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My “never have to work again” number – An introduction to the Safe Withdrawal Rate

Reading Time: 10 minutes

This post will go into the basics of Safe Withdrawal Rate and the 4% rule, so if you’re already familiar with the concept, you may wish to skip this one.

When speaking to my friends about financial independence – and the freedom you get from knowing you’ll never have to work again to earn money unless you really want to – I often get exasperated questions like:

“How do you know how much you need?”

“Won’t you run out of money and then have to eat maggie mee for the rest of your life?”

“How do you know when you already have enough so you can stop working?”

These are all very valid questions. In Asia we may already be saving a lot more than our American counterparts because we are taught from young – sometimes overly so – to be fearful of debt and credit cards; however most people don’t know when to stop.

I mean, how much is enough really? I see a lot of people who save and save and invest and invest, forever growing their net worth but with no end goal in sight.

Without knowing when we have enough, we’re navigating blind

If you don’t know when you have enough then you’ll never feel safe – you’ll never be free and you’ll never feel or be financially independent.

We’d just be walking around aimlessly saving until we’re 75 and “maybe retire” because we’re too old to work, but we’d have no clue about whether what we’ve saved is enough. Maybe it’ll last until I die but maybe it’ll run out 10 years down the road! I’ve got no time for that kind anxiety man.

So it’s very important to know your magic “FIRE number”, the amount you need to have in a diversified portfolio of investments which will be “enough” for you to never have to work again, forever.

This number gives you a finish line, it lets you know when you can stop working, it lets you plan your investments and savings so you know when you will likely reach financial independence.

So how do you go about calculating this number for yourself? For that, you’ll need to be able to answer some important questions.

How much income do you need after FIRE?

Before we look at how much you need in your investment portfolio in order to FIRE, we need to look at how much you think you’d spend after you are financially independent.

Think of it this way, the idea of FIRE is to provide you with a stream of passive income that essentially covers all of your expenses so you don’t have to work unless you feel like it.

In order to do that we first need to understand how much you’re spending and how much income would cover your expenses or expenses that you think you’ll have after you’ve reached financial independence.

Let me take myself as an example. I think for myself – because my wife is also on this journey – I will need at least S$6,000 in monthly income or S$72,000 in yearly income (in today’s dollars) to support all my expenses if I stop working.

(I’ve actually recently revised this number and I detailed the reasoning and the new number in this post.)

The expenses should already include:

  • Utilities
  • Transportation
  • Food
  • All insurance payments: Health, Life, Accident, Hospitalisation, Pregnancy, etc.
  • Medical expenses (in addition to the insurance payments)
  • Mortgage Payments
  • Car Loan Payments
  • Any costs related to any children or potential children
  • Any allowances to parents or dependents and cost of care
  • Any discretionary spending budget: gifts, doodads, toys, etc.
  • Holiday or travel budget for each year

For me, I feel that S$72,000 per year for me and S$72,000 per year for my wife, will be able to cover all of the above and the potential children we may have down the road (we are planning for ~2).

So for just my part of the calculation, S$72,000 a year in income (I know that’s pretty high) is a good place to start. You will need to work out this number for you and your family. Find a number that you think will allow you to live comfortably and start from there.

Now we are ready to calculate your FIRE number – let me introduce *drum roll* “The Safe Withdraw Rate!”

The Safe Withdrawal Rate – The 4% Rule

The safe withdrawal rate (aka SWR) is a concept of how much money you can withdraw from your portfolio on a yearly basis so that it does not run out.

This concept works due to the fact that money invested in a balanced portfolio will earn a certain rate of return. If you withdraw from the portfolio each year less than the portfolio has grown each year then, in theory, the money will never run out before you pass on.

So what is this safe withdrawal rate that will give you the number that you’ll need to save? Well as the heading of this section states, the figure is 4%.

What this means is that if 4% of your total portfolio value is enough to cover all your expenses in the above section (S$72,000 per year in my case) then my “FIRE number” is:

S$72,000 / 4% = S$1,800,000

An easy way to calculate this number is to just multiply your yearly expenses by 25, you will get the same result:

S$72,000 x 25 = S$1,800,000

This means that if I continue to save and invest my money into a well-diversified portfolio of broad-based low-cost index funds, then once I reach a portfolio value of S$1.8 million, I have reached my goal of being able to withdraw S$72,000 per year (even adjusting for inflation each year) from the portfolio without having it run out.

