Can You Retire Early With 100% VTI Using the 4% Rule? | Q&A
The dream of early retirement is alluring, and many are exploring investment strategies to make it a reality. One popular strategy revolves around investing solely in VTI, the Vanguard Total Stock Market ETF, and leveraging the 4% rule. But is this a viable path to early retirement? Let’s break it down with a Q&A format.
What is VTI and why is it popular for retirement investing?
- Answer: VTI (Vanguard Total Stock Market ETF) is an exchange-traded fund that provides broad exposure to the entire U.S. stock market. It tracks the CRSP US Total Market Index, holding thousands of companies from large-cap giants to small-cap emerging businesses.
- Why popular? It offers diversification, low expense ratio (typically around 0.03%), and potential for long-term growth, making it a seemingly simple and efficient choice for retirement savings.
What is the 4% Rule?
- Answer: The 4% rule is a guideline for retirement withdrawals. It suggests that you can withdraw 4% of your initial retirement portfolio value in the first year, then adjust that amount for inflation in subsequent years, without significantly depleting your funds over a 30-year retirement period.
Can you realistically retire early with 100% VTI using the 4% Rule?
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Answer: Potentially, but it’s not a guaranteed path and requires careful consideration. Here’s why:
- Historical Performance vs. Future Guarantees: The 4% rule is based on historical stock market returns. While the U.S. stock market has performed well historically, future performance is never guaranteed. Periods of prolonged market downturns can significantly impact your portfolio’s longevity.
- Volatility: A 100% VTI portfolio is entirely invested in stocks, making it inherently volatile. Market fluctuations can significantly impact your portfolio balance, especially in the early years of retirement, potentially forcing you to cut back on withdrawals or delay retirement.
- Retirement Length: The 4% rule is based on a 30-year retirement. If you’re aiming for early retirement, you likely need your portfolio to last much longer, making the 4% rule potentially unsustainable.
- Personal