In an earlier blog post I wrote:

“In a future blog post I’ll share more ways to get comfortable with the 4% SWR.”

That’s based on a question from a member of ESIMoney’s Millionaire Money Mentor forum:

“I have to admit I don’t understand all the details, but what I walked away with was that the 4% rule wasn’t great for folks who were highly averse to the chance of running out of funds, or have a long time horizon.”

“Nooooooooo!”

 Let’s discuss how to minimize your chances of failure with the 4% Safe Withdrawal Rate.

In some cases you’ll actually drive the (remote possibility of a) 4% SWR failure to zero, even with a time horizon of 60 years!

(For those of you who want a reminder about the details of the 4% SWR, after the end of this post I’ve included an excerpt from our book “Raising Your Money-Savvy Family for Next Generation Financial Independence.”)

“Is It Gambling?”

Before we dig into the math & logic, here’s an analogy for fear of financial failure:  

What if we were invited to play with our investments at a casino for at least 30 years with an 80% chance of never running out of money?  Better yet, what if the casino promised that most of the time we’d end up with as much money as we started— or that we could possibly get richer off the house?

I’ll be over here.

Yeah, we’d all gamble. 

That’s math & logic, yet humans are driven even more strongly by the emotions of behavioral financial psychology.

How Do You “Feel” About the 4% SWR?

Because we’re human, we all focus on the few failures behind the 4% Safe Withdrawal Rate.  Even when we get the success rate up to 95%, we immediately shift focus to raise the success rate to 100.0000% and drive the failure rate to 0.0000%.  

That can’t be done.  The best perspective on our emotions of this behavioral financial psychology was summarized over 20 years ago by William Bernstein.

In a few more paragraphs we’ll get to better ways to simply sidestep these failure situations instead of trying to prevent them.

When people can’t trust a promise that they’ll never run out of money, their emotional default is working Just One More Year.  That’s why my earlier post quoted “If you choose not to decide, you still have made a choice.”

People see the default-work choice as much less scary than the flaws of the 4% SWR because they *feel* better about staying at work.  Yeah, the job might suck, but it’s a known suckiness next to the unknown risks of the 4% SWR.  

That dubious bliss (from our human illusion of control) lasts until a worker’s life is disrupted by a health crisis, a family emergency, a layoff, declining physical or mental health, or any other external event beyond their control.  

I’m 63 years old.  I’ll vouch that as life throws curveballs, they’re a lot easier to handle when you’re not working for a paycheck.  It’s far better to leave paid employment on your own financial-independence terms— before uncontrollable life events abruptly force you to leave paid employment.  

There are worse things in life to worry about than the few failures of the 4% SWR.

Sidestep the potential failures of the 4% SWR.

So, what do risk-averse people do when they want a guarantee, or at least want to stretch the 4% SWR past 30 years?  Here’s five different options, and none of them depend on the 4% SWR.

1.  Buy a guarantee.

Buy a Single Premium Immediate Annuity to cover your core expenses.  (Or pay extra for one of its ugly cousins like a deferred annuity or a term-certain annuity.)  For most Americans who qualify, Social Security is all the annuity guarantee we’ll ever need– and Social Security comes with a CPI inflation adjustment.  

(If anyone is going to bring up the failure modes of insurance companies or Social Security, then we can’t help you until you’re comfortable with insurance or SS.  I recognize that there’s financial and political risk with both, but the first is regulated by federal laws.  The second will be fixed by the time Social Security becomes a 2034 election issue.  Both are far less risky than a failure of the 4% SWR.)

For military veterans, even a small amount of VA disability compensation can fend off a potential failure of the 4% SWR.  You’ve already paid the price for it, so make sure you file your VA disability claim.  Unlike most annuities, VA disability compensation is adjusted for inflation, so its value will persist for the rest of your life.

2.  Sequence of returns. 

Every failure mode of the 4% SWR is tied to sequence of returns risk during the first decade.  If you can survive that SORR for the first 10 years then you’re going to have enough money for at least the next 20 years.  

One way to handle SORR is to keep two years’ expenses in cash for the first decade.  

Put 8% of your asset allocation in high-yield savings, short-term Treasuries, CDs, or even TIPS.  Replenish the cash each year when the market is up, or continue to spend it the second year when the market is down.  Using that cash stash with the 4% SWR for the first 10 years of FI will give your stock & bond investments enough time to recover from any bear markets and even from the Great Recession.  You’ll be fine for the remaining 20 years of the 30-year period.