Important Note: It is important to note that your money must be invested in low-cost broad-based index funds and in well diversified portfolio and not left in cash for this to work. Cash depreciates in value through inflation, a diversified portfolio should grow with the economy which – at sufficient size should grow quicker than you can spend it all down – allowing you to withdraw the funds until you are no longer in this world. Click here to read how you can build a portfolio like that in Singapore.

Let’s take another example. Say you have a family of 4 and believe that in order to stop working, you will have a post-FIRE expense of S$8,000 per month or S$96,000 per year to support your entire family forever. This is what the calculation would look like:

S$96,000 x 25 = S$2,400,000

That might seem a lot! But the magic here is that the math works in reverse as well!

If you and your family are frugal and keep your expenses under control and you only spend S$4,000 per month or comfortably within S$48,000 per year. Then your calculation looks like this:

S$48,000 x 25 = S$1,200,000

Looks much more doable now, doesn’t it? This will work for all income levels and for all lifestyles that you are shooting for. All you really need is your yearly expense number that will sustain you and your family forever.

You will already see that the lower your expenses are, the less you will need to have before you can consider yourself FIRE’d. This is why many FIRE bloggers will focus on optimising your income, reducing expenses, travel hacking and credit card rewards hacking. It really shortens the amount and thus the time you need to get to FIRE!

The beauty of this method is that it has already taken inflation into account. Every year you are allowed to adjust the withdrawal amount up by 2% to cover any reduction in purchasing power due to inflation.

So when I say this method will cover your spending long-term, I really mean long term.

Side note: Based on this starting point, you should already see that if you can reduce the amount that you will need, it will reduce the amount you’d need to have in investments to reach your number. This is why a lot of personal finance and financial independence bloggers advocate reducing your spending. Aside from reducing the amount you’d need to reach FIRE, it will also increase the rate at which you can save (aka the savings rate aka SR) because whatever portion of your income that you don’t spend, you can use to save and invest, further accelerating your progress.

Now we have a clear number to work towards and plan our journey.

However, keep in mind that the 4% rate is not gospel, reality is much more complex than that. It all depends on your end goal and how much risk appetite you have.

For example, although based on the above calculations, my FIRE number should be S$1.8 million, but it is not. The number I’m actually gunning for is actually closer to S$2.17 million, and here’s why.

Choose the Safe Withdrawal Rate that’s right for you

In reality, the 4% rule is a general rule of thumb which should get most people started. It’s a guidepost, a line in the sand, a simple way to give people some direction.

However, if you dive deeper into the Safe Withdrawal Rates, you will realise that there is a lot of room for adjustments to fit your needs. You are able to adjust the SWR up or down based on the end results that you’d like to have. Here are some factors – aside from your expenses – that will affect the SWR that you should aim for:

  1. Your risk appetite.
  2. How flexible you are during retirement.
  3. How much money you’d like to leave for your family after you are gone.

Your risk appetite

As you dive deeper into the 4% rule, you will realise that it is more of a “rule of thumb.” This number is based on the Trinity Study first published in 1998 which determined that a 4% withdrawal rate had a success rate – the portfolio did not run out of money within a 30 year period – of 95% for a portfolio containing 50/50 stock to bond ratio.

The study spans periods between 1925 to 1995 which included the great depression, World War II, and Black Monday, some of the worst financial turmoil in history so you’ve got to be very very unlucky for your portfolio to fail.

But this also means that:

  • Roughly 5% of the 30-year-periods failed, or ran out of money before 30 years is up.
  • The odds published in the study is really valid for retirements that last 30 years. For people in the FIRE community who may be planning for a retirement timeframe of 30-40 years, the failure rate for the 4% rule can be as high as 8% or more. As the numbers of years the money must last, the failure rate of the 4% rule increases.

If your time horizon is longer than 30 years or a 5% failure rate sounds too risky for you, then you can choose to drop the withdrawal rate from 4% down to somewhere nearer to 3%. At 3% the failure rate drops to 0% within the periods that the trinity study covers (for 50/50, 75/25, 100/0 stock to bond portfolio.)

