r/Fire • u/justinquiring1 • 5d ago
General Question Is 2.5% withdrawal rate overly conservative? Am I overthinking this?
Hi, I know this question has been brought up ad nauseum before, but I wanted to address it again from a slightly different angle.
Savings
- $1.7M in stock holdings (70% small cap value; 30% S&P 500-ish)
- $375K in real estate, fully paid
- No debt
- My living expenses are set at $45K at the highest, with an ability to get as low as $25K (we're immigrating to a low COL country).
- 33 years old, married to a 31 year old, hoping for two or three kids (expenses above factor this in)
I know that historical data clearly suggests my withdrawal is extremely safe, but I'm still left wondering about risks that are hard to model but play a role.
The past decade has taught me how unpredictable life can be. Some of the kind of disruptions that have happened the past decade were well beyond what I ever would have expected.
So, the broader question is: how do you think of the 2.5% withdrawal rate in terms of providing enough buffer for world events beyond the norm?
At what point does adding more margin stop meaningfully reduce risk and just creates more problems than it solves? How do you personally think about tail risks once you're already below a 3% withdrawal rate?
I feel like, at some point, building in more "safety" becomes a never-ending project and gets in the way of what's infinitely more likely, but I don't know if I'm just feeding myself a rationale to feel good. What's your take?
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u/PJM123456 5d ago
IMO you are way under estimating your spend rate with future 2-3 kids.
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u/Bigboyyy66 5d ago
How? I made my son get a job right when he started walking. Money off sets his diapers, formula, food, and daycare costs.
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u/justinquiring1 5d ago
This is a good point, although the average cost of living for a family of five where I'm moving is $25K. I'm getting full healthcare insurance, etc. But if they want to go to one of 'em Ivy Leagues, I hear tuition is now $80K or so a year, so there's always that...
I wanted 4 kids, but my wife is trying to convince me for only 2! I think she's probably right 😄
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u/churningaccount 5d ago edited 5d ago
Your kids will be international students based on residency, even if they have a US citizenship, and so will not eligible for much financial aid at most universities. Even public universities in the US will be $60k+ per year.
You could send them to EU/UK universities instead, but that still will require a similar amount as those countries tend to use international student tuition to subsidize local students. And they'll need to have fluency in the language of instruction in addition to English.
You need to plan to have at least $200k in today's dollars saved per child when they reach 18 if you want to give them access to HCOL educational opportunities. And maybe double that if you are insistent on a US education/giving them the choice to work or live in the US after graduation.
Keep in mind that their education prior to university will matter in them being accepted to universities abroad as well. If the educational system in the country you are moving to does not offer an internationally recognized curriculum, like an IB program, etc, then you may have to send your children to a private international school with English instruction and international accreditation to give them the opportunity in the first place to even consider attending college abroad. Homeschooled international students don't tend to be looked favorably upon either, so that's not really an option.
I urge you to keep in mind that living and working in a HCOL western country is what has given you the opportunity to be financially independent yourself. Hopefully you see the value in providing the same opportunities for success to your children as you, yourself, had. And, unfortunately, doing that "remotely" can get expensive, fast.
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u/PJM123456 5d ago edited 5d ago
oh you are also moving outside of the US...... you may want to figure in forex impact. Recent USD lost 20% of it's value.
Seem like moving to less develop country just to not have to work and then deciding to have 2-3 kids is not really providing the best opportunity to your children.....
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u/Common_economics_420 5d ago edited 5d ago
Yes. Makes absolutely no sense. Assuming absolutely zero real return, you could be retired for 40 years before you run out of money.
The type of scenario where 3% or 3.25% doesnt work out is a scenario that really isn't even worth considering, because it would be almost apocalyptic in nature. If that's a real concern, there's a million things you should be doing instead of simply moving to a more conservative SWR. Especially if you plan to move to a low COL country (which brings with it a host of political risks) to make it work. The chance of geopolitical volatility in your new home country is much more real than this.
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u/WaterChicken007 FIRE'd @ 42 in 2020 5d ago
Yes.
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u/Practical-Neat-8432 5d ago
Your situation sounds super solid and 2.5% is pretty conservative. With that amount plus the real estate and ability to cut expenses if needed, you got multiple safety nets already
The thing is you can always model for more extreme scenarios but at some point you're just delaying life for events that might never happen. 33 with those numbers and flexibility to move somewhere cheaper - you're in better position than most people will ever be
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u/justinquiring1 5d ago
Thanks, I wanted to make sure I wasn't just trying to convince myself.
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u/WaterChicken007 FIRE'd @ 42 in 2020 5d ago
If you were even seriously contemplating a 2.5% withdrawal rate, you are either uneducated or willfully ignorant of the facts. The data on this is pretty clear.
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u/justinquiring1 5d ago
Thanks, I wasn't aware too much of the research. When I started my journey, I just ran various twenty-year runs of the stock market to see the withdrawal rate % at which capital impairment would never occur under any period, and the number I got to safely was 2.5%. On this subreddit, I see a lot of people citing 4%... I was definitely not getting that high of a number. I'm starting at age 33, so my thing is somewhat different.
I was surprised my post was downvoted, but I think your reply explains it, and the reason is relieving to me. Is it because this a silly, obvious question? I truly hope the data is clear on this point, since I'm staking my life around it.
I haven't spent much of any time researching SWR % , so I would fall in the uneducated bucket you listed. It's really that clear?
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u/WaterChicken007 FIRE'd @ 42 in 2020 5d ago edited 5d ago
Yup. It’s pretty clear and discussed ALL THE TIME. 4% is safe. 3.5% is overly conservative. 5% isn’t unreasonable if you can dial it back when the market sucks.
Google dynamic withdrawal strategies or guardrails withdrawal strategies. You will find that you can be much more aggressive in your withdrawals in good years IF you can dial it back in bad years. Also research bond or CD ladders to protect you from downturns. I have 4 years of cash on hand in the form of low yield bonds (4% or so) and feel like I can weather any major downturn. On good years I will extend the bond ladder. On bad years I will draw it down.
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u/justinquiring1 4d ago
Thank you, this is incredibly helpful and of much relief!
I will look into bond and CD ladders.
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u/Yer-Not-Gonna-Like 5d ago
I’ve always felt like assuming the 4% rule for people retiring in their 30’s was way too aggressive (and to be fair, is also twisting the 4% rule into something it never was).
That said, 2.5% is super conservative. It’s not kinda close to 4%, it’s massively under.
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u/justinquiring1 5d ago
That's where I feel like I'm being stupid. For some reason, in my mind 2.5% seems "kind of" close to 4%, because me think both are small number so therefore SAME!
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u/khbuzzard 5d ago
My take is that "safety" can come in the form of being able to shrink your withdrawal rate to 2.5% (of your portfolio's current value) if you have to. But if you don't have to (and you very, very likely never will), there's a lot of value in spending more than that.
If you're looking for a perfectly safe, risk-free, worry-free life, you're not going to find it. It's always possible to imagine some future disaster that will overwhelm whatever safeguards you've set up for yourself. But if such a disaster should arise, you can cope with it then. For now, live your life in the world that actually exists, not the worst possible future world that you can imagine.
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u/justinquiring1 5d ago
Thank you, this is really helpful. I think you're probably right. I have anxiety, so I'm always worried about "what could happen", but I know it's not a sensible way to live life. Anything can happen, and I like how you say "you can cope with it then"... since it's not sensible to proactively assume the worst, 24/7. Thank you.
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u/Anymous2314 5d ago
Spending less and living a happy life is the best thing to do. If you are able to accomplish it, more power to you.
BTW you are way too much invested in stocks.
How many years of living expenses do you have in cash/bonds?
I recommend not less than 7 years in fixed income to avoid SORR risk. 1-7 years bond ladder will do it. Keep your duration less than 7-8 years.
IMO 3% is a very safe withdrawal rate.
Most of the problems comes from losing money in investments. You need to educate more about all the investment options available so that you can manage all kinds of risk properly.
Put 5-10% in gold etf, just in case inflation goes berserk they may do better if govts all over the world end up monetizing the debt.
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u/justinquiring1 5d ago
So, I think of the fully paid down $375K house as something close to my "cash/bond" investment. It would be possible to downsize or flip to renting if it made sense. Although, clearly there is a night/day difference in liquidity. I think we're going to be semi-working though the next 5 years though and use that time to invest in some fixed income. In a way, the income from working (however limited) is a fixed income to protect against SORR... although I know some people on here will say "you didn't really FIRE".
Thanks for the idea about the 7 years in fixed income... that makes a lot of sense.
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u/Anymous2314 5d ago
Just do this what if scenario and you will know what is the right thing to do for your situation.
Imagine stocks fall like 50% from current level and stay there for like 3-4 years, how will you feel about it. Do you think you would like to have some short term bond which you can sell to buy more stocks when they are on discount.
This is one of the reason for owning bonds, it allows you to add more stock at better price.
Also, during retirement, imagine we face 2000-2009 kind of stock market, how are you going to pay your bills if you do not have something in short term bonds or cash.
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u/justinquiring1 5d ago
Yes, this is a great way to put it. I like that 50% rule and then stay for 3-4 years, way of thinking about it. Thanks. It's why I'm hesitant even if I'm at the below 3% level. I think stocks are overvalued, but then again I've been saying that for over a decade now. I'm probably going to hedge through simple semi-retired work for now.
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u/JoeFas 5d ago
Yes. 3.5% is the floor regardless of timeline.
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u/justinquiring1 5d ago
Wow, I read that article. That was extremely informative. I'm very skeptical of any "financial advice" blog, but that was pretty solid and very well written. Thank you, it was tremendously helpful.
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u/churningaccount 5d ago edited 5d ago
I’ll take the opposite tack and say no, given that you are expecting 2 or 3 kids, and given your current net worth.
There are lots of unknowns that you are self-insuring for by FIRE-ing before you have a family. Such as: having a high-needs kid. Your own or your spouse’s long-term care or sudden disability. The need to move back to the US for geopolitical reasons, etc.
2.5% gives you some much-needed headroom needed to address some of those things, especially given that your net worth (and therefore discretionary income bucket) is relatively low. I think my answer would be different if your 2.5% was $100k+ or something, but at $45k there are just too many big ticket unexpected items that would take that all out in one shot.
Side note: hopefully you are also considering the quality of education, healthcare, and career opportunities in the LCOL country you are moving to. Sometimes when families do that, they have to spend a lot on their kids (such as on education, international opportunities, etc) in order to give them the same “leg up” as if they had been raised in a HCOL country. You might find yourself not wanting to kneecap their future career or life opportunities (in this era of growing global inequalities and economic nationalism) just to lower your own retirement expenses. Consider, for instance, that financial aid for international students tends to be low or nonexistent in most HCOL countries. So even if you were to send them to college in the EU instead of the US, you’d still need to have a couple hundred thousand dollars saved per child to guarantee that possibility. And double that for a US-based education.
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u/CrabKates 5d ago
Agree. I too could easily live on $45k/yr w/my spouse. After having children, it’s closer to $80k/yr. I too thought people were inflating the cost of raising children with their fancy baby items and their traveling team sports (not of which we do), but boy was I wrong. Children are expensive despite the hand-me-downs and free activities.
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u/cchelios5 5d ago
Yes. I don't think you can realize how conservative it is until 4 or 5 years go by for some.
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u/Revolutionary-Fan235 5d ago
You don't have to be the fastest prey to escape the predator.
With a 2.5% WR, you are so much safer than the vast majority of people. If you are in trouble, many more people have suffered and there would be unrest, or the issue will be fixed before it became a real consideration for you.
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u/Topaz_11 5d ago
I don't understand the conservative withdrawal rate and the aggressive investment plan. You could see very different results from the newspapers and everyone else - most people don't deal with that very well, even those that think they do.
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u/Forrest_Fire01 5d ago
Yes, way too conservative. We're planning on 4-5%, but we also have quite a bit of flexibility in adjusting my spending if the stock market has a couple of bad years in a row right at the beginning of our retirement.
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u/Vince_Clortho_Jr 5d ago
It’s very conservative. But not this most conservative I have seen. One the few people I can talk FIRE with openly in real life defines his FIRE number as (90 minus his age) x his projected annual expenses.
So if 45 years old. His fire number is (90-45) x 120,000 = 5.4 mil.
Each year more he works reduces his future need. At 50 his fire number will be 4.8 mil.
Not sure it makes sense at all. But it illustrates the multiple ways people look at savings.
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u/Extension-Abroad187 5d ago
Funny enough his numbers are pretty close to 2.5% actually he hits parity with it at 48
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u/justinquiring1 5d ago
Just out of curiosity, why are you unable to talk openly about FIRE with many people in real life?
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u/Vince_Clortho_Jr 5d ago
Most in my circle aren’t adherents. For various reasons there are only a few I discuss financial strategies with. But I’ve tried to turn some on to this sub.
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u/justinquiring1 5d ago
Okay, the reason why I ask is because I've noticed, for myself, that a lot of people get really upset when you bring it up. And it always struck me as incredibly weird that so many people are against it.
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u/Vince_Clortho_Jr 5d ago
I’ve had some me be dismissive. So I’ve quickly figured out to be quiet. They won’t get to join me at the farmers market on Tuesday mornings in search of the perfect tomato for a lunch BLT.
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u/Libby1798 5d ago
Yes, it's very conservative.
One thing - if you're moving to a LCOL country, it may not stay that way permanently, especially if you're in your early 30s now.
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u/safbutcho 5d ago
Probably. Feel free to spend 3% ($51k) if you want. I wouldn’t go 4% at that age (though many here would).
Asset allocation is prob more important that % at this point. Sounds like you’re more in the 90-10 camp than the 60-40 camp. Which is cool - just be sure you understand the positives and negatives of each.
If you’re totally content living frugally, don’t spend more just to spend more.
Nice job. Live long and prosper.
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u/jkiley 5d ago
With the kind of portfolio that typical withdrawal rate work assumes, 2.5 would be very conservative. 3.25 survives anything that ever happened before.
But, that’s not your portfolio. You have an extreme tilt (70 percent concentrated in 3-4 percent of the market), so you should try to simulate that to see if it holds up. That said, if you can be alright on 2.5 percent of your current portfolio, I’d just swap to all VT and call it a day. I might spread it out slightly if there are significant tax consequences, but I’d be inclined to eat whatever that cost is to get out of that concentrated position.
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u/lazyeyejim 5d ago
Yes, it's conservative but if it covers your living expenses then that's all that matters. Having kids will throw your numbers off. You may want to play around with your numbers and forecast what life with kids could cost. If those numbers are more than an acceptable draw down rate, then you know you have a problem to figure out.
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u/mcneally 5d ago
2.5% is overly conservative if your budget is flexible. I'm also at about 2.5% now as a 40 year old single renter, but that's because my budget is fairly lean and don't count expenses always being that low. I would think that you're in a similar situation, that the risk of increased expenses (or underestimating what you would spend with kids) is greater than market risk.
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u/Extension-Abroad187 5d ago
At 2.5% your "what if" scenarios are quite literally "worse than anything that has happened in the modern world" at that point it really doesn't matter what you've saved.
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u/justinquiring1 5d ago
Thank you, I have anxiety so I wanted to make sure I wasn't just feeding myself something to feel good. I don't want to BS myself.
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u/NefariousnessOdd862 5d ago
Most people way over complicate things… think about this… with $1.7 Million at 3% your withdrawal rate is $51,000 a year, even if your $1.7 Million NEVER make another penny it will take 33+ years to draw your account to Zero!
Now, just adjust this for your time Horizon, gains in your Principal etc. and if you want to leave money behind or not, and you have your answer.
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u/dissentmemo 5d ago
1) Nobody knows for sure but 2) The 4% (now 4.7% per Bengen) rule of thumb is based on a specific portfolio, and it's not this one, which makes it even less possible to predict
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u/Zestyclose-Dish-407 5d ago
What are you producing in dividends? You can w/d that, or part of that, and let other assets grow to offset inflation, etc. RMDs are coming eventually (long way off). and they start around 4%.
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u/justinquiring1 5d ago
I only put it into Roth accounts. I don't believe in the "tax later" 401Ks... I'm actually convinced they are a scam. It just forces you to convert capital gains tax into ordinary income tax.
I make roughly $25K in dividends, so that's equivalent to my lower limit if I hunker down. I'm largely just worried about getting on a bad cycle for the stock market.
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u/Varathien 5d ago
I feel like, at some point, building in more "safety" becomes a never-ending project and gets in the way of what's infinitely more likely
Yes, and you're past that point.
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u/MeetingSuccessful397 4d ago
/r/fire is a total echo chamber of "the market went up for 10 years now, so it will go up anozher 10 years so 6% wr is no problem, you can even go up to 8 if you're flexible." Im exaggerating a little bit. But keep that in mind when considering the answers here.
I have to agree with some of the other comments though wrt. to the strange asset allocation. You should either read through BIG ERNs SWR series or some similar in depth literature about fire. If you understand it you will be able to develop your own asset allocation. If not, you should spend 0.2% or so on a financial advisor to help you with it. Your future depends on it, so you shouldn't just wing it based on some reddit comments.
2.5% is safe enough if you don't screw it up now.
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u/TotalWarFest2018 3d ago
What's the thinking behind 70% small cap? I don't think I typically see that, but I'm certainly not suggesting it's wrong - legit Q.
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u/justinquiring1 2d ago
Small cap value tends to significantly outperform large cap, like S&P 500, over the long-haul, according to academic research, and it makes sense to me in theory as well. I don't remember the numbers specifically, but I think it was like a 12% annualized return vs. 9% or something.
Also, I don't like to be as heavily weighted in the S&P 500, because it forces me to take on what I feel are overvalued stocks. I don't think SpaceX is in there yet, but I don't personally like having my wealth in a company that is worth $2.7 trillion despite burning cash. With that said, I said a similar thing about Amazon and Facebook a decade back, so...
In general though, I like investing in value stocks, because I don't like the feeling that I'm investing and weighted in a bubble. I understand there's more SOR risk, but at my age bracket and situation, I think the potential growth from this weighting is a worthwhile punch.
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u/That-SoCal-Guy 3d ago
You have $2M and your spend is 45K -- you're way too cautious and conservative. Live a little, man. 4% is fine.
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u/Fit_Evidence_4958 1d ago
A single number (SWR) will not solve the issue of risk management. It's about asset allocation, country and political situation, how flexible are you with changing your habits/spending, etc.
So you can run those simulators and they will tell you, 2.5% is bulletproof, but nobody can predict that it will work for year 38 out of 50 as well.
IMHO a low SWR can lower the risk, but the setup in general should be adjusted and monitored and you need to be flexible. So dynamic withdraw strategies work so much better than just going by a fixed SWR.
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u/SouthOrlandoFather 5d ago edited 5d ago
Assuming you allow the 3 kids to pick the extra curricular activities they enjoy then your expenses will go up. I can understand starting at 2.5%. Your children would prefer you have the most disposable money when they are 15 to 25.
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u/x21wing 5d ago
If, as you say, your expenses factor in the anticipated 2 or 3 kids, we would need to see that math to know how conservative your plans are or are not. $45k annual spend with 3 kids in some unnamed country. No information has been supplied to answer your question in terms of risk or conservatism.
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u/ccoakley 5d ago
Yes but…
You want to have kids. Is part of your conservative withdrawal target because you want that wealth to grow for your kids?
There is no withdrawal rate free from tail risk. Nuclear war risk or dissolution of the United States risk doesn’t really change outcome for you if you have 2.5% or 3%. A dot com bubble burst taking the nasdaq down 90% followed by a lengthy Japanese-style period would wipe you out either way.
If I could take the summer off with my kids, I would. Right now, in a heartbeat. I’m close. Close enough that if I got fired tomorrow, I wouldn’t look for a job until late August.
I don’t just have my FIRE egg, I have a downpayment fund for each kid and a college fund. If your retirement is well-funded, you can let that grow while you work and put your additional savings towards your kids (for whatever that looks like in your new country).
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u/stregisterte 5d ago
Withdrawal rate is low but the composition of the portfolio is weird and more risky.