Let’s be clear:  it may take 3-4 years for the stock market to recover its value from a recession.  However spending just two years of cash gives your equities the chance to recover from the worst part of the losses.  Even if they haven’t fully recovered their value after two years, they’ll still survive the 30 years of the 4% SWR.

You might not even need the cash stash if the sequence of returns risk doesn’t show up in the first 10 years.  That’s especially true if you have reliable income from a military pension or VA disability compensation.

At the end of your first decade of financial independence, you can compare your annual expenses to your net worth.  You started your FI by spending 4% of your net worth, and a decade later your investments have probably grown faster than inflation.  Meanwhile you’ve grown your spending at no more than inflation.

If that’s the case, then your withdrawal rate has dropped below 4%.  You now meet the conditions for never running out of money during a 30-year FI, and you still have 20 years left.

If your withdrawal rate has dropped all the way down to 3.5% then Karsten Jeske’s analysis at EarlyRetirementNow has confirmed that your investments will survive for 60 years.

3.  Investment rental properties (by landlording or by syndication).

Over the long term (>10 years) real estate appreciates at the rate of inflation.  Over the long term your rents will rise at the market rate, and that’s probably close to inflation.  

Better yet, you have the tools to find good real estate investments in every ZIP code of the nation.  You’ll buy at a discount, your rents will grow at least as fast as inflation, and your syndications will return more than inflation.

“How much real estate?” is a diversification question, and everyone has a different answer.  You’ll find your comfort zone somewhere between avoiding the failure of the 4% SWR and before accidentally building a real-estate career.

4.  Variable spending. 

This is a catch-all section for the rest of the techniques– because #1-#3 above are all some element of variable spending.

This includes tactics like Blanchett’s “retirement spending smile”, Pfau’s “safety first, floor & upside”, or Guyton & Klinger’s guardrails.  Morningstar’s Christine Benz has even more suggestions, although some of them might seem downright apocalyptic.

All of those are tactics in addition to the 4% SWR, and they’re all resistant to recessions as well as inflation.

5.  The dividend model.

When your investments grow to the point that their dividends (or for real estate, their net income) pay your expenses, then (by definition) your withdrawal rate drops to zero.  You won’t run out of money because you’re only spending the income without selling the shares or the real estate.

I don’t recommend working until you meet the dividend model.  

Instead, get close to it with assets of 25x-30x your annual spending.  Then stop working and enjoy life while you let another decade or two of compound growth (faster than inflation) boost your income for the rest of your life.  You might start out at a 4% SWR but as the dividends grow then your withdrawal rate gradually declines to zero.

Yes, this looks an awful lot like copping out to just one more year (or two).  In its defense (not much) you at least have a concrete goal instead of perpetually moving the goal posts.

Military Pensions

Now let’s address the part where someone says “Yeah sure, Nords, but dude:  you have a military pension!”

 I retired from active duty (and stopped working for money) in 2002 at age 41.  I planned for a 60-year time horizon, although I might only have 35 years of cognition.  With my family history of dementia, I’m very glad that I quit work (as soon as I could) to live life on my terms (for as long as I can).  The attitude of “just one more year” could have led me to far more working than living, and dementia is a horrible reason to have to quit working.

My spouse is a year younger than me, yet she has an even longer horizon.  She has Ashkenazi Methuselah genes, and her grandparents were centenarians.  Her parents are in their late 80s and still healthy… and still at their full cognition.  My spouse’s metabolism & health are so good (compared to mine) that they’re on the verge of annoying.

When we stopped working, we continued tracking our spending (at the 4% SWR)* until we were confident that we were past sequence of returns risk.  (Because of the Great Recession, that took about a decade.)  Today, after 20 years of FI, our lifestyle costs less than the 4% SWR because our assets grew faster than our spending.  

*(Yes, I started my inflation-fighting military pension in 2002.  Each year we spent all of my pension– and then spent more from our investments at the 4% SWR.)

Now we’re doing everything we want to do and we’ll never run out of money for our lifestyle. **

**(Yes, my spouse started her Reserve pension in 2022.  Today we’re spending all of it on philanthropy and gifting… because we’re confident we’ll have more than we need for our lifestyle.)  

We’re starting Social Security in 2030 when we reach our 70s.  Because the 4% SWR has worked out so well, our Social Security will be spent on still yet even more philanthropy and gifting.

Call To Action:

When will you reach financial independence?  Do your math at that link.

Which of these methods will you use to avoid a failure of the 4% SWR?