This was the reason why my personal SWR is 3.33% to mitigate the above risks.

Your flexibility during retirement

A second factor to consider when picking your SWR is whether you’re:

  1. Willing to go back to work to earn extra income if the market happens to tank early on during your retirement; or
  2. Reduce your yearly spending so you effectively reduce your withdrawal rate.

#1 Making extra income during retirement

If the market tanks early on, your 4% withdrawal may be too low for you to live on because your portfolio has dropped in value so much during a crash. However, if going back to work to earn additional income is in the picture for you, then even if the market tanks, you can still make up for the shortfall of the withdrawal by earning extra income.

#2 Buckle up and reduce spending to weather the storm

If you are able to cut down your expenses significantly during hard times, then you also may not need to go back to work and still can maintain the viability of your portfolio when we face a catastrophic market downturn.

How much you’d like to have left for your family

As how much you withdraw each year will also affect the amounts remaining in your portfolio when you pass on, one big factor that influences the SWR that’s right for you is how much you’d like to leave behind for your family and the end.

In this case, you have 3 broad options:

  1. Option 1: Leave little to nothing at the end.
  2. Option 2: Leave almost as much as you started with.
  3. Option 3: Leave more than you started with.

Option #1: Leave little to nothing

This is the option I have selected. It is the option that requires the least amount of savings. The idea is that you plan for your money to run out just around the time you will pass away. My philosophy has always been to teach my potential children how to fish and be financially independent themselves so I do not have to support them once they reach adulthood. This allows you to keep your SWR at 3.33%-4% as per above.

Option #2: Leave as much as you started

Another option is to only withdraw just as much as the portfolio increases in value each year so that at the end, you leave a portfolio that is roughly the same size as you started with when you FIRE. This requires a much lower SWR which means you must either save a lot more or spend a lot less to achieve. However, the benefit here is to allow you to leave quite a substantial sum for your family so that they may not need to work as hard to get ahead in life.

You may also want to provide support to your wife or husband after you pass on and this is the option you can elect to pursue. For this particular option, you will need to stay below 3% SWR. Using my S$72,000 figure above, the magic FIRE number becomes much larger:

S$72,000 / 3% = at least S$2,400,000 in portfolio value

Option #3: Leave more than you started

This is the most difficult option and takes the longest. You might want to build an empire, you may want your family and lineage to never have to work again. You want to set up an epic dynasty that will last for generations like the Koch brothers. You will want to leave your family and children with even more money than when you started, maybe even double or triple your starting portfolio value.

To ensure this, your SWR will need to hover between 1%-2%, which will translate to a pretty huge starting portfolio value. Let’s look at my example with 1% SWR:

S$72,000 / 1% or 2% = between S$3,600,000 to S$7,200,000 in portfolio value

Of course, I’ll have to avoid lifestyle creep and maintain my expenses to S$72,000 (inflation adjusted) per year forever.

Further reading

For another introductory article, check out Mr. Money Mustache’s Shockingly Simple Math of Early Retirement.

For a more comprehensive analysis of how to mitigate the risks inherent in the SWR, I highly recommend Big ERN’s Ultimate Guide to Safe Withdrawal Rate. It’s a deep rabbit hole and super comprehensive but trust me, it’s well worth it if you love details and numbers.

Conclusion

So I hope that gives you a pretty good introduction to the Safe Withdrawal Rate and allow you to calculate your own FIRE number.

It should give you the confidence in your portfolio and how much it can provide for you once you stop working.  It should give you something to aim for instead of sailing without a clear destination.

Although there is a bit of nuance in actually deciding on a final SWR that you are comfortable with, remember that there is no right or wrong number. Choose something you are comfortable with that will support your lifestyle.

If you’d like to ask questions, feel free to comment below or you can also follow me on twitter @firepathlion!

Good luck on your own journey and thanks for reading!

FPL

10 thoughts on “My “never have to work again” number – An introduction to the Safe Withdrawal Rate”

  1. Thank you for starting this blog and join the really small group of bloggers encouraging FIRE in SG. However, i also feel that there is great responsibility being the first few FI writers in the region.

