Retirement. Let’s call it ‘chill-tirement’ — The 4% Rule
Chill-tirement, sweeeet.
The ‘don’t blame me’ blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it’s information to get you going. Please consult your trusty professional and do your due diligence. Carry-on!
We’re all pounding money into that i401k, watching it grow while resisting our monkey brains that want us to buy shiny things all the time. Let’s look at the reward for investing in an i401k. It’s chill-tirement, baby!
How big does the pot of money need to be when we get close to chill-tirement, and how much can we spend every year? We’re going to chat about the 4% rule.
TL;DR - the 4% Rule
You can safely withdraw 5% (why 5% and not 4% later) from your i401k balance (or any brokerage account) over 30 years without bottoming out your account. 59 1/2 is when you can start withdrawing from an i401k.
Example: A $1 million i401k balance = you can withdraw $50,000 every year.
An inflationary raise is added yearly to the initial withdrawal amount, so the amount is dynamic.
Your money should last at least 30 years from when you start withdrawing it.
5% should work during the worst possible stock market/economic conditions.
The stock portfolio used: 60% stocks (S&P500) and 40% bonds.
It’s not a hard and fast rule; it’s a guide, and we should have the flexibility to spend more or less.
Bill Bengen, a financial advisor, created the rule after years of research (he says it’s a guide, not a rule, but everyone calls it a rule.)
Chill-tirement
Retirement, as a term, has such a bad vibe. I think of some oldie hobbling out of their office building with a potted plant and a gold watch. The culture in the U.S. seems to be you work until you drop dead. I’m a U.S. citizen, but I'm Australian by birth. In Oz, people retire earlier and focus more on living the good life. You can, too.
I don’t think about retiring; I think about more of a ‘Stage 2’, where I will work less or switch to doing something lower income but more fun. Like writing for this site! Chill-tirement.
The great thing about being freelance is that we can taper our workload. We don’t have to quit our job like staffers do and go from working 100% to 0%. We can start taking on fewer projects/gigs, work 3-6 months of the year, ditch the pain-in-the-ass clients, and just do the jobs you want to.
You’re young, investing, and hopefully pounding the money into your i401k. This is just a very basic article to show you how the withdrawal phase of the i401k, or any stock portfolio, will work in the distant future. If you haven’t read the i401k guide, have a look, don’t wait. It’s easy to have $1 Million+ by age 55. But you have to start as soon as possible.
The goal of investing in your i401k: setting up for chill-tirement.
The goal for us freelancers and single-person biz’s is to accumulate enough money in our i401k (the compound interest investment snowball that’s rolling downhill, getting bigger and bigger over time), plus any other investments like real estate (a rental property, invest in a private real estate syndicate or invest in something like Fundrise.*).
The i401k absolutely rocks. Congress created it. It’s only for freelancers, single-person businesses, and your spouse. It’s a massive tax deduction, up to $76,500 in 2024 — Read the guide here.
The earliest you can start withdrawing from your i401k is 59 1/2. This is where we can start to switch from saving and investing to spending. Stage 2, baby!
Want to retire before 59 1/2? You can use the same 4% rule and withdraw money from a non-retirement taxable brokerage account. Remember, if you hold your ETFs or shares for more than a year, you pay only the capital gains tax of 15%, not your personal tax rate, which is probably around 22-26%. Read the post on how your tax rates work here.
The 4% rule — Except it’s now 5%
Luckily, there is a relatively easy-to-follow rule to follow.
It’s called the 4% rule and was initially researched and developed by financial advisor Bill Bengen in 1994, although Bill maintains it’s a guide, not a rule. But everyone calls it a rule. Many financial advisors use it as a rough guide. See the links below to hear Bengen talk about how it works and the research used to develop it.
Bengen has since revised the withdrawal rate to 5% because of further research and changes in the stock and bond markets.
The now 5% withdrawal rate is designed to make your nest egg last through a 30-year retirement during the WORST possible market conditions. This is where the market is going sideways or dropping, and inflation is on the rise, eating your buying power. It’s the double whammy. This is the backtesting that Bengen did to make sure the system works.
That’s right; the now 5% withdrawal rate should work even if the shit has really hit the fan and the stock market starts doing terribly just as you retire. This is often missed when people discuss the 4% rule, so listen up:
“The worst case scenario, which is the 1968 retiree, the 4% would have worked.” — Bill Bengen
Listen up, guy from Office Space!
Bill found in his research that only one of 400 subjects had to stick to 4%, while many could withdraw at around 7%, some even higher. Have a listen to the Financial Samurai podcast with Bengen below.
How does the 4% rule work?
Let’s use the 5% withdrawal figure: If you have $1 million in your i401k, you will withdraw $50,000 in your first year. If inflation rises 3% the next year, you would withdraw $51,500 ($50,000 x 1.03 = $51,500), and so on. The beauty lies in its simplicity.
Your income in chill-tirement:
Ok, let’s look at a really basic retirement income scenario just to give you an idea of how it will work down the track.
