?

[00:07:27] You would live for another 50 years.

[00:07:28] This is more exciting, right?

[00:07:30] Now, we're talking like legit fire, right?

[00:07:33] So, this is fire.

[00:07:34] Financial independence, retire early.

[00:07:35] I'm now 45 years old.

[00:07:37] I'm sick of the workplace.

[00:07:38] Right.

[00:07:39] I still need how much to live on?

[00:07:40] In this scenario, I think that the 3% rule would probably be more appropriate because,

[00:07:47] again, you're going to be retired, hopefully, for more than 30 years, closer to 50 years,

[00:07:52] right?

[00:07:52] So, what was the, sorry to interrupt, what was the annual expenses?

[00:07:57] Still 75 a year.

[00:07:58] Still 75 a year.

[00:07:59] Okay.

[00:07:59] So, I'm now 45.

[00:08:01] I identified 75,000 a year is what I need in order to live.

[00:08:07] If you're going to live by the 3% rule, your nest egg would have to be $2.5 million at the time of retirement adjusted for inflation.

[00:08:13] Okay.

[00:08:13] So, 2.5 million.

[00:08:15] But, this is a fun part.

[00:08:17] Okay.

[00:08:17] Let's say you want to reach Coast Fi by the time you're 35.

[00:08:22] Okay.

[00:08:23] And so, Coast Fi, just to clarify again, in case you missed the first couple episodes, Coast Fi simply states that you have enough in your investments to push that ball down the hill.

[00:08:33] So, where you don't have to contribute anymore to any of your Roths and your 401ks or traditional retirement accounts.

[00:08:40] Because it will compound.

[00:08:41] Exactly.

[00:08:42] So, you have the nest egg already in the oven.

[00:08:44] And now you just have to make enough to live.

[00:08:47] You just have to wait until that compound interest grows that snowball.

[00:08:51] So, when you do retire, it's big enough for what you need upon retirement.

[00:08:54] Okay.

[00:08:55] The more that Jan and I simplify and automate our finances, the happier we became.

[00:09:01] And this is the single greatest finance budgeting tool that's come out in recent times.

[00:09:06] It's called Cube Money.

[00:09:08] And it's changing the way couples implement financial health.

[00:09:13] We're investors in this company.

[00:09:14] We have exclusively been using Cube Money to do our own personal budgets since 2020.

[00:09:21] And it's so simple that even our kids are now using it.

[00:09:24] Cube has developed and patented a technology they call Default Zero.

[00:09:29] And it requires a category to be opened from your personal budget before you can spend with the card.

[00:09:37] And then, once you spend, it deducts it all in real time.

[00:09:41] This single feature has made Cube the safest card in the world to use.

[00:09:47] If you drop it, it always has a zero balance on it unless you open the budgeting app.

[00:09:52] It's been extremely handy for us.

[00:09:54] And it saved us, actually, several instances of fraud.

[00:09:57] And we're never going to go back.

[00:09:59] Cube is perfect for families, too, because they've got shared spending categories that allow you to spend in real time from them.

[00:10:06] And everyone else in the family can see the updated balance.

[00:10:10] It's essentially making it 100% foolproof to always stick to our budget.

[00:10:15] And that has actually been the case.

[00:10:17] We have not overspent from our budget since we started Cube.

[00:10:21] And it's amazing.

[00:10:22] This is the tool that helped us get a handle on our family spending and made our journey to Coastify so much easier.

[00:10:29] So if you're ready to take your budget to the next level where you truly can automate it, you truly set it and forget it, then you're in luck.

[00:10:38] Because Cube Money is offering an exclusive deal just for our listeners.

[00:10:42] Go to cubemoney.com.

[00:10:44] That's Q-U-B-E money dot com.

[00:10:46] And at checkout, use the code COAST.

[00:10:49] You can try the premium or the family membership for free.

[00:10:53] And again, we highly recommend it.

[00:10:56] It's a personal endorsement.

[00:10:57] We know that if you use the program, it'll work for you.

[00:11:01] Enjoy.

