How much savings should one have to retire by 40?
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- The issue is that there's a high probability of a recession at some point during your retirement and you need to be able to make it through that. You might also have unexpected expenses at some point. (Old people tend to have more medical problems).
If you suddenly lose 30% but you're drawing at close to the same rate or if you withdraw a huge amount one year, then you'll suddenly be eatting up more than 4% and it won't get a chance to rebound.Jun 6 1
- I personally calculate with 5% prior to inflation.
Might be too low, but I don’t have many good expectations for the next decade or two. I think we’re going to hit a massive recession soon and there’s no way to go. Europe is in a bad shape, and don’t get me started BRIC.
So whatever is invested in the market right now might tank 50% and will recover more slowly than usually.
Am I very off?
- That's fine to make your own predictions but the data doesnt support it. Past returns do not gaurantee future returns of course but are a good place to start. Personally my rentals pay my living expenses so haven't touched much stock at all and rents tend to rise during recessions. Downturns are normal and fine but if you want to decrease your risk that's fine.
- No, the 4% rules proposes that your money lasts for *at least* 30 years. Big difference.
Keep in mind that the market traditionally runs at 6% YoY (6.7% in the last 45 years) then 4% is a safe draw.
Go online and find any 15 year period since your birth year that the market returns were under 4%.
I’ll wait.Jun 5 1
- At least 30 years when the return rate is 4%
Is not the same as *at 30* years.
Even at 0% return your principal burndown takes 25 years. 19 years with inflation.
For many people, social security even, that and all other defined benefit plans are not a part of the 4% calc.Jun 5 1
- Life expectancy probably drops rapidly when retirement money runs out, so maybe this is a self-fulfilling prophesy.
Also, life expectancy for someone who reaches retirement age is not the same as the overall life expectancy. There's also a pretty big difference based on wealth.
- There are lots of assumptions baked into that 4% rule. Things like past performance predicting future performance, rate of inflation, years til death. You are suggesting it's a rate where you're living off passive income. But, it's a rate where you have a high probability of your original nest egg not being completely gone within 30 years. You might want to read up on it a little more before you hit the beach.