Why you will NEVER retire

What's up, Graham? It's guys here. So if you want to quit your job, stop working, and build wealth, there's a strategy that allows you to live completely off your investments for the rest of your life without ever having to worry about money ever again. This is what's typically known as the four percent rule. This gives you the complete blueprint to financial freedom, which simply puts allows you to spend four percent of your portfolio every single year. If this is enough, then congratulations! You never have to work another day in your entire life ever again.

Except there's a problem. Now that stocks and bonds have had the worst year since 1932, there's come the realization that the four percent rule may no longer work. Because of that, your entire investment strategy may have to change to avoid complete financial ruin. That's why it's so important that we cover exactly which changes are being made, why the four percent rule may soon fail, and what you could do about it to make money as soon as we thank the sponsor of today's video, the Subscribe button. Because for the low cost of nothing, you'll get three new videos every single week. And as a thank you for doing that, here's a picture of a baby turtle. So thanks so much, and now let's begin!

All right, so for those unaware, I've been an avid follower of what's called the financial independence retire early community, where the entire goal is to track your expenses, optimize your investments, and grow your portfolio to the point that it would sustain your lifestyle for as long as you live. To be honest, the framework is way easier than most people think. See, the basic early retirement strategy suggests that you would be able to spend four percent of your portfolio every single year throughout retirement without running out of money in the worst-case scenario.

That's because, as your portfolio grows an average of seven and a half percent adjusted for inflation, data shows that you could safely spend half of that and leave the rest in your portfolio to continue growing so that you'll have more to pull from in the next year. But there were a few pitfalls that everyone needs to know about if you were to do this successfully. Like, number one: you got to make sure not to spend too much money in the event your investments don't pan out as expected or if Elon Musk buys Twitter.

And two: you don't want to spend too little money to the point where you could have spent more but didn't because people on Wall Street Bets kept saying that Daddy Jerome Powell is going to rug the market again. That's why researchers simulated every single retirement year in history, starting from point A to point B, and then projected how much money would have been left over assuming the worst possible scenario. So to calculate the precise amount that you could withdraw, they assumed the worst possible scenario over the last 120 years, back-tested it against the following 30 years, and from that, the four percent rule was born.

By following this, you would have a 99 percent chance of not running out of money during a typical 30-year retirement, even if we saw a market drop like we did in 2022 or the runaway inflation that we saw in the 1970s. However, other experts are warning that the four percent rule is too simplistic and can actually leave you broke if you're not careful. And because of that, we've got to talk about the YouTube channel Ben Felix. If you haven't seen his videos before, I would highly recommend them because he's a portfolio manager with PWL Capital in Canada and has some really great insights into the world of investing, including why the four percent rule may no longer work to start.

He argues that the four percent rule is based on a standard 30-year retirement. So if you plan to live longer than that without working, then chances are you could run out of money. Just take a look at this: as you can see on the left, if you're 100 percent in the stock market and spend four percent a year, you have a 97 percent chance of that lasting you for 30 years. From there, if you're 75 percent in stocks and 25 percent in bonds, that increases to a 99 percent chance of success, which is pretty good. But if you want that money to last you for 60 years, that success rate declines to 85 percent, which means you might go broke.

Therefore, if you're young and you want to retire before the age of 65, then most likely the four percent rule is not going to work, and it's probably better to spend three percent instead. However, this is really only the tip of the iceberg. Because as Ben points out, there's another problem. He mentions that the performance is based on United States stocks and bonds, which have seen some of the strongest returns throughout the entire world, but it's unclear as to whether or not that'll continue.

He cites a study known as the equity premium puzzle, which basically suggests that investors are compensated extra for taking on additional risk. But when those risks never materialize, then investors simply get lucky, and there's a chance all that luck could eventually run out. For example, he cites research that shows that the U.S. could be the ultimate survivorship bias with high returns being the exception and not the norm. Because of that, they mention that stocks could only return four percent above risk-free treasuries instead of the historical six percent that we've all gotten used to, leading, of course, to lower returns.

The other issue he mentions is that once you look beyond the United States, other developed countries see nowhere close to the average seven to ten percent that we see here. So what's the solution? The issue is that if you're young and you want to retire when you're young, you'll have to significantly readjust your expectations if you want your money to last for 40 or 50 years. Because even though the United States has done exceedingly well since 1920, it's not guaranteed to continue based on every other developed country out there.

So as a result, you gotta spend less. In this case, Ben argues that the 2.7 withdrawal rate is going to be the safest for people retiring today to give them the highest chances of living a long life without running out of money, assuming the worst possible case scenario, which is basically that the U.S. doesn't give us the returns that we've all become accustomed to. Of course, is there a chance this happens? Absolutely. Is it likely? Who knows? Is it being overly conscious? Probably.

So in order to get the full picture, let's look to some of the other experts. Because I have to say, there's a lot more that meets the eye, and there could be a very simple way around this if you want to make sure you don't run out of money. Let's start with Vanguard. They found that more than one in five Millennials plan to retire before the age of 60. And because of that, using past returns may no longer be accurate for the future. For example, historically, they mentioned that we've seen a 10 percent return in stocks, 5.3 percent in bonds, and 2.8 percent for inflation. But going forward, they're forecasting a four percent return for stocks, 1.3 percent for bonds, and 1.5 percent for inflation.