[00:11:01] So let's say you want to reach COAST 5 at the time you're 35.

[00:11:05] In example one, where you are retiring at normal retirement age, 65, you're going to use a 4% rule for your projections and take 75 a year roughly annually.

[00:11:15] Mm-hmm.

[00:11:16] Mm-hmm.

[00:11:17] In example one, you'd need $250,000 saved at 35 to reach $1.9 million at 65.

[00:11:24] Okay.

[00:11:25] So I love your mind because you speak so quickly.

[00:11:27] So let me just kind of digest this for a second.

[00:11:29] So I'm 35 years old.

[00:11:31] Mm-hmm.

[00:11:32] My career might be difficult.

[00:11:33] I'm kind of ready to slow down.

[00:11:36] Mm-hmm.

[00:11:36] I've looked back at my 401k account.

[00:11:38] It now has how much?

[00:11:40] $250,000.

[00:11:41] So I've collected $250,000 in my 401k accounts, generating roughly 10%, right?

[00:11:50] Which is the market average if you're investing in low-cost index funds.

[00:11:54] And so that means that with $250,000 in the bank at 35, what?

[00:12:00] At 35, you just let it sit.

[00:12:02] You stop investing.

[00:12:03] You just cover your expenses until you're ready to retire at 65.

[00:12:07] So it sits for 30 years.

[00:12:09] It compound interests for 30 years.

[00:12:12] And by the time you get to 65, you will have $1.9 million.

[00:12:17] Ready to go.

[00:12:18] Gotcha.

[00:12:19] So that says that at 35, I hate my job.

[00:12:25] I'm done with it.

[00:12:26] I want to do something that I enjoy.

[00:12:27] I want to work at the movie theater.

[00:12:29] This is, we'll talk about my dream job.

[00:12:31] Thank you very much.

[00:12:32] My dream job is to work at a movie theater.

[00:12:34] That's a very good point.

[00:12:34] So at 35, I want to leave my corporate job, but I want to work on something that I enjoy.

[00:12:42] And so I've now have $250,000 in my account and I'm done.

[00:12:47] I no longer have to contribute any more to my retirement accounts.

[00:12:51] I don't have to save any more.

[00:12:53] All I have to do is cover my yearly expenses, which are $75,000 a year.

[00:12:58] Yes.

[00:12:58] Okay.

[00:12:59] Now an example two, if you're looking to retire at 45.

[00:13:04] Gotcha.

[00:13:05] So first example was you do your fun job or the job that you can maybe enjoy more that

[00:13:11] doesn't have to earn as much because you're not contributing to those retirement accounts.

[00:13:14] You're just using enough to live on.

[00:13:16] You still plan to do that from 35 to 65.

[00:13:18] Yes.

[00:13:19] Gotcha.

[00:13:19] Yeah.

[00:13:20] Coastify isn't retirement.

[00:13:21] It is I'm done investing.

[00:13:24] So that way, when I do need to retire at the set age, I'll have what I need.

[00:13:28] In the meantime, I just have to cover my annual expenses aligned.

[00:13:33] An example two, if you're looking to retire at 45, which is sooner.

[00:13:38] And like I said, you might want to consider the 3% rule for your projections in this scenario.

[00:13:44] So you're taking less of the pie for longer, but you still need 75K a year to live.

[00:13:52] An example two, you'd need 1.25 million saved at 35 to reach 2.5 million at 45.

[00:14:00] Gotcha.

[00:14:01] So the difference is because you're looking to stop working at 45.

[00:14:05] Yeah.

[00:14:05] So you're starting to dip into your investments sooner.

[00:14:09] So they don't get to compound for as long.

[00:14:12] Right.

[00:14:12] Here comes the math game.

[00:14:14] Gotcha.

[00:14:14] Okay.

[00:14:14] So, and then I was like, well, what about a sweet spot example?

[00:14:18] Cause both of these seem pretty extreme.

[00:14:20] Like I don't want to wait until I'm 65 to retire and reaching 1.25 million dollars by

[00:14:27] the time I'm 35 seems like a pretty steep ask.

