The Best Withdrawal Rate

To figure out how much one needs for retirement, many turn to a 4% withdrawal rate, which is based on studies that suggest this could have been a “safe” (you wouldn’t have run out of money) strategy in the past. So once folks get a portfolio large enough that 4% of it equals their annual expenses, many will pop the bubbly and be done with work forever.

One concern is that a 4% withdrawal rate may not be safe anymore. But that’s OK, because my target withdrawal rate is safer. Much safer.

What is it? Go ahead and tell them, Dean Wormer:


0% Is the Safest Withdrawal Rate

That’s right, the withdrawal rate I’m targeting for my “retirement” is 0.0%. I want to build up a big ol’ pile of assets and never withdraw any of it. Hopefully it’ll grow with inflation AND produce enough income to fund my awesome retirement.

I imagine some of the 4% rule adherents are busy with their slide rules. “Dude! You’ll need a waaaaay bigger pile for it to work at a 0% withdrawal rate. You’re too conservative and will have to work so much longer for the Man.” If I’d like to just sit on my pile of treasure with a 40 and the TV remote, then they are indeed correct.

But I have a little secret. It’s a cunning and brilliant life hack that only a handful of people in the world know.

I’m Not Going to Retire

There is an incredibly simple and mathematically sound way to achieve a 0% withdrawal rate without saving any more than you’d need for a 4% rate: you just keep working.

That’s right: I’m not looking to achieve FIRE (financial independence / early retirement).

Rather, I’m looking to achieve financial flexibility (sadly, a much less catchy and acronym-able term).

The goal is to build up a big ol’ pile of assets, and then sit there and watch it grow.

Some would say, if you are never going to stop working, why do you need to save anything at all? And that is a great point, but I never said I was going to keep working at full capacity, did I? My pile of financial assets has already been incredibly important in giving me options and allowing me to take my foot off the gas a little, but I’ve always planned on my human capital pitching in.

How Can a 0% Withdrawal Rate Work?

Let’s say you saved enough where the 4% rule says you’re in great shape at an early age in life. Perhaps you spend $50K p.a., and your pile clocks in at a cool $1.25 million. Hooray.

But to get to a pile of $1.25 million (or whatever your 4% number is) at an early age, I’ll wager you had a really nice savings rate. That, of course, implies that your annual income is significantly higher than your expenses.

To use a 0% withdrawal rate, rather than 4%, you would therefore face the modest challenge of earning work-related income that is a fraction of your market rate. You no longer need to save, or fund college, or pay off your house. You just need to earn enough to cover your current expenses.

That seems like a rather easy challenge to win.

Also, the financial flexibility of having a nice-sized pile allows you to do things other people can’t or won’t when you do choose to work. You can start a business. You can take risks. You can invest in (potentially) more lucrative investments (e.g., angel investing).

Having a sizable asset base puts you in the enviable position of needing to work less with better work options. Your work can focus on things you like and/or are really good at, which should be the most rewarding (financially, psychologically, or both) use of your time.

Shifting to a happier balance where you can do more with less sounds more appealing to me than stumbling to a retirement finish line.

It’s a Journey, Not a Race

What worries me about a desperate race to early retirement is that that it’s probably best not styled a race in the first place. It’s a process of building up your assets – especially your financial ones – and getting the best return possible on them. Your human capital doesn’t drop to 0 at “retirement” unless you let it.

When dot com billionaires get cashed out, not that many of them just sit around drinking malt liquor for the rest of their lives. They keep working, because it’s fun, and challenging, and what else are they going to do with their time? Warren Buffett would be wandering the streets, lost, confused, and miserable, if you didn’t let him work.

The desire to create and build is innate, and measuring our efforts in dollars does guarantee some efficiency in deploying our talents, even if we don’t need the money.

I hope to keep finding things that are engaging, interesting, and yes, financially rewarding, for the rest of my life.

Retirement therefore scares me. I’ve interacted with many a retiree, and you know what they like doing, more than almost anything else? Working! They want to help, and be valued, and stimulate their brains. If you went to a retirement home and asked for some help with something, folks would be falling out of their rocking chairs to give you a hand.

Marginal Costs Are Really Important

Too much of anything is generally a bad idea.

I’ve pulled my share of 100+ hour work weeks in my life, and they were not fun. The marginal cost of an extra hour of work in those weeks was insanely high. I’ve also had weeks in consulting where I was “on the beach”, just waiting for a new engagement to start. If you asked me to do an hour of work those weeks, I would have given you a hug.

I’m fully on board that, all things equal, leisure time is more fun than work. But once you’re gone too far in one direction, “all things equal” no longer applies.

Wearing a hair shirt and killing yourself to get to early retirement, only to sit around wondering what to do now, doesn’t make much sense to me. Early retirees have taken a very good concept (deferred gratification) to an unhealthy extreme. (A more jaded view of “early retirees” is that they aren’t retiring at all and are just trying to win the limbo contest of the youngest retiree ever.)

Why not just take your foot off the gas a little but still continue to work? Shift from income-based to (you know this is coming) asset-based?

Models for Retirement

Traditional model – you work for a super long time, particularly if you have a low saving rate and ever-escalating wages (just one more year!). You golf for a little while and then die.

FIRE model – you are in a headlong rush to retire as early as possible, because you are really eager to [fill in the blank]. You work hard with a high (hopefully super duper high) savings rate.

Asset-based model – you start off as an income-based wage slave to the Man. You work and save and build a pile of assets, which starts to grow itself. As your financial assets grow, you gain a lot more financial flexibility. You don’t need to work as much, but your work is more rewarding, so you probably do it as long as you can.

Solve the Problem

Let’s say you absolutely loathe your job, and you cannot wait to be free. You’re willing to work like a dog, live WAY below your means, and save like crazy so you can get to the promised land of doing nothing all day long. You’ll be able to travel (travel!), read books, watch TV, golf, whittle, or whatever.

But what if – and I’m just spitballin’ here – you found a job that you loathed a little bit less? What if you found a job you actually liked?

What if you coupled your high saving rate with an increased ability to work on only those things you really liked or found inspiring?

What if you used the financial flexibility provided by your growing pile and were able to say no when someone asked you to do something unpleasant. You could even take a (gasp) below-market wage for yourself to get more flexibility. You could chase your entrepreneurial dreams!

Having a big pile doesn’t necessarily make you “free”, but it certainly makes you a whole lot more flexible.

The 0% Withdrawal Rate, Applied

As our assets grow, we’re not looking for a finish line of early retirement. I don’t have a countdown clock, sadly.

Rather, we’re looking to continue to shift along a continuum from income-based to asset-based. We’re hopeful to spend an ever-diminishing amount of time working on tasks of ever-increasing interest.

As long as I have family, and obligations, and risk, I may never truly be financially “free”. But I am already way more financially flexible that I thought I’d be at this point in my life, and we’re seeing nice dividends from that flexibility. I have my pile of financial assets, and my continued plans for a 0% withdrawal rate, to thank for that.


Picture courtesy of Maialisa


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