Mother of all Newbie Questions


Confused about dryer sheets
Jul 13, 2007
Southbay, California
Hi all. I just found this forum after starting to look into early retirement. Lots of good info but it's making my head spin just trying to sift through all the info and find/understand the basics. I just did a google search to find out what FIRE meant and what was this FIRECALC, so please excuse me for my ignorance :D

What is the recommended way to finance one's early retirement? Is it to accumulate enough wealth so that one can take 4% out every year during his/her retirement? Or is it to accumulate enough wealth so that one can just live off the interest/gains each year without touching the initial amount?

Maybe I'm really conservative but I always assumed that just living off the interest/gains was how I was going to retire early.

Thanks in advance for any advice for this newbie O0
First of all, welcome - there is a ton of information here. I would suggest a couple of books to start "Work Less, Live More" by Bob Clyatt and "Four Pillars of Investing" by William Bernstein.

To try a quick answer to your questions, I'm sure others can correct me if I'm wrong:

If 4% safe withdrawal rate (SWR) of accumulated wealth equals your yearly living expenses (including healthcare and taxes) and it is invested per recommendations in the books cited above, then you should not run out of money. The combination of capital gains, stock appreciation and yields should, on average, allow for 4% SWR and inflation. There will be times when you might have to go into your principle but over the long haul it should stay essentially intact.

IF your investments are more conservative, ie more bonds, interest bearing investments; then you will need more accumulated wealth to meet living expenses since they historically produce lower yields.
Hmmm - tongue in cheek wise either:

1. Take advantage of the modern era - pssst Target Retirement (lifecycle fund based on your age), save early and often, don't read a lot of investment books, do your life and career. When you have saved 25 times your expenses - retire.

2. Or be anal retentive - minutely track your expenses and study/buy value stocks or funds(like psst Wellesley) - when you get to ballpark 33 times expenses then retire and live off dividends/interest and never touch principle.

Of course - in real life people get way more complicated. Some even do real estate, have pensions and stuff.

But since we're pontificating: psssst Target or pssst Wellesley, keep your day job until you're ready(bellybuttonwise) and don't read books. Or do real estate if you wish to march to a different drummer.

heh heh heh - first cup of coffee post! Actively invest early and often, keep the faith and don't overthink the problem.
It can seem pretty overwhelming from where you are now, but it doesn't have to be all that complicated.

If you are hoping to keep it smart but simple, you might wish to read The Smartest Investment Book You'll Ever Read by Daniel R. Solin and Bogle's Little Book of Commense Sense Investing (or something like that).

UncleMick is right on with the target retirement funds if you want to combine your bonds and stocks in one place. I think the biggest risk at your age is chasing returns that are nonsustainable long term, getting too far off in one direction or another, and losing your shirt.
IF your investments are more conservative, ie more bonds, interest bearing investments; then you will need more accumulated wealth to meet living expenses since they historically produce lower yields.

I'm ultra-conservative, so my money is in government backed securities.
To offset the protected but lower yields, I am debt free, I live in a less
expensive area of the country and I work from home part time.
I'll bring in the more radical notion of Bernicke that says your spending will naturally decrease starting at age 55. In watching my parents and in laws, it is true even in the face of rising medical expenses. If you chose this option on FIRECalc, you will be amazed at the increased spending that your portfolio will allow.

The 4% SWR can also be challenged by Guyton's work on portfolio asset allocation and a willingness to cut withdrawls if the market tanks.

Remember one thing, we all buy our ticket and take our chances. There's no "guaranteed" retirement funding plan. A COLA'd Federal pension comes pretty close but this kid doesn't have one.
Thanks all for the great advice and I've got a lot of reading to do. I'm glad I found this forum.

Is there a dummies guide or a good online article about SWR? Maybe one with examples/numbers. I guess I'm missing the concept of this SWR (which I only learned about yesterday).

For example if I have a $1 million dollar at retirement and have it invested in a mix of stocks/bonds, the 4% SWR implies that I can take out $40k per year for 25+ years or so, is that correct? The things I've read and tried to understand is that the SWR is taking 4% of the principal balance ($1mil) and living off that for the year. What about any gains from the stocks/bonds of the $1million? Wouldn't that usually cover the 4% living expense? Couldn't one just invest $1 million dollar into a long-term CD and get 4% and still have the principal?

I know I'm missing something ...
You're missing the part about taxes and inflation, which should together run you somewhere in the range of 3-4% on average, per the 4% study.

The way it works is that you utilize an allocation of assets to stocks and bonds that produces sufficient returns that you can take 4%, and the growth offsets inflation and taxes.

You need a return of about 7-8% to pull this off, which is a little tough to do with a cd or most fixed income products.

The basic idea is that your portfolio value will rise and fall, sometimes substantially, but by planning your investments, taking your 4%, and continuing to work that'll never run out of least you wouldnt have given all the historical data we have. Nobody has a crystal ball.

By the way, an 'advanced search' for titles containing the words 'book report' will get you a discussed synopsis of many of the books that have been recommended, and many others...
The "Classic 4% SWR" is based on a balanced portfolio and the 4% is based on the initial value of the portfolio. Every year the amount withdrawn will increase with inflation and the future portfolio value "theoretically" doesn't impact any future action. The "success" is based on the % of time that the portfolio has at least $1 in it at the end of the period selected. The "4% SWR" gives approximately a 95% success rate on a 30 year plan.

Nobody but nobody would ever do that. If you retired in January 2000 and had your equities drop by 40% almost instantly, I'm sure you would start looking at cutting back spending "until the market recovered."

Guyton has a model for adjusting spending up and down based on the changes in portfolio value. Bernicke assumes real spending will decrease by 3% every year between 55 and 75. Both are worth understanding.

"4% SWR" is a great goal but the research says that focusing blindly on that as your measure of success will either delay when you consider yourself FIRE'd or seriously limit your spending when you are younger and more likely to want to spend money on traveling and "stuff."

It's not an easy decision to make on how much is enough. Some people have the decision made for them either by their health or Mega Corp. Other people just hang it up one day and then figure how much their stash will support in lifestyle. Then there are the hyper-analytical types like me that will know every theory and anguish over every wrinkle in the road.
Southbay, in addition to a really useful calculator, the FIRECalc site has a lot of great information. Check out the "Background and Questions" tab if you haven't done so already.

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