[00:14:30] Yes.

[00:14:32] $250,000 saved at 35.

[00:14:34] Like that seems attainable.

[00:14:35] Right.

[00:14:36] Yeah.

[00:14:36] Right.

[00:14:36] I think $1.25 million invested.

[00:14:40] Like that sounds, that sounds hard, you know, but a sweet spot example, coast by sweet

[00:14:45] spot example is if you wanted to coast by at 35, um, planning to retire at 55.

[00:14:54] So that would give you 20 years of compounding interest.

[00:14:57] If you were able to save $575,000 at 35 and your long-term investments, then by the time

[00:15:05] you retire at 55, you could take 3.5% of your portfolio, which would give you 75 a year.

[00:15:15] So 75 a year, 77, 77, 77 at 55, which is at the 3.5 rate because that we're assuming is going to last longer than the 30 years.

[00:15:29] So 55, you are projecting, you're going to live longer than, you know, the 80 mark, which is a smart way to go.

[00:15:36] Right.

[00:15:36] You don't necessarily want to be it.

[00:15:38] No one knows when you're going to die.

[00:15:40] Yeah.

[00:15:40] So you kind of want to plan to, you know, I don't want to run out of money when I'm 92.

[00:15:46] Yeah.

[00:15:47] That would be a bummer.

[00:15:48] I'd say a lot of people too, um, uh, unless you're, you know, Bill Perkins and want to die at zero.

[00:15:54] A lot of people do want to leave some money, you know, to their kids or for charities.

[00:16:00] Right.

[00:16:01] Right.

[00:16:01] So the idea of not touching your principle and living off the interest is an attractive one because it gives you full autonomy to not have that stress of, you know, eating away at your nest egg as you're, as you're getting close to it.

[00:16:15] And there are a lot, a lot of calculators online that you can use to sort of play around with these numbers.

[00:16:23] Try the 4% rule against your numbers.

[00:16:26] Try the 3.5% rule, you know, 20 years of retirement, 30 years of retirement, 50 years of retirement.

[00:16:31] I've done it all and it's fun.

[00:16:33] Uh, so definitely try it.

[00:16:34] We'll, we'll include some, um, some links in the show notes for some resources for you all to check out.

[00:16:41] Yeah.

[00:16:41] So I like the, the super conservative example though, where you have 250,000 in an account.

[00:16:50] I said, what?

[00:16:50] 35.

[00:16:52] I have to quickly look up what the average 401k account is.

[00:16:55] It's probably not even close to 250,000, but I do think that if you start early enough, 250,000 in an account, uh, by 35 is attainable.

[00:17:06] Right.

[00:17:06] And so again, it's a math game.

[00:17:08] Right.

[00:17:09] The earlier you start or the bigger your shovel and the lower your expenses, the faster you can get that in there.

[00:17:14] These are all levers that you can kind of pull.

[00:17:16] It's the game.

[00:17:17] To sort of play.

[00:17:18] It's just to play the little game.

[00:17:20] It's the little game.

[00:17:20] Yeah.

[00:17:21] Exactly.

[00:17:22] Yeah.

[00:17:22] There was another, uh, uh, interesting point I wanted to make about retirement age.

[00:17:30] Oh, your fun five fact.

[00:17:33] My fun five fact.

[00:17:34] Yes.

[00:17:35] Yeah.

[00:17:35] I was going to say that for the next episode.

[00:17:36] Oh, sorry.

[00:17:37] Yeah.

[00:17:38] We can talk about the fun five fact.

[00:17:40] Yes.

[00:17:40] All right.

[00:17:40] So fun five fact for those out there that are interested.

[00:17:44] I've got some stats.

[00:17:47] The average age that people retire.

[00:17:50] What do you think?

[00:17:51] What is the average age that people retire?

[00:17:54] I would say 65.

[00:17:56] That's correct.

[00:17:56] 65 for men, 63 for women.

[00:17:59] That's the average age.

[00:18:00] What do you think the average age that people die is?

[00:18:04] I do know this for one demographic.

