The Problem With FIREing At 4% And The Need For Flexible Spending Rules



The modern form of retirement – a period of non-work that you can and must enter because you’re no longer able to work – is itself a rather modern phenomenon, and one that ironically became both more feasible and more necessary as life expectancies increased over the past 100 years. Because when coupled to the industrial revolution and the shift from farms to factories, rising longevity became both a business and societal necessity to figure out what to do with the “obsolescent” human beings who couldn’t productively work anymore, but still needed to support themselves!
Yet as life expectancies and medical science continued to advance, we reached the point where retirement wasn’t just a stage of being unable to work, but instead a stage of being able to enjoy a period of non-work leisure. The only requirement was to save and invest enough to be able to afford to not work. Which in turn led to those who tried to reach the threshold earlier and earlier, younger and younger, until the “Financial Independence, Retire Early” (FIRE) movement was born.
But the challenge of trying to “FIRE” out of work as quickly as possible – sometimes as early as one’s 40s or even 30s – is that it leaves a very long time to be in “retirement.” So long, in fact, that the classic “4% rule” of retirement should probably be more like a 3.5% rule (given the extended time horizon). But also so long that most human beings will struggle to be idle for so long… which often leads back to productive engagement that even ends out producing post-retirement employment income. Which ironically means that if many of those accumulating towards FIRE considered this likely income, they might even transition sooner instead! (Because even earning “just” $20,000/year of side income in retirement can reduce nearly $500,000 from the required retirement savings!)
And ironically, despite the focus on accumulating enough assets to FIRE (often as quickly as possible), the real challenge is that while sequence of return is a real risk, it is more often a great boon. In fact, while a 3.5% initial withdrawal rate is necessary for the one worst sequence… 50% of the time, a FIRE retiree at a 3.5% initial withdrawal rate finishes with more than 9X their starting principal left over!
Which suggests the real key, especially for the kinds of extended time horizons that FIRE retirees face, is to develop more flexible spending rules that can adapt to whatever markets (or post-retirement income) may bring. Because while 30-year retirement time horizons have both some upside and downside risk, 40-50+ year time horizons end out with extraordinary upside potential… if only the retiree can weather any potential initial storm. Creating options to ratchet spending higher over time, to create spending “guardrails” to remain in a safe zone, or to segment expenses to ensure the essentials are covered but allow more adaptive lifestyle expenses to creep higher over time (as it will likely be feasible to do!).
In the end, though, the key point is simply to understand that, with extended retirement time horizons under FIRE, it becomes necessary to be more conservative against the potential worst-case scenario, but flexible to the overwhelming number of more positive scenarios likely to occur. Especially when considering that most retirees will struggle to remain “idle” for 40-50+ years (especially when retiring in their early still-productive years). The good news is that more flexible spending rules create many options to still adjust spending dynamically along the way. The problem is simply that they’re arguably the area that most needs to be studied further, to determine spending rules that are both comfortable to manage lifestyle and spending expectations, and really can weather the adverse-returns storm should it happen to come!
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