    72k is a lot of money to spend for an individual. And by suggesting a family of 4 needs 10k a month to spend, that is totally not ‘FIRE-ish’ at all. One, if anything, it discourage people from achieving FIRE, since accumulating 3m is generally quite impossible for a lot Singaporean (especially if you are spending away 10k of your salary while building your wealth). Honestly, how many years do a average Singaporean have to work to reach 3m of savings?!

    Two, it makes you less flexible during your FI years when market tanks.

    Me and my wife spend a combined of 38k a year, less the mortgage and work related expenses, and we still feel we are leading a luxurious life, considering this also includes occasional restaurant meals, travel, etc.

    I personally believe that learning the beauty of frugality has to be part of the FI journey.

    • Hi MH! Thank you for commenting and giving your thoughts and feedback. I really appreciate your input and I certainly agree that as the first few FIRE bloggers in Singapore, there is a responsibility to represent the community in the right light. It’s important that newcomers to the community has the right understanding about what FIRE stands for.

      I did not mean to imply that a person must have millions in the bank in order to FIRE (My 72k a year figure is definitely on the very high side) or even that there is a right or wrong amount to aim for. I will update the post to make this clearer! It’s important to me that I introduce the concept to as wide an audience as possible and I believe that once people understand the core concepts, frugality should become an obvious next step. As a person learns that the “FIRE number” is simply 25 x the annual expense, the hope is that they will realise that if they lower their expenses, they can FIRE with less money and thus quicker.

      I definitely agree that this should have been made more obvious in my post, I better make that clear.

      Frugality and learning to find happiness from a low consumption lifestyle is certainly one of the core pillars of FIRE. However, I also believe that there are different types of FIRE and different lifestyles that people can shoot for as there’s no right and wrong number. As they say “Build the life you want and then save for it.” As long as you’ve planned well and understand your expenses, no matter if you want to leanFIRE, baristaFIRE or fatFIRE we can all reach FI. I want to make sure that it’s not a concept that works only if you embrace frugality and that frugality is the only way. (That’s why I take issue with DollarsAndSense article here: 4 Things Singaporeans Need To Think About Before Joining The “Financial Independence, Retire Early” (FIRE) Movement which I feel misrepresents our community and raises very bad points against joining the “FIRE movement.” What do you think?)

      FIRE, to me, is about freedom, having free time to do what you love, finding happiness and living the life you want without being dependent on your job. The travel hacking, optimising credit card rewards, stoicism, frugality, finding happiness outside of “buying stuff” are directions we can take to get to FI (and we should definitely get into if we’d like to optimise our path to FIRE and get there as quick as we can.)

      Thank you again for reading my blog and giving your comments. I hope we can continue the discussion and that I can play a part in growing the FIRE community in Singapore and have more and more people that we can discuss these concepts with in the future!

  2. Hi FPL, thanks for replying to my comment. I have a different take regarding the relationship of frugality and FIRE.

    Big Income/Big Spender (BIBS) approach to FIRE sounds very attractive and possibly attract more interest from a ‘wider’ audience but it is not practical to majority of the Singaporeans. To maintain a expenditure of $10K a month for a family of 4, how much must the family earn in order to save enough for FIRE? How many years of unhappy work do they need to do in order to save $3m to continue supplement the consumer lifestyle even after FIRE?

    For instance, to save 50% of their income, they need to earn $20k a month. This takes 17 years to retire. If they aim to save 25% of their income, they will need to earn $13k a month. This take 32 years to retire. Don’t seem to me very ‘early’ to me.

    Not just the example you give, but the same example can be used for a Singapore household with median income of $9000, or lower.

    So initially, it might seems like frugality is just a ‘tool’ to optimize FIRE. This makes a lot of sense, since by doing simple math, reducing expenditure = save more, so you can achieve the number faster. However, this is a rational way to look at it, hence, the feeling most people get is that frugality = suffering and deprivation of happiness. This is in order to get happiness after i’m FIRE.

    But once you go deeper with the philosophy, you will realize that, being frugal has zero sufferings. Instead, frugality brings happiness. It makes you understand that one do not need so much material to enjoy life, to lead a happy life. So the lesser you need, obviously the faster you achieve it, but the more important part of this is that, you are left with more time to enjoy meaningful things during your FIRE years. Furthermore, you know where to cut your ‘fats’ during market downtime, which gives you bigger security during FIRE, hence more happiness at the same time.