[00:18:06] So I'm just going to guess around that it's 74.

[00:18:10] Exactly.

[00:18:10] Okay.

[00:18:11] Yeah.

[00:18:11] So for, for men, I think it's 73 for women.

[00:18:14] I think it's 75.

[00:18:15] So we'll just average it out to 74.

[00:18:17] Okay.

[00:18:18] So the way that most 401k plans are kind of started is they expect you to, you know, stop

[00:18:27] working at 65.

[00:18:29] Right.

[00:18:30] Now that's kind of the, the expectation.

[00:18:34] I think most people in the workforce are thinking about themselves, right?

[00:18:38] Like retirement age.

[00:18:40] Exactly.

[00:18:41] We assume that we're going to work toward 65.

[00:18:43] Exactly.

[00:18:44] I mean, even the rough 401k withdrawal penalty is lifted only when you're 59 and a half.

[00:18:51] So the government is expecting you to work until you're 60, but on average people die

[00:18:57] by the time they're 74.

[00:18:59] And so you're only really leaving yourself, you know, 15 years tops.

[00:19:04] 10, maybe 15.

[00:19:05] 10, 15 years tops before the average person is going to pass away.

[00:19:09] Okay.

[00:19:10] And that's again, the end of your life.

[00:19:13] So you're probably not going to be as, as nimble as maybe cognitively, you know, capable,

[00:19:19] definitely not physically capable.

[00:19:20] And so it's up to you, right?

[00:19:24] I mean, do you want to live your life earlier where you're able and physically, you know,

[00:19:30] capable and, and not be tethered to a desk?

[00:19:33] Or do you want to just not have a plan and ignore some of these principles and wake up

[00:19:40] in your 65 and you're like, Oh, I did it.

[00:19:42] But then, you know, you might, you know, contract something or, or not, not be able to really

[00:19:47] enjoy it.

[00:19:48] So luckily the education is out there.

[00:19:52] You know, we, we, as part of this podcast are trying to get this education out there

[00:19:57] in a way that's, you know, easily to receive.

[00:20:00] Yes.

[00:20:01] Um, cause it can be confusing, but it shouldn't be.

[00:20:04] This is potentially life-saving information, life-altering information.

[00:20:10] It's freedom, it's freedom to make choices for yourself and your lifestyle.

[00:20:14] Is it going to be challenging in the beginning?

[00:20:17] Yes.

[00:20:17] But also very, very rewarding.

[00:20:20] So.

[00:20:20] Yeah.

[00:20:20] I want to have control of my life and I want to have time with you and I don't want to

[00:20:29] have to live my life by a paycheck or by a job that unfortunately we'll just, you know,

[00:20:37] hire somebody as soon as I leave.

[00:20:39] Right.

[00:20:39] So you want to control your life and this is the way to do it.

[00:20:44] The 4% rule is a basic, uh, tool, a basic level education to say, Hey, remember it's

[00:20:52] just math.

[00:20:52] It's just math.

[00:20:54] Yeah.

[00:20:54] I would way rather live my life by my little retirement calculators than having to live

[00:21:01] my life forever tied to a W2.

[00:21:04] Exactly.

[00:21:04] Because I didn't plan.

[00:21:06] Yeah.

[00:21:06] So the W2 is a very great, uh, projection model.

[00:21:10] Like I said, it's not necessarily a actual applicable withdrawal strategy, which we could

[00:21:16] talk a little bit more.

[00:21:17] You mean the 4% rule?

[00:21:18] Yes.

[00:21:19] Yeah.

[00:21:19] No.

[00:21:20] We could talk about that a little bit more, uh, in later episodes, but, um, definitely

[00:21:24] use it, apply it, play with some of the calculators.

[00:21:27] I find it really fun.

[00:21:28] Yeah.

[00:21:29] Yeah.

[00:21:29] Yeah.

[00:21:30] I think we'll wrap up the episode this time.

[00:21:32] There are about 20 minutes and really appreciate you all listening.

[00:21:36] And, uh, next episode should be a lot of fun too.

[00:21:37] So please join us.