Fuel for the FIRE: Updating the 4% Rule for Early Retirees

By kgrunsfeld@hightoweradvisors.com on May 2, 2023

An updated perspective on saving and investing for retiring early

Retiring early has possibly never sounded so good — and yet seemed to be such an unattainable goal — to so many people. From generational shifts in work-life balance philosophies, to a renewed focus on passion projects post-pandemic, working until a traditional
retirement age is becoming less congruent with pre-retirees’ goals and expectations. Yet, at the same time, inflation and market losses this year are eroding the very savings — and confidence — needed to make leaving the workforce earlier possible.

To help those interested in early retirement with this dilemma, including by separating sound guidance from industry myths, we hosted Paulo Costa, PhD, an investment strategist at Vanguard whose most recent research focuses on the Financial Independence, Retire Early (FIRE) movement. FIRE followers seek to live simply, cut costs aggressively and save large percentages of their income in order to retire at a relatively young age. The movement has been
around for decades but has gained more momentum in recent years.

In our discussion with Dr. Costa, he addressed:
• How retirees can replace the concept of a fixed spending plan (e.g., the ubiquitous 4% per year) with more efficient, dynamic approaches
• The outdated historical performance assumptions upon which the 4% rule originated many years ago
• How retirees can adjust their asset allocations from historical norms to better align with their spending plans

Dr. Costa also provided examples to illustrate:
• How much more one could possibly spend in retirement by diversifying into international assets
• The significant difference that optimizing one’s social security claiming strategy can make on funding retirement
• The role that tax planning can and should play in retirement timing

For Dr. Costa’s perspective on the above topics and more, listen to Fuel for the FIRE: Updating the 4% Rule for Early Retirees webcast. And for help planning your retirement, please reach out to us to get a better understanding of what is possible. Helping clients retire on their timetable with the financial ability to fund what matters most to them is one of the most motivating and gratifying parts of our business.