    I personally think that very little people can reach FI by being a BIBS. Good for those who can, but the beauty of frugality is definitely part of the ‘modules’ for FI ‘graduation’.

    Having said so, its just my own personal opinion (and stubbornness maybe?). The you-spend-a-lot-but-just-earn-more approach does not go well with me. Sorry for the long message, but this topic deserve a full article! This is another article to share – https://www.mrmoneymustache.com/2011/06/21/frugality-as-a-muscle/

    Hope you don’t take it personally, just sharing! 🙂

    • Hi MH! You’ve made a lot of very valid points which I completely agree with. The earning power and the amounts of savings required for FatFIRE or a Big Income/Big Spender (BIBS) lifestyle is certainly not practical for most Singaporeans and definitely shouldn’t be taken as the “right way to go” or the only direction. As you’ve pointed out, the required income and savings will likely require a person to work for a long time – defeating the core premise of FIRE, which is being able to become financially independent earlier than usual.

      You’ve also put the difference between frugality and depravity and why it’s not just a “tool” but a core philosophy of FIRE into words much more effectively than I could have. Given the misconception that a lot of people have – that frugality is equivalent to depraving yourself and that it must mean “suffer first to enjoy later”, I also think it does deserve it’s own article and I hope to be able to articulate it well for the rest of the community. (Mr. Money Mustache’s post on frugality is fantastic.)

      Don’t let the size of my FIRE number deceive you though, I do not want to show an example that misleads people to believe that you need a ton of money to FIRE, however I also do not want to misrepresent my numbers to the community as I’d like to make sure to use my real number rather than using a hypothetical situation. In my case, my projected number is higher due to the fact that I may have to fully support my parents during my FIRE years and that drives up the monthly cost quite a bit. My actual monthly cost (just for myself) is closer to S$2,800 per month currently – this already including yearly travels and some allowance for splurges etc (so there’s room still to cut! I really should cut that gym membership actually.) Maybe I will get a chance to dive into my actual budget and finances in another post too!

      So do not worry! I am not taking this personally at all, in fact I am enjoying this conversation a ton. Thank you for your detailed and passionate response and I look forward to hearing more from you. 🙂

  3. Great article. Would like to clarify a few things.
    1. Can I confirm that the 4% SWR is for a 50-50 stocks-bonds portfolio?

    2. I am wondering why don’t you factor in dividends that the portfolio will give. That will make your FIRE amount lower.

    Thanks

    • Hey Steve! Thanks for reading!

      1. The 4% SWR is for 50-50 all the way up to 90-10 stock to bond portfolio. With any higher equity or bond allocation, the success rates begin dropping. Keep in mind that this is for a 30 year period, so for longer retirement, it’s best to stay lower than 4%.

      2. The 4% withdrawal rate assumes you are always reinvesting dividend. Once you start withdrawing, you can count the dividend as part of the 4% withdrawal, so if the dividend is already more than 4% you won’t need to withdraw, and just need to reinvest any portion of dividend that is in excess of your 4% SWR.

      Hope that makes sense!

  4. Thanks. I am trying to understand how inflation is already factored in. In your case, you need $72,000 per year in today’s dollars. From there you divide by 4% to get $1.8 million. But your withdrawal only starts X years from now. At that time the withdrawal amount should be more than $72,000 due to inflation. Shouldn’t you adjust the $72,000 for inflation for X number of years till the desired retirement year, then only divide by 4% to get the FIRE number?

    • Hi Steve! This is certainly true. For the most accurate number, I will need to increase my expected FIRE number by inflation. So the S$72,000 per year I am expecting today would actually be slightly higher by the time I decide to retire. In this case, if my retirement date is in 10 years and the inflation is 1.5% each year, the S$72,000 would become about S$83,600 per year by the time I retire (which equates to S$72,000 per year in today’s money.)

      However, the number of years I would need to FIRE is not fixed so I plan to evaluate this number each year and determine whether I have enough today to generate a withdrawal that would have the purchasing power equivalent to S$72,000 in 2019 dollars or not.

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