How Much Is Enough?

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Retirement planning can seem like a dense jungle of confusion and jargon, which is why many financial planners like to rely on a few simple rules to guide our decisions, and easily the most important one is known as the 4% Rule. It’s a rule borrowed from the traditional finance world, and as with most of the “ideas” coming out of that world, it’s supposed to help people plan for their eventual, grey-haired, artificial hip-assisted retirement, but in practice just tends to discourage people from trying anything at all.

The Millennial Revolution, on the other hand, takes this decades old rule and twists it to our advantage, allowing us to retire years, sometimes decades earlier than we’re “supposed to.”

Take THAT, linear passage of time!

How? Well, let me explain. But first…

What is the 4% Rule?

The 4% Rule, also sometimes known as the Rule of 25, came from a giant study into retirement planning and economic theory. Such a study that could change so many people’s lives would undoubtedly take on an almost religious importance, so fittingly it was named The Trinity Study.

Basically, the authors took all the price data from the stock and bond markets throughout all of recorded history, pretended they were a retiree starting with a bucket of cash at every year throughout that history, and simulated what would happen if that retiree withdrew a certain percentage of their portfolio every year and left the rest invested. Then they counted how many of those made up geezers made it to the end of their retirement with their cash intact, and how many ended up broke and dying alone in an alley surrounded by empty cat food canisters.

Picture a man named Allen. Allen has $500,000. But Allen needs $50,000 to live each year. So Allen’s withdrawal rate is 10%. Now let’s pretend Allen retired in 1975. He invests his money into the stock market, only selling assets every January to fund his next year’s living expenses. Does he make it? Or does he run out of money?

Now picture a woman named Betty. Betty has $650,000, but she only needs $26,000 to live. So her withdrawal rate is 4%. And Betty retired in 1982. She also invests her money into the stock market, and withdraws when she needs to pay her grocery bills. Does she make it? Or does she run out of money?

This mind numbing tedium is why so few people decide to become economics researchers..

But after countless hours of punching calculators (or more accurately, whipping grad students as they punched calculators), the Trinity Study came up with an answer. A withdrawal rate that had a 95% success rate. Meaning that out of the 100 made-up retirees, 95 of them made it to the finish line without running out of money. Here’s a picture of those 100 retirees.

Well, THAT clears things up...
Well, THAT clears things up…

How you read this crazy graph is that each colored line is a made-up retiree starting at a different point in time, and the vertical axis represents that person’s retirement portfolio while withdrawing the equivalent of 4% of their starting value every year, adjusted for inflation. Any retirement that dips below the red line ran out of money, while if it stayed above they were A-OK.

The vast majority, 19 out of 20, make it to the end of their retirement with their portfolios intact. In fact, most of them wind up with WAY more money than when they started with! From this study, the researchers determined that 4% was a reasonable Safe Withdrawal Rate, or SWR.

And I know, I know, to all the people who are getting outraged right now by the fact that 1 of those 20 people ran out of money, you are free to use 3% as your own personal withdrawal rate, which results in a 100% success rate.

So that means (assuming that you’re comfortable with a 95% success rate), once 4% of your portfolio matches your living expenses, you are officially retired. So flip off your boss, play his head like a bongo, and ride out of there on a rocket ship of glory! Your new life starts NOW! That’s where the Rule of 25 comes in. Take your living expenses, multiply by 25, and that’s your target portfolio size. Why 25? Because dividing your living expenses by 4% is the same as multiplying those same living expenses by 25!


Why The 4% Rule Sucks

The reason that the 4% Rule is so discouraging is that it tends to produce these wild, scary numbers. Take Jill, for example. Jill works a nice office job, making $60,000 a year. Jill assumes she must be spending it all (since she doesn’t appear to have much savings), so she takes $60,000, multiplies it by 25, and determines she will need 1.5 Million dollars. Jill then takes the calculator, throws it out the window and resolves never to listen to a stupid finance blog again.

But that would be a mistake, because the mistake she’s making (and what most finance planners do) is link their post-retirement spending with her current spending.

This is wrong. Why?

Working is Expensive

Think about how many expenses you have now that are directly attributed to your work. The fancy clothes, the fast food lunches, that car, even that condo right near the office are all expenses that are related to your workplace. All of that flies out the window the minute you leave.