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In Memoriam:
(This post is in memory of my friend S. K., a military retiree who had moved into an enjoyable bridge career.  He agreed that he was afflicted with the worst case of Just One More Year syndrome that I’ve ever seen.  Every time we got together he’d tease me about being unable to hold a job, and I’d ask him when he’d finally feel that he had enough money to retire.  After a decade of this trash talk, one day he paused and said “We’ll pay off our mortgage in about six months, and I think I’ll retire after that.” 
Four months later he suddenly passed away from a cerebral hemorrhage— at work. 
His widow paid off the mortgage with his life insurance.)

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For those who want to refresh their memory on the 4% Safe Withdrawal Rate, here’s an excerpt from our book “Raising Your Money-Savvy Family for Next Generation Financial Independence”:

Appendix B: The 4% Safe Withdrawal Rate

We’re not going to talk about the details of reaching financial independence. The FI research and analysis is all over the Internet, and our Resources section can send you down that rabbit hole. 

But we will share the best tip: the 4% Safe Withdrawal Rate (SWR). 

It has two parts: 

1.  You’re financially independent when your assets reach 25 times the amount of your annual spending (4% is 1/25). This is the point where you can stop relying on paychecks. 

2.  You can start your FI life by withdrawing 4% of the value of your assets at the beginning of your first year. Every year afterward you can raise that withdrawal by the inflation rate. 

The 4% SWR computer simulations show enough statistical resilience for your investments to survive at least 30 years, although there are a few failures. Your investments may last for at least 60 years, although there’s not enough stock-market data to be statistically confident in the results. 

Humans don’t focus on the success rate. We’re optimized to obsess over the failures. 

Here are the solutions for the failures, even though a failure is unlikely. 

The 4% SWR research does not include Social Security income or other annuities (like a pension). Your investments will almost certainly make it to your minimum age for Social Security, and then that inflation-adjusted annuity will let your portfolio recover. For some Americans, Social Security may be all the longevity insurance that you’ll ever need. 

The 4% SWR research assumes that spending rises every year with inflation because it’s easier to program those computer simulations, yet humans are not SWR robots. We can use variable spending to boost our investment portfolio’s survival. 

When a recession hits, you’ll delay big spending (like a fantasy vacation or a replacement vehicle) and maybe even cut back (temporarily) on your monthly entertainment spending. You may be worried, but you won’t face deprivation.

When the economy is booming your investments will grow much faster than inflation or your spending—and that growth will rebuild your portfolio’s survivability margin for the next recession. 

Even if there’s a recession (or two) during your first decade of FI, then during the second decade your investments will probably still compound fast enough to reduce your actual withdrawal rate (your latest annual expenses divided by your latest portfolio value) to less than 4%. 

If a full-on Great Depression repeats itself, then variable spending will help your portfolio survive. (Variable spending was only necessary for a tiny part of the Great Depression.) If a new depression is even worse, then your variable spending will ease the pressure of the annual withdrawals. You don’t even need to start variable spending until after the first year or two of the economic catastrophe. You’ll see the problem coming from a long way off, and you’ll only need to cut back a little to avoid failure. 

You could even get a part-time job, and at the 4% SWR you might only need to work for 10 hours per week to earn about $10,000 per year. You might only need it for 6-12 months. Depressions have very high unemployment, but those part-time jobs are everywhere because employers can’t pay full-time salaries while (unemployed) workers want full-time jobs. 

But what if you reached FI and worked for another year or two to reduce your withdrawal rate below the 4% SWR? That seems pretty easy, right? 

This logic trap is so widespread that it has a diagnosis: the Just One More Year (JOMY) Syndrome. 

JOMY Syndrome looks great, because the 4% SWR is already good enough and a small annuity can insure that plan against failure. JOMY only piles on more assets and guarantees that you’ll die with even more money. A decade after you start your FI life, you’ll realize that you wasted a year of your life to delay that decade. Was it worth it? 

More importantly, is it worth working one more year to reduce your scarcity stress and to sleep better at night? Will you feel better despite having more work stress, spending less time with your family, and trading life energy for excess money? 

Only you can answer that behavioral economics question. The math and the 4% SWR research says that you’re wasting your time.

Starting with the 4% SWR, perhaps with a little annuity income and variable spending, your investments will last for the rest of your life. You’ll also have plenty of money to pass to the next generation. You could hand over that legacy in a lump sum, or you could spread it out a little at a time over many years. 

That’s how you can help your money-savvy family reach financial independence. 

That’s why we wrote this book.

Related articles:
“Fear And The Just One More Year Syndrome”