The 4% Rule. In the personal finance community, it hailed as the golden rule for achieving financial independence.

In this post, I want to challenge the 4% rule, and discuss how it may not be the only way we measure our progress to FI.

Along the way, I’ll be discussing a handy calculator that shows an alternative way to think of FI readiness. Download below!

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4% of what?


The 4% is the nickname for a study performed from 3 professors at Trinity University. The study aimed to determine what was a “Safe Withdrawal Rate” (SWR) to allow a stock/bond portfolio to survive a 30 year retirement.


A Safe Withdrawal Rate is the percentage of your overall portfolio that you should expect to be able to pull annually from your portfolio without it failing you – running out of money.


So on a portfolio of $100,000, a SWR of 10% would be $10,000 per year.


The study concluded that a 4% SWR was a reasonable expectation to survive a 30 year retirement.


This is huge for the personal finance community! It allows us to easily calculate how large of a nest egg we should need before we quit the rat race!


Using these guidelines, we are able to take our annual desired cost of living, and multiply it by 25x to calculate the size of our portfolio required before we hang up our hat.


For the non math-y types, that is because 1 / 4% is the same as x 25.


So applying this logic, if we desire a lifestyle of $60,000 per year, we would need to save up $60,000 * 25, or $1,500,000 before we would consider it “safe” to stop earning.


Seems solid, what’s the problem?


It’s great to have such an easily applied rule to follow. But there are few omissions that I want do discuss in this post:


Issue 1: The study assumes you will never earn another dollar


This one is crazy to me. Especially for the FI community.


We are a bunch of eager beavers, that are looking for the shortest path to freedom.


I haven’t met a single early retiree that decides to simply sip mojitos all day every day and never do another productive project in his or her life.


We work hard to get to FI. I don’t know about you, but I don’t intend on stopping altogether.


I would be way to terrified of being bored out of my brain to intentionally PLAN on never making another dollar.


In fact, part of starting Nine to FI is to be the project I dive head first into once I finally pull the FI cord and open up hours of time every day.


Besides, it’s never been easier to start your own business online


Starting a business isn’t a terribly scary and risky thing like it was decades ago.


There’s no insane start up costs. No brick and mortar store to insure. No employees to pay. All you need is a laptop.


I’m not saying we’re all going to be millionaires sitting on the beach. And that certainly is not my goal.


But the opportunity is here for us to follow a passion, whatever it is, and make a consistent stream of money from it.


We are not going to be 65 years old and in failing health when we “retire”


I get it. The study was based on the common logic of retirement. You retire when you’re just too tired to lift another finger. Oh, and I guess there’s no more motivation to learn another skill or trade.


But that’s not us. We can do better.


Issue 2: The portfolio assumes only Stocks / Bonds


The study stress tested various allocations of stock/bond portfolios to arrive at their conclusions. And this makes total sense – there’s good data that shows how these asset classes have performed over time. So they can make some assumptions on future performance.


But what about real estate? Residual income from a side hustle? Your blog’s income?


In general, business income is not taken into account.


And it also makes sense – how in the world can you publish a research paper about each individual’s own side income streams? It simply wouldn’t make sense.


But it’s YOUR financial independence we are talking about here. Don’t turn a blind eye to the incredibly important aspect to your financial future.


So how can we do better?

Let’s take a look at what our “portfolio” will really look like after FI.


Yes, we will have stocks. Probably a few bonds.


But what about rental property?


A side business that we work on after the kids go to bed? (Hint: I think everyone should be doing this!)


I don’t think the only resource we should consider is our finances.


As the bible says, “Time, Talent, and Treasure.” Treasure is the last of the resources listed.


And if we are planning our time after FI – our Time bucket is going to grow significantly. That’s kind of the  whole point.


So let’s think about our Talent for a minute. What do you do well, that you also love doing?


I would challenge you to think of a business around your passion, now. Not to start thinking about it after you’ve left your career. Well in advance.


And that’s because I firmly believe that anyone – especially the smart people who have already discovered the FI concept – can make some significant residual income doing what they love, when they want to do it.


And besides, making money is fun! Who would want to completely stop earning money?


And when I say business – it doesn’t have to mean a major company. It could be a blog, a Youtube channel. Shoot, even just an instagram account.


Do you have a special skill that you developed at your career? Something that you fear you will miss when you quit? Start teaching people online about this special skill that you have.


If you find it interesting, I guarantee others will too!


OK – I feel like we got side tracked. How does this impact my SWR and does it help me retire earlier?


What does residual income do for your SWR? It has a major impact. That’s why I stayed on the topic of starting a business for so long. Let’s take a look:


Let’s assume you want to live off $60,000 per year after FI. But you started blogging 2 years prior to quitting, and began earning $2,000 per month consistently through ads and affiliate products. You love what you do, and would love to dedicate some of your FI time to growing the blog.


So how could that $2,000 impact your SWR?


Well, $2,000 per month becomes $24,000 per year! And that directly reduces the amount of money your stock/bond portfolio needs to sustain in retirement!


So let’s use the 4% again. Without having the side hustle income factored in, you would need $60,000 x 25 = $1,500,000 in your portfolio to support your retirement.


But including the $2,000 per month, your $60,000 per year is reduced to $36,000 per year that is not covered by your income. So the remaining living expenses would require $36,000 x 25 = $900,000 in the portfolio to support your retirement.


That’s a 40% reduction in portfolio required to support your FI goals! How many years earlier would you be able to create your own freedom, if you included one of your passions into your income streams?


But wait, there’s more – don’t forget about taxes!


Having a side hustle is the gift that keeps on giving! Once you have your side business up and running, you’ll be able to further reduce the amount of taxable income you claim through big tax deductions!


You’ll be able to take a good portion of your rent, internet bill, electronic purchases, completely out of your taxable income!



A couple of disclaimers before you all start quitting on me


We can’t predict the future of our businesses. Does that even need to be said?


Don’t go out and assume your business is going to make $20,000 per month consistently until the end of time.


It’s good to test your hand for a few years as a side hustle before you start accounting for it in your FI number. And I would still probably aim to have more than the minimum required portfolio balance before calling it quits. You don’t want to stress yourself out in the beginning as you are finding your stride as a FI-preneur.


I’ll tell you one thing though. I believe anyone can create a meaningful income stream with consistency and determination. And it can be so much fun –  who WOULDN’T want it in their life once they are granted freedom?


Especially when you see the impact that even the tiniest residual income stream can have on your FI number, you’ll see why I think passion projects should become a large part of any FI plan!


Click below to download a copy of my spreadsheet for yourself, to see what your own entrepreneurial ideas could do to your FI date!


Download Your own Free FI calculator to go along with this post!

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So what do you think? Will you be including some assumptions of future earnings in your FI plans? Let me know in the comments below!