Is 4% rule safe for early retirement?

[Rahul Handa]

I fell like there is more to it than just this. I have watched lots of videos on people claming that if you invest $1m dollar into index funds and only take out 4% every year then you will never run out of money. Is this really true? If its true then why isn’t everyone doing it.

[Joe Splitrock]

@Rahul Handa part of the problem is people on Youtube or on podcasts are spewing out the same thing they heard someone else say, without using their own critical thinking to validate if it is true. There is also misinformation around the caveats that go with this advice. 

The general 4% rule is for people retiring at 65 with expected 25-30 years remaining before death. The other assumption is that people are receiving social security and medicare benefits. Also most people by age 65 have much lower expenses and usually own their home outright. 

I have seen the early retirement crowd latch on to the 4% rule, but it ignores a different reality of their stage of life. Someone retiring at age 30 has 60-70 years remaining before death. They will not receive social security or medicare for 35 more years and since they quit working young, their social security benefit will be on the low side. The more important factor is that people in their 30's and 40's have much higher spending rate then people in their 60's and 70's. (Grandma has had the same couch for 40 years, right?) One of the biggest expenses is kids, not just feeding and clothing, but all the other stuff. Like living in a good neighborhood for schools or extra activities and college. Even if you don't have kids, there is health care, which can be one of the biggest challenges for early retirement.

Also keep in mind that the bloggers who retired early make more money now telling their story, then they made while they were working. So they are not really living on 4% withdrawal, but rather live from the post retirement income. Arguably they are not even retired, because most are still working, just in their own business.

More importantly if you had $1M, it would better to invest it in real estate. It is fairly easy to get a 10% annual cash flow return on your investment. So you can invest $1M and get $100K per year cash flow. Plus you have appreciating cash flow over time to account for inflation.