5% withdrawal rate from retirement accounts, such as your i401k, Roth IRA, and other retirement accounts from old employers and/or a taxable brokerage account (that’s a share trading account, not in a retirement vehicle.)
Total of all accounts: $1.2 million = $60,000/yearSocial Security (official calculator here) = $30,000/year
Other investments like real estate = $20,000/year
Part-time work = $10,000/year
Total income for the year = $120,000
Remember, much of this is taxable (unless it’s from a Roth account), just as if you were earning the $120k from working. The cool part is that your investments are paying you, which is known as passive income. You’re not having to work for your income.
Some general points to mull over:
The 5% rate is not a hard rule; it’s a rough guide. You could withdraw more.
You can withdraw from your i401k starting at age 59 1/2.
If you retire early, say at 50, and have no other income sources, Bengen suggests you may want to withdraw at a conservative rate as your money has to last a long time. This is assuming you are withdrawing from a non-retirement brokerage account until you hit 59 1/2 when you can start taking from the i401k.
If the i401k is a traditional deferred pre-tax, you do have to pay income tax when you withdraw money, it becomes income. Don’t worry; it will be way less tax than you were paying in your prime earning years as your ‘earning’ way less. If it’s a Roth i401k, there is no tax. (Note: for most of us, pre-tax i401k is the way to go because of the huge tax deduction we get every year while in our prime high dollar earning years.)
Bengen’s stock portfolio is based on a 60/40 mix: 60% stocks (S&P500) and 40% bonds.
If you work part-time and earn some money on the side, you can either spend more or withdraw less from your i401k.
At 62, you can begin to draw on Social Security. Some say to wait until you are 70 as you will get a larger monthly amount, but that’s another discussion. Me? I’m taking it at 62 and having fun.
If the market does shit the bed, then it makes sense to lower your withdrawal rate until it starts to recover. This is something to consider.
Conversely, if the market is gangbusters, take a little more out and have fun.
Financial Planning
I am not a financial planner, and this is not financial advice. When you are 3-5 years out from chill-tirement, I suggest seeing a CFP (Certified Financial Planner). For a fixed, one-off fee (around $3,500 - $5,000) they will create an investment and spending plan for you.
Some financial advisors want to charge you a percentage of your invested assets annually (known as AUM — Assets Under Management). For some, this is okay and potentially a good idea. As an investment geek, I will avoid advisors charging a percentage every year as they can be expensive. 1% is common, so if you have $1 million in your accounts, the fee could be $10k per year. Note: accountants are NOT financial planners! It’s easy to confuse the two, but they don’t have the expertise for long-term planning and investment.
Finishing up
This is not a definitive guide to retirement. It’s just to give you a rough idea of how much income you are creating for yourself later in life.
Investing $23,000/year for 25 years at an 8% growth rate will get you $1.7 million. At a 5% withdrawal rate, that’s $85,000 of income per year. Play around with the compound interest calculator here and try different scenarios.
Me: Since 2015, when I went freelance, I invested $43k per year in the i401k. I upped it to $60k per year in the last two years. Yes, I earn decent money and have no kids, so it’s easier for me to do that. Remember, those amounts are a tax deduction each year! The i401k limit in 2024 is $76,500. Read about starting your i401k here.
Want to dig a little deeper?
There are some fantastic free websites that will plan and track your retirement outlook. I’ve written about the Empower Dashboard here. I have been using it since 2016 and love it. I have also just started looking at Boldin, a website created to help you plan your retirement. It has a free version.
Retirement planning online tools
Empower Dashboard (Formerly Personal Capital)
www.empower.com
Boldin Retirement Planner
https://www.boldin.com
Books
There are loads of them out there. Here are two I recommend:
’How to Retire’ — 20 Lessons for a Happy, Successful and Wealthy Retirement’ by Christine Benz — https://amzn.to/41PXQJZ
‘Control Your Retirement Destiny’: Achieving Financial Security Before the Big Transition’ by Dana Anspach — https://amzn.to/3DC7ztn
Podcast links
Ok, sure, these podcasts are a bit investment wonky, but you can listen to Bill Bengen discuss the 4% rule.
Bogleheads Live chat with Bill Bengen
https://podcasts.apple.com/us/podcast/bogleheads-live/id1622867611?i=1000591309631
Financial Samurai talks to Bill Bengen
https://podcasts.apple.com/us/podcast/the-financial-samurai-podcast/id1324765509?i=1000677085323
Financial Samurai follow-up blog post on the 4% rule
https://www.financialsamurai.com/bill-bengen-retire-earlier/
Financial Samurai interview with Boldin CEO Steve Chen
https://podcasts.apple.com/us/podcast/the-financial-samurai-podcast/id1324765509?i=1000679469430
Follow-up blog post on the Boldin planner
https://www.financialsamurai.com/boldin-financial-planner-review/
Bogleheads on Investing conversation with ‘How to Retire’ author Christine Benz
https://podcasts.apple.com/us/podcast/bogleheads-on-investing-podcast/id1436401528?i=1000666658408
* I receive a small referral amount to my Fundrise balance if you open a Fundrise account. They also give you the same amount to invest!
The Amazon links pay a small referral fee.