STOP USING THE 4% RULE

what's up you guys it's graham here so we have some pretty big changes for anyone who's investing their money building wealth and working towards financial independence and that would be the end of the four percent rule and why we should stop using it according to the person who literally invented it to begin with see for nearly thirty years the four percent rule was known as the holy grail of making sure you have enough money invested to never have to work another day in your entire life however that was all until the other day when the inventor of the rule itself said it no longer applies and changes have to be made now of course you might be wondering but come on why does this even matter how does this even affect me i just came here for the cute turtle pictures and the three free stocks down below in the description when i deposit a hundred dollars on weeble and that's a good question but truth be told the math behind this video is probably going to be the most important calculation you're ever gonna have to make through your entire life and this applies to pretty much anyone watching who invests their money it's gonna tell you exactly how much money you need exactly how much money you could spend and what you need to do to never have to work another day in your entire life and if you think i'm joking about this just watch into the end of the video and you'll see how this math can change the way you invest your money and why it's suddenly changed that is as soon as you thank the sponsor of this video it's called this video doesn't have a sponsor so if you wouldn't mind just smashing the like button for the youtube algorithm it'll greatly help me out a lot it helps out the entire channel it even helps out the almighty youtube algorithm so with that said thank you so much for doing that and let's begin over here all right so here's why the four percent rule was such a big deal it was invented back in 1994 and used as a method of calculation to make sure you never run out of money in retirement or basically if you just want to have endless amounts of passive income forever this tells you exactly how much you need and how much you could spend now to figure this out the inventor analyzed every single year of stock market returns and then he simulated what your money would have been worth had you retired that year and then lived off your investments for a 30-year period now the goal with this was that if done right you would never run out of money and in order for this to be a success the calculation needed a few things to happen one they wanted to make sure you didn't spend too much money in the event your investments didn't do as well as you thought they would yeah i'm looking at you denny's i still have not made my money back on that one and number two they want to make sure you don't spend too little of it to the point where you can't possibly spend it all so you gift it to your grandkids to then go and blow on first edition pokemon cards so in order to calculate how much money you need invested in order to live indefinitely without ever having to work another day again in your entire life they simulated every single retirement year in history from point a to point b and then they projected how much would have been left over assuming the worst case possible scenario which is really you retiring at the peak of the market and then slowly watching your investments just get decimated day after day lower and lower and lower anyway that sounds confusing well it is a little bit confusing but here's a chart to help break that down now as you can see from the chart here if you're a hundred percent in the stock market and spend only three percent of it per year it's safe to say your money is going to last you indefinitely with a 100 success rate that's because the market on average returns anywhere from seven to nine percent annually two percent of that gets deducted for inflation so effectively by spending three percent that leaves you with a two to four percent buffer each and every year to let your investments continue to grow in value without you needing to do a single thing now on the other hand if you're 100 in the stock market and spend 5 per year over 40 years you'll only have a 76 chance of not running out of money by the end of those 40 years that's pretty much a one in four chance you're going to be completely broke by the end of the time frame which is not a place you want to be between the ages of 70 and 90. now this guideline is also known as the trinity study and from all of this research the 4 rule was born that means if you want to live off an income of 40 000 a year without you ever needing to work another day in your entire life or make any more money you'll need one million dollars invested and that will give you an 89 chance of lasting for the next 60 years without running out this calculation also works in reverse as well for example if you have a hundred thousand dollars invested congratulations you could effectively spend 333 dollars a month adjusted for inflation each and every year in passive income because that's how much your investments are going to be growing by every single year but now according to the inventor of the rule itself the four percent rule is no more and instead he recommends a change he says that now he's no longer sticking to the four percent and that that number was treated too simplistically see historically he took into account the worst possible case scenario in that you retired precisely at the worst moment possible in history and the markets were like no no no graham we're gonna punish you for retiring early so here's a circuit breaker here's a bankruptcy say goodbye to your tesla call options or in a more realistic approach this is someone who retired at the worst moment in modern history that was october of 1968 just as the stock market peaked and runaway inflation had just begun however somebody who retired at that time would still be okay if they just stuck with the four percent role for 30 years so that was basically taken with the worst case scenario in mind first and then readjusted backwards to make sure even if that happened you'd be okay but now he adds that during other times in history when inflation is low and bonds are cheap a new retiree would be able to spend much more and still be okay historically he says the average safe withdrawal rate has turned out to be about seven percent and at points it's reached as high as 13 percent of course the only way to know this is after the fact in hindsight at which point it's probably too late although given the current state of the market with low inflation and low interest rates the four percent rule has now been changed to the five percent rule meaning that you would be safe to spend one percent more per year in retirement and still have money left over by the time you reach that big like button in the sky if anything he says that now four and a half percent is the new worst case scenario and seven percent could be saved for the average 30-year retirement now that of course relies on low inflation and all of this is in hindsight after the fact so what happens over the next 10 years could absolutely change this however not everyone is happy about this and right now there's quite a few rebuttals against this one is from the popular finance blogger financial samurai he's very outspoken in his claims regarding the legitimacy of spending 4 per year and he says it was established at a time where the 10-year bond was 5 so he says that now with 10-year bonds yielding just below 1 that instead you