And get even more creative than that. If you didn’t have to work, what would you do with your life? Would you go surfing all day in South America? Would you go live in a warmer climate and grow your own vegetables? Would you sit on a beach and drink margaritas? Those activities are actually far less expensive than you think.

And besides…

Who said anything about Retiring anyway?

The Millennial Revolution wants you to live freely, the way you want, rather than the life imposed by others. It does not require you to “retire” in the traditional sense.

Try to visualize what your ideal life would be. I know, it’s hard. So many of us are so busy paddling just to keep our head above water, we’ve forgotten what true freedom even feels like, but pretend you have it. Pretend that someone’s promised to take care of your rent and your basic needs for a year. Now what does that person do when they wake up every morning? Many of us wouldn’t just lie there in bed and do nothing. Millennials are too intelligent, and intelligent people get bored quickly.

Maybe you actually enjoy parts of your job, so you go down to part-time work. Maybe you move across the country or find a lower-paying, but more fulfilling version of that job. Maybe you finally write that great American novel you’ve been putting off. Maybe you’ve always loved arts and crafts, so you design purse ornaments and sell them on Etsy.

If any of those activities earn any money, no matter how small, that needs to get factored in, which the 4% rule doesn’t.

Putting It All Together

So now, my fellow Revolutionaries, I’d like to present Millennial Revolution’s new and improved 4% Rule. It goes like this:

  1. Take your basic living expenses, AFTER you’ve attained freedom. Be as aggressive in making this number as low as possible, counting only basic living costs, and absolutely feel free to use Geographic Arbitrage as you see fit.
  2. Then subtract any income you can expect from doing work that truly fulfills you.
  3. Then multiply THAT by 25.

I’ll use myself as an example. A highly paid engineer working for a Silicon Valley company, the living expenses of my coworkers were sky-high, easily $50,000 to $80,000 USD a year, and I had to jump through all sorts of hoops to get that down to something reasonable. But after I left and started travelling the world, I realized how much cheaper it is to live in nearly any other city in the entire friggin WORLD. I fell in love with SE Asia, and over HERE, I can live extremely comfortably for less than $20,000 USD a year. Seriously, I can sit on a beach in Thailand or Vietnam every day drinking margaritas for a fraction of what I was spending while I was working. And on top of that, I also picked up some freelance IT consulting contracts, since I still love coding and wanted to keep doing it. I also wrote and published a children’s book. These activities have earned me about $15,000 USD.

So by applying the Millennial Revolution’s 4% Rule, my target is ($20,000 – $15,000) x 25 = $125,000.

Not so scary now is it? This means I could have left my full-time job WAY earlier if I had known this formula back then. In fact, this means that I ended up amassing WAY more than I needed to. Whoops.

So take a moment, visualize what your Ideal self would be, where they would live, what they would do each day, and calculate your new savings target using the Millennial Revolution’s 4% Rule.

You may find it a lot closer than you think.




photo credits:

  1. Allan @ Flickr
  2. Results from
  3. EyesOnFire89 @ Flickr

16 thoughts on “How Much Is Enough?”

  1. Very interesting method. My last go to ‘how much is enough’ article is MMM’s saving rates article, but I like that yours take the future income during the FI period. Although I feel like ppl like safety nets and probably want to keep working longer than they need to just to feel more security. I know I probably will.

    1. Thanks, Jinx! I’m a huge fan of MMM too and his savings rate article is awesome.
      I get that people like to feel safe/secure, so they try to make their safety net as big as possible before quitting. We had fears too, but what helped was building up some writing and coding income while we were working. That way we could a) supplement our investment income and b) work on something we enjoy after retirement. It’s working out great so far! Without needing to dress up for work, buy subway passes, go bar hopping, etc (all the costs that come with employment) our costs have dropped even further. This made us realize that we can completely live off the 3% dividend income and not watch the market. Developing a side income while you’re working helps you feel secure and gives you something to do in retirement. It also helps you realize you don’t need as much money as you think to retire from your 9 to 5.

      1. You’ve mentioned freelance coding in a few of these posts. I am curious if you would share how you find the contracts. Are you using upwork or task rabbit?


  2. The Trinity Study is interesting but I don’t believe that it has been run against a dataset of where we are today: ZIRP and QE. It’s interesting that the Trinity Study suggests that a 4% of assets withdrawal will allow one to never run down one’s assets. However, for decades prior to 2009, it was possible to get a 5% return just by putting money into a savings account and, of course, returns were higher in bonds or equities. That 1% spread is what keeps one from running out of money.

