This is Optimal Living Daily. If I were retiring today by Jeremy Jacobson of GoCurryCracker.com, and I'm Justin Mollick, this is the podcast where I simply read to you kind of like an audiobook, but on Sundays, someone else does, covering a different topic within personal development, today's topic being money, some playing an episode from Optimal Finance Daily, so that'll get right to the bonus episode in Diana's commentary as we optimize her life. If I were retiring early today by Jeremy Jacobson of GoCurryCracker.com, would you do anything differently if you were retiring in today's economic environment? What do you think of the 4% rule for people planning to retire soon?
Let's go through both of those questions. If I were retiring early today, loosely and nominally, the S&P 500 is down 20% year-to-date and 15% over the past 12 months. In real terms, it's down and additional about 9%. Headlines are very doom and gloom, inflation, Dow Jones, war, housing market, gas prices.
I even saw one headline or another that said 2022 was the worst stock market performance year to date of any year in history. Based on all of this, what would I do differently? Nothing. The 4% rule.
The 4% rule is a rough guide that says you can probably spend 4% of your initial portfolio value each year adjusted for inflation and have your retirement savings last at least 30 years. A lot of retirees, early and otherwise, use this as a planning tool. But why is it called the 4% rule and not the 5% rule or the 6% rule? Using data going back to 1871, spending 5% of a portfolio would have worked 75% of the time.
6% would have worked more than half the time. Even 9% would have worked on occasion. But 4% worked throughout the worst times in economic history with a 96% success rate. Again, pandemics, world wars, depressions, recessions.
Through all the bad times, even the worst of times, the numbers come out to about 4%. Add in Social Security and this is the closest thing you can get to guaranteed. The 100% guarantee. I don't want the closest thing to a guarantee.
I want 100%. Okay, no problem. With complete certainty, you will die and pay taxes. There are no absolutes here, but the 4% rule with Social Security is pretty dang close.
Worse than the worst. This doesn't mean times are good, of course. Headlines aren't just made up nonsense most of the time. Maybe you personally feel the squeeze of rising prices.
So the question we need to ask ourselves is this. Do I expect the future to be worse than the worst we've ever seen? Think about it for a minute. If you answered yes, retirement probably isn't for you, or at least not right now.
Retirement is an optimistic act. If you answered no, we can at least be comforted by the knowledge that we agree. Either way, it doesn't mean things are going to be easy. How would you feel if early into retirement your portfolio was worth half its starting value?
When the markets fall fast and hard, it hurts, and our withdrawal rate doesn't have much impact. If 30 to 50 years to go, you only have 12 years worth of savings remaining with a current 8% withdrawal rate, 4% equals 25 years of savings. This has happened multiple times in the past, 1929, 1965, and 2000. Maybe this year will be on that list.
We have no way of knowing until after the fact. 2012 flashback. Back in 2012, it certainly wasn't clear what the future would hold. Here's some headlines from that era.
The global economic outlook isn't pretty. 2012 forecasts and neemic growth in U.S. at best. That hangover in the aftermath of the Great Recession.
Gas prices at record highs. Slow recovery in the job market. Fiscal cliff looms. It seems the case is always death on one side and doom on the other, with our retirement plans caught in the crossfire.
The plan. Ten years after the fact, it looks like most of those headlines were intentionally gloomy to drive clicks and engagement. Maybe some of that is still true today. Low unemployment, prediction markets have inflation dropping substantially, strong U.S.
dollar, U.S. oil production at highest level since the pandemic, travel demand through the roof. The markets are not the economy. It's down, but really only to 2020 levels, et cetera.
But we can only know for sure with the benefit of hindsight. We must hope for the best and plan for the worst, or continue to work and save. Which is why, from my post on the 4% rule, we had formulated this plan. Number one, plan on a 4% withdrawal rate.
