Let’s discuss the Trinity Study / 4% Rule – what it means for investing your money for early retirement and financial independence – and why it changed. Enjoy! Add me on Instagram: GPStephan
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Here’s why the 4% rule was such a big deal. It was “invented” back in 1994 and used as a method of calculation to make sure you NEVER run out of money in retirement…or basically, if you want to have endless amounts of passive income forever…this tells you how much you need, and how much you can spend.
But now…according to the INVENTOR of the rule itself…he says the 4% rule is no more…and instead, he’s recommending a change.
He says, NOW, that “he no longer sticking to 4%, and that that number was always treated too simplistically.” Because of that, he says 5% is still pretty safe….if anything, 4.5% is now the new “Worst case scenario” and 7% can be safe for the AVERAGE 30 year retirement.
One is from the popular finance blogger, Financial Samurai…he’s outspoken in his claims about the legitimacy of spending 4% per year, and says it was established at a time when the 10-year bond yield averaged 5%.
So, I THINK…in fairness here, I’ll break down my OWN calculations independent from everyone else…and I’ll give my thoughts, as someone who makes YouTube videos from their home all day.
So, first…in order to do this, we’ve gotta take a look at what’s called a “rolling 30 year return” of the SP500…this is basically the AVERAGE return that you’re going to get, over any 30 year timeframe, and by doing this, we’ll be able to find the best and worst case scenarios for your money.
We’ll start with this chart, they found that a 20-year stock market has NEVER ONCE produced a negative result, adjusted for inflation, in HISTORY…and the WORST CASE SCENARIO, EVER REALIZED…was a .5% average return adjusted for inflation.
Another chart found that, on a 30 year rolling period, the WORST CASE SCENARIO was an 8% annual return, before inflation, and the best case was nearly 15% before inflation.
And a third chart shows the worst possible 30-year rolling period was 4.3% after inflation – again, that would’ve been during the 1960’s.
Given all of this information…if you’re looking at a 30 year retirement and you want to be 100% safe in the worst possible case scenario given ALL of the historical data we have available to us over 130 years…spending 4% annually would be okay.
Although my BIG CRITIQUE here is that, IF you want to retire early, and have LONGER than a 30-year retirement…then you’re probably safest to aim closer to 3%-4% withdrawal rate because you’ll need that money to last you a lot longer. That way, even IF the market doesn’t return as much as it did historically…you’d be able to budget appropriately so you don’t run out.
The metric we should use is that it’s OKAY to spend 3-6% of your portfolio annually, IF you’re willing to cut back on your spending in the event the market goes down, or if the markets aren’t producing as much as you thought it would.
And really, all of this should be used as purely a rule of thumb, and by understanding the math behind what this is and what it does…you’ll be able to better budget how much you’ll need to save and invest.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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