should aim to spend just point five percent every year uh yeah you heard me correctly not five percent point five percent and he even lays it out for you in a nice chart that i'll put up right here so if you want to go and retire off forty thousand dollars a year you're gonna need eight million dollars invested now to be fair i'm not sure if he was just having a really bad day that day but him saying that caused a lot of criticism and backlash from people who say that he's lost his mind there have never been any periods of time where the stock market has returned so little over a 30-year time span and to be fair they're right but that also doesn't stop people like karen i i mean susie orman from telling people that if they want to retire they're going to need 5 million dollars her reasoning is that that's enough to raise a family and live a very middle class lifestyle and a high cost of living area while still having money left over to go on vacations every year and have a little bit left over in case something comes up or the markets go down now obviously both five million and eight million dollars is a pretty ridiculous number to come to especially if you don't spend a lot of money or you're planning to retire off forty thousand dollars a year and aspiring for five or eight million dollars is pretty daunting so i think in all fairness here i'm just gonna break down my own calculations completely independent from anybody else and i'll give you my thoughts from someone who makes youtube videos from home all day so first in order to do this we got to take a look at what's called the rolling 30-year return of the s p 500. this is pretty much just the average return that you're gonna get over any 30-year time frame and by looking at this we're going to be able to figure out the best and worst-case scenarios for your money we're going to start off with the chart that goes back the furthest and it goes all the way back to the good year of 1872. this one found that a 20-year stock market has never produced a negative return ever in the entire history of the market adjusted for inflation and even in the worst case scenario ever realized in history over 20 years that return worked out to be 0.5 percent adjusted for inflation however this was like i mentioned during the 1960s when inflation just went crazy and the likelihood of that happening again is slim to none but during any other time however the average return was more like six percent annually with a best-case scenario of 13 now another chart found that on a 30-year rolling period the worst-case scenario was an 8 annual return before inflation and the best case was nearly 15 before inflation and a third chart shows the worst possible 30-year rolling period was a 4.3 return after inflation again that would have been during the 1960s however with the unlikely chance that the worst possible case ever scenario happens in history at the precise time that you decide to retire and on top of that you never want to work another day in your entire life ever again then according to all this data in the entire history of the market over any 30-year period you would actually be okay at five percent although my only big critique here is that if you want to retire early and have longer than a 30-year retirement then you're probably safer to aim for more like a three to four percent withdrawal rate because you need that money to last you longer that way even if the market didn't return as much as it did historically you would still be able to budget appropriately to make sure you're okay but let's be real the biggest thing to keep in mind for almost everybody watching is that none of this matters that much if you're okay being flexible in your spending it's not like you have to spend five percent of your portfolio every year otherwise you're a failure and it doesn't mean you can't scale back to three percent per year if you just can't find anything to spend money on instead the metric we should use is that it's okay to spend three to six percent of your portfolio annually if you're willing to cut back on your spending in the event the market goes down or your investments don't do as well as you thought they would for example if the market goes down 10 next year then hey maybe that's a sign that you should not be buying a first class ticket to paris and maybe you should postpone staying at the ritz carlton as long as you have flexibility in your spending chances are you're gonna be fined whether you're spending three percent or five percent now this one also assumes that you're never going to make money from working ever again in your entire life and again the likelihood of that happening is slim to none so in the event you retire and take time off but then wait a second the markets aren't doing that well there's nothing stopping you from ooh spooky going back to work and making more money or you could just make youtube videos the possibilities are endless and again all of this should really just be used as a rule of thumb by understanding the math behind this and how it works you're going to be able to better budget save and invest your money just take the amount of money you want to have in retirement then multiply that by 20 to 33 and that's how much money you will need to have invested if you want a 30-year retirement just multiply that number by 20 to 25 and that's approximately how much money you'll need now if you need this money for more than 30 years or if you're an immoral vampire who intends for this money to last you for many centuries then you should probably multiply your spending by 33 and that should be enough to last you for a long time so there we go we got a full-on history lesson here we got a math lesson combined with investing and me then pestering you to hit the like button so if you guys enjoyed this video it would help me out a lot to hit the like button and also if you want get your three free stocks down below in the description when you deposit a hundred dollars on weeble because those three free stocks are totally free and they could be worth all the way up to 1 600 so with that said you guys thank you so much for watching i really appreciate it as always make sure to subscribe and hit the notification bell also feel free to add me on instagram i posted pretty much daily so if you want to be a part of it there feel free to add me there as my second channel the graham stefan show i post there every single day i'm not posting here so if you want to see a brand new video for me every single day make sure to add yourself to that and lastly like i mentioned if you want three free stocks use the link down below in the description and weeble is going to be giving you three free stocks when you deposit a hundred dollars on the platform with those stocks potentially worth all the way up to one thousand six hundred dollars so if you want those stocks use the link down below let me know which three free stocks you get thank you so much for watching and until next time

Channel: Graham Stephan

Views: 670,141

Keywords: investing, investing for beginners, investing in your 20s, how to invest, how to invest in real estate, how to invest in stocks, stock market investing, stock market investing for beginners, stock options, robinhood, robinhood app, best stock trading app, how to be a millionaire, how to be a millionaire in 3 years, credit score, credit score explained, credit card, credit cards for beginners, passive income, how to build wealth, how to build wealth in your 20s, real estate 101

Id: GaHrHTELJ2A

Length: 12min 1sec (721 seconds)

Published: Fri Oct 30 2020