As I frequently (obsessively) do, I was playing around with a compound interest calculator last night. What got me thinking was what my FIRE portfolio growth after early retirement would look like in the context of the 4% safe withdrawal rate (SWR)? The answer threw up some surprising and very positive results.

What is a 4% safe withdrawal rate?

Firstly, for those new to FIRE, its useful to briefly explain the 4% SWR. In a nutshell, studies have shown that if you withdraw only 4% of your invested FIRE money per year of early retirement, then you can live off that pot forever and it won’t run out. Only withdrawing 4% also means your FIRE pot will increase over time over and above inflation. The 4% SWR assumes you are invested in the S&P 500 which has given an average annual return of 8% per year.

By limiting withdrawals to the 4% SWR, you are leaving 4% of average annual growth on the table. It’s the impact of that extra growth which I was considering last night in early hours.

You can read a much more detailed discussion on the Mr Money Moustache blog here.

Let’s run the numbers…

Let’s imagine that our good friend Jordan is planning to retire at age 40 with $1,500,000 invested.

At 40 Jordan reaches his number and finally quits his day job. Based on the 4% SWR, he can withdraw $60,000 per year from his FIRE portfolio. The magic, however, is that on average he will still have 4% per year of FIRE portfolio growth after retirement. This means that his portfolio could be worth (having made NO additional contributions):

  • At age 45: $1,831,495 allowing a new SWR of $73,259 per year
  • At age 50: $2,236,249 allowing a new SWR of $89,449 per year
  • At age 60: $3,333,873 allowing a new SWR of $133,354 per year
  • At age 80: $7,409,807 allowing a new SWR of $296,392 per year

If Jordan doesn’t increase his annual spending, he will end up withdrawing less over time as a percentage of the value of his FIRE portfolio. Ultimately, 10 -15 years after retirement, Jordan’s withdrawal rate will likely fall to 2%-3% or even less. He can spend then spend more in his later years or end up with a huge sum of money left in his FIRE portfolio to pass onto his family etc. before he dies.

If Jordan continues to do some work in retirement, his effective SWR will fall even further. This will allow more gains to compound over time. Jordan’s FIRE portfolio is a real money printing machine.

The elephant in the room

The elephant in the room is inflation.

Inflation will eat away at the purchasing power of these additional gains over time. However, inflation doesn’t apply to everything in the same way. If you own your home, ride a bike and grow your own food, you will feel the effect of inflationary pressures much less than other people. I’ve continually reduced the absolute value of my expenses over the past 3 years. This effecitvely meaning I’m beating inflation with my lifestyle habits. This is unlikely to last forever, but does mean you might not necessarily feel the full impact of inflation year on year on your FIRE portfolio.

The sooner you reach your FIRE number, the sooner you can choose early retirement if you want to. Increase your savings rate, invest in broad base index funds and compound your gains. Over time your FIRE portfolio growth will grow beyond your wildest dreams and you can live a life of abundance. If you continue to work and increase your FIRE portfolio after reaching your FIRE number, you will supercharge the entire process even more!