This would greatly influence how much your account will grow over the next decade. Not to mention, going from a 30-year to 50-year retirement horizon decreases the probability of success from 81.9 percent to 36 percent, which means chances are you're going to run out of money way faster than you expect, and the four percent rule would no longer work. Charles Schwab also says something similar, believing that a 3.4 withdrawal rate would be sufficient for 30 years, with less if you need the money to last longer.

As far as what the creator of the four percent rule has to say about all of this, he went on record to note that current market conditions may require an even more conservative approach. The combination of eight and a half percent inflation with high stock and bond market valuations makes it difficult to forecast whether the standard playbook will work for recent retirees. The issue today is there's not a backdated history that deals with prolonged inflation above eight percent during a time where interest rates are coming off record lows and stock market valuations are coming off record highs.

After all, if you simply adjusted your spending to keep up with inflation, you would need to spend a lot more money than your portfolio might be able to handle during a time where things, like the cost of eggs, have tripled in price from the year prior. Not to mention, even Morningstar came on record to say that if inflation, which is at a 30-year high, remains at or near today's level for an extended period, even a reduction to 3.3 percent could prove optimistic. But even with all of that, what does the market have to say about all of this? Because the market can't speak, we've got to look at the data.

This all starts with what's called the S&P 500's rolling 30-year return, which is basically the average return that you could expect over any 30-year period. By doing this, we could determine the best and worst case scenarios for your money. We'll begin with this graph, which dates all the way back to 1872 and shows that a 20-year stock market has never once produced a negative result adjusted for inflation in history. In addition to that, the worst case ever realized was a 0.5 percent average return adjusted for inflation, and the best case was a return of 13.

So there's a lot that could happen in between. Although from there, if we do the same calculation but extend it to 30 years, we could see that the worst case was a return of 4.3 percent after inflation, which was even during the stagflation era of the 1960s. So given all this information, if you're looking at a standard 30-year retirement and you want to be sure you're not going to run out of money, based on all the past performance and data behind us, then yes, spending four percent would have been okay if you're diversified across international stocks, domestic stocks, and bonds.

However, with the unlikely chance that the worst case scenario is going to happen at the precise moment that you retire, and every economic model for the United States decides to fail at the exact same time, then fortunately there are a few tips to help you weather the storm. And this is what they are: first, spend less. I mean, I know it sounds obvious, but if you want to retire for longer than 30 years, then most likely you'll have to reduce your spending to three percent depending on how long you want to live off your investments. For some people, this might mean spending 2.7 percent, like Ben Felix recommends, or three and a half percent if you want to retire for 35 years.

Just knowing that the four percent rule was only designed to last you for 30 years is going to help point you in the right direction to determine how much you will actually need. The second practice variable spending. This means when times are good and the market is up, you could spend more, but when the market is down and times are bad, you'll spend less. It might kind of look like this chart here, where your spending will never exceed four and a half percent, but it'll never go below two and a half percent. That way, you'll still have wiggle room on anything that isn't 100 percent necessary.

And third, diversifying to international markets. As you can see, throughout the last 50 years, international stocks have actually outperformed the U.S. on several occasions, and even Vanguard believes that a mixed portfolio could increase the chance that your money lasts by more than 20 percent. Honestly, I think Vanguard just really summarized it perfectly. They say, by adding international diversification to the portfolio, the withdrawal rate can increase from 2.6 to 2.8 percent.

Finally, by using a dynamic spending rule, the rate could rise to four percent. Of course, keep in mind that this still only accounts for a 30-year retirement. So as far as what I think, coming from someone who actually plans to retire for longer than 30 years using this exact method, here's what you need to know and what I'm personally doing. I think the four percent rule is great because it gets people to think about how much money they spend. I mean, let's be real; most people have absolutely no idea how much their lifestyle costs.

But by calculating how much money goes out, you're able to work backwards to determine how much you need to retire. In addition to that, it also helps you separate how much you want to have versus how much you need to have. For example, your mortgage payment could be non-negotiable, but the Mercedes in the driveway could easily be replaced with a Toyota costing one-third of the price should something happen. For many of us, food shopping and entertainment is purely extra. So if you don't mind cutting back when the market is down, you'll go a lot further in terms of how long your portfolio is going to last you.

That's why I personally follow the three percent rule, knowing that I could easily cut back if needed without overextending myself in the worst-case scenario should something happen and I live to 120 years old and still want to play around with reef aquarium, which happens to be a very expensive hobby. Another interesting point is that generally, the older you get, the less money you spend. In fact, it was found that spending declines by 10 percent for each decade in retirement. So most likely you're not going to spend as much money at 80 years old as you will when you're 40.

I guess all that is to say that I think it's reasonable to plan for lower returns because, worst-case scenario, you came prepared; in best-case scenario, you'll have more money left over in the future if you decide to spend it. Plus, just because you're retired doesn't mean you can't ever work again. So if you're open to potentially going back part-time or returning to the office if you absolutely have to, then most likely four percent is fine, or three percent if you're planning to retire for a long time or just in case we're absolutely screwed.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram, and don't forget that you can get a free stock at their sponsor public.com down below in the description with the code "GRAM" when you make a deposit. Because that could be worth all the way up to a thousand dollars. So if you're interested, let me know what stock you get. Thank you so much, and until next time!