Number two, spend less in the early years, the lower the better. Minimize taxes, travel hack for free flights and hotel stays, and minimize investment costs through Vanguard Index funds. Number three, earn a little accidental income. Number four, be prepared to move bond position into stock in a severe downturn.
Number five, be okay with going back to work for a while. That still looks like a solid plan to me. I see no need to change or update it. Retracing our steps.
In late 2012, we flew to Mexico City with a plan to spend a year traveling throughout Mexico's Central and South America. Six months later, we were still in Mexico. The dollar is much stronger now, buying 19 pesos versus 12 pesos back in the day. A nice looking guest house in La Sudad on hotels.com is $19 a day, whereas I think we spent $25 a day for a fairly dumpy hotel when we first started.
That option also still exists for about $25 to $40. We then headed to another city, arriving by bus with a reservation for one night in a hostel. Today, that costs $25 a night. I think about the same.
Tuition for the Spanish school we attended is $420 for a month, which also seems about what we paid 10 years ago. I just browsed through some online menus. Prices are higher, but you can still get an entree at a mid-range restaurant for $6 to $10. And this is for restaurants that have websites and an online menu, which is not the norm.
Two of our favorite meals were a bowl of postal or torto de carnitas from little hole-in-the-wall shops. Two? Two dollars. Maybe lunch is now $3.
No big deal. This has got me thinking, perhaps we should pack up the kids and head to Mexico. This looks fantastic. In any case, spend less than the early years seems completely reasonable and achievable while retracing our footsteps.
By continuing to live below our means, we allow the portfolio to continue to grow and or weather any storm. But what if it was a requirement that we stay in the U.S. and live the American dream, pushing our budget hard to 4% with minimal wiggle room? In that case, I would probably continue to work for a while longer, which is the same as in 2012 or any year.
What can I say? I'm conservative. Would you do anything differently if you were retiring in today's economic environment? Nah, Viva La Mexico.
What do you think of the 4% rule for people planning to retire soon? It depends. Retirement is an optimistic act. There's no way of knowing what the future holds.
The 4% rule with Social Security is incredibly robust. It's walk the walk and has stories to tell, and it's still here. If you think today's economic environment is worse than the worst we've seen, it's probably not a great time to retire. If you absolutely have to spend 4.01% to meet the bare minimum standard of living you're entitled to and you're 25 plus years away from Social Security, it's also probably not a great time, same as every year.
But if you have a more sophisticated perspective and a reasonably conservative plan as we did in 2012, I would personally be fine taking the plunge. You just listened to the post titled If I Were Retiring Early Today by Jeremy Jacobson of GoCurryCracker.com. I'm constantly thinking about how to optimize my health, what supplements to take, hours of sleep, what my diet should focus on. Superpower finally takes the guessing out of it.
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I definitely see myself consulting a flat fee advisor to help me with a drawdown strategy when the time comes. However, I've heard from many friends who are currently drawing down on their portfolios that in the face of an uncertain future, you're better off relying on general rules of thumb rather than trying to suss out and predict every last detail. And that's what the 4% rule is, it's a guideline. The downside is that the model assumes that you have no other income and will never have any other income for the rest of your life, which for most people isn't true.
Social security is going to kick in at some point if nothing else. Also early retirees oftentimes go on to create businesses or find other hobbies that end up earning them some money that they didn't anticipate when they were retiring. It also assumes that you'll never decrease your spending for any reason. It doesn't consider when Medicare kicks in and reduces your healthcare costs, and it assumes that your personal rate of inflation will match the overall rate of inflation, which for the frugal among us is laughable.
Rather than plan your withdrawals for the rest of your life based on the 4% rule, it makes much more sense to have flexibility and refine your retirement plan annually. Some tools that I've heard great things about for modeling include portfolio visualizer and new retirement. And that will do it for today and another installment of Optimal Finance Daily. Have a happy Thursday, thank you for being here every day and listening, and I'll see you on the Friday show tomorrow, where your optimal life awaits.