Is the Safe Withdrawl Rate, the magic number?

[Darian Richardson]

Evening Fellow Investors, 

As I am finishing up  @Scott Trench's own Set For Life, I came to a section in the book under "Exploration of Financial Freedom" about The Safe Withdrawal Rate. I thought this section was fascinating, so fascinating I had to explain to another a friend of mine @Ryan Davis, thinking I might  have the answer to the question we both have been wondering. "How much wealth do I need to accumulate to become financially free with little to no risk?"

The Safe withdrawal Rate is a brilliant strategy that is explained in the chapter of THE Exploration of Financial Freedom in the awesome book of Set for Life.

"The Safe Withdrawal rate (SWR), expressed as a percentage, determines what percent of usable net worth ("real assets) that can be withdrawn each year, such that your assets are not depleted. The SWR is defined as the quantity of money, expressed as a percentage of the initial investment , which can be withdrawn per year for a given quantity of, including adjustments for inflation, and lead to portfolio failure."

I couldn't help but think of this idea of tying The Safe Withdrawal Rate with the classic 2% rule. Let's say you have properties that were renting for at least 1 to 2 percent of the purchase price, in this example having a total of $500K in real estate assets specifically rental properties. Approximately, this would calculate to around 5k monthly of gross income (depending on different variables such as property tax, pmi, insurance, etc.) only getting a 1% percent return per purchase price, 10K monthly if all the assets producing at a 2% rate. 

2% rentals are tough to come across especially in today's competitive market, but I myself recently closed on a duplex that has the potential to be producing 1.04% rental income of the purchase price, the crazy thing is I did not realize this until I was already 2 months deep house hacking! The safe withdrawal rate formula is the individual's (annual lifestyle expense)/ (total real asset value). If an individual kept their monthly expenses moderately low at $2K monthly having a total of 24K annually in expenses and 500k of total real asset value, their SWR would be 4.8%.

I would be interested to hear if any other fellow investors have used The Safe  Withdrawal Rate to work backwards to blue print out their success in real estate or journey to financial freedom. What are some Safe Withdrawal rates, that made you take the leap of leaving that wage- paying job?