    To the best of my knowledge, there has been no period in modern history like now. Even after WWII when interest rates in the U.S. were kept artificially low, the stock market was not overpriced and real estate, which could be bought and rented out at a profit, was sanely-priced. Those other asset classes could provide the return necessary to not full deplete one’s savings.

    I guess what I’m saying is that I am not terribly confident that the 4% rule will work if asset prices do nothing for 10 or more additional years while interest rates for savings accounts and bonds stay at sub-1% levels. I think this is a scenario with a good probability of happening given the coordinated interventions of the world’s central banks. I’d like to have enough money to live in the developed world so living in SE Asia as one leg to control costs is out of the question for me.

    Even living in SE Asia to control costs has its risks. What if the nation one resides in rapidly develops? In all likelihood, real estate prices and rents will skyrocket. What then? Move to another country? I don’t want to seem negative but, at least for me, I’m one of those people who really hates moving.

    1. ZIRP and QE are in the rear-view mirror. The FEDS have said this. And the graph in my article, showing the 4% rule, is from FIRECalc, which uses data from the past as well as recent history, like our great financial crisis of 2008. At the end of the day, 4% is a guideline. If you’re more comfortable using 3%, which shows no failures, then do that. Our own personal experience is that we planed for 4% withdrawal, but once we stopped working, our expenses went down to 3% so we could live off our portfolio dividends, without having to even look at the market. You save a lot by not needing to live in a high-cost city for you job. And there’s always going to be places (even North America) with a low cost of living.

  3. It all comes down to what type of a life style you want in retirement. For us we never traveled much while we worked so we want a travel budget. That increases what we need, at least for the first few years after we retire.
    I would never plan on any type of a consistant return on my investments unless it was in a bank with term interest. I do expect interest will go up but it just how soon.
    Most people don’t have an income problem, they have a spending problem. Most people don’t know where there money goes so keep track of every penny for a year and you will find places to save money.

  4. The best retirement advice I received was to decide what your magic number was, then the fastest path to achieve without regard to a set number of years. Once you get there, retire. The point was, if you think you need to be 65 to retire, then you will set your goals accordingly. Once I figured out how much I needed to retire, I adjusted my spending, reduced unneeded assets, redirected savings, sought out all the free financial advice available (turns out there is a lot), and charted a course at best possible speed. Even though I started this process later in life, I managed to put three kids through private school and college and retire nine years sooner than I thought possible. My advice is the same as I received from Skip (by the way, thank you Skip), with one upgrade; do it now.

  5. It is interesting …. you did it by moving to Ontario, Canada … and investing … and I did it by moving from Ontario, Canada to Beijing to teach at a Christian school … my wife is a Beijinger etc etc etc … we invested here locally … on paper we are very well off …. I have non resident status … by the way my brother went to the university of Waterloo and the other siblings to Guelph Uni … I still choose to teach here … though according to your system if I sell everything and invest in the Shanghai stock exchange index funds etc etc etc … or Canadian one’s back home then technically I do not need to work …. hmmm cool! ………. God Bless!

  6. It’s really cool that you’ve been able to freelance in the middle of all this. Any tips for a fellow developer who wants to get into freelance work?

  7. Thanks for the good explanation Wanderer.
    In this big study, you say each simulated retiree was”invested in the stock market” and that a 4% withdrawal rate had 95% success. My question is what does “in the stock market” exactly mean? Were they just tracking the entire stock and bond market average? I’m curious because wouldn’t your success rate greatly depend on how the money was invested? For example someone 100% in stocks withdrawing 4% during a crash will do worse than someone 50/50 doing the same.

  8. In San Francisco or any HCOL, if you only had $125k in total net worth, you can easily burn through in 6.25 years at most, assuming you had no other income in those years in a HCOL city.

    1. Which is why how much you need to retire depends on where you plan to live. And if you are retired and aren’t tied to a job, you aren’t forced to live in San Francisco. For those who are obsessed with HCOL cities, then they’ll need to work longer and build a bigger portfolio. But that doesn’t mean other people who don’t like HCOL cities would need the same amount. Different situations for different personalities. Gotta do you.

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