In my recent post on How to retire in 5 years, I defined financial independence/early retirement at the point where expenses equals 4% of investable assets. Retired Syd asked what my underlying assumptions were for the 4% withdrawal rate, specifically

Would someone that is planning on extremely early retirement (say in their 30’s) really be safe at a 4% withdrawal rate?

To which my answer is a very qualified “Maybe”. 4% means that a person needs 25 times annual expenses or 300 times monthly expenses. This makes it fairly easy to use in estimations. Of course, such calculations remain estimates. They may be precise but they are far from accurate. 30 years is a relatively short horizon when it comes to liquidating buy and hold investments. The stock market has historically remained flat for periods comparable to this time period (within a factor 2).

A 4% withdrawal rate is the canonical value for late (60 year old) retires planning to live another 30 years. Personally I plan to live to 100 after which I will book a one-way cruise trip to shark infested waters and disappear under mysterious circumstances. So having almost 70 years to go, am I safe?

First of all, I am not keen on making one-time estimates on portfolio growth and average inflation and extrapolating this 70 years out like an annuity (that’s what insurance companies do). Volatility (particularly in the beginning) can easily kill such extrapolations. It is the same problem when sending a satellite to Saturn. Early mistakes causes much bigger cumulative errors late on than late mistakes. To account for the volatility, I generally use‘s calculator, which only requires my present annual expenses, my present asset base and the amount of time until the above mentioned trip. The fireclac automatically accounts for historic inflation and historic returns. This is in my opinion better than assuming fixed numbers as it accounts for volatility and thus computes a likelihood that the portfolio will outlive me.

Still, will future returns reflect past returns? In other words is the historic growth repeatable or was it a product of cheap domestic oil, immigration, and military dominance, all of which are unlikely to repeat for another 70 years? Who knows.

This leads me to my real answer to whether a 4% withdrawal rate is safe. I think extreme early retirement is qualitatively different from early retirement. Retirement is typically thought of as spending an accumulated nest egg at a certain rate without income. However, I can not see myself as never having any kind of income again. Who knows what I will be doing in 5 years? Possibly this is different at age 60. A 70 year old might very well be doing the same as he did at 65. I hope not though. I for one am doing different things compared to 5 years ago. I’m married. I freelance. I’m very interested in investing. Neither of these were even something I considered 5 years ago. Also I live in another country, something I did not plan either.

I also think that true financial independence does not come from spending a large sum of money slowly. It comes from not spending any money at all. I will keep working to make myself more and more independent from the financial system by wheeling and dealing and creating and making rather than buying. Doing so can only make my “retirement” more and more robust.

Originally posted 2008-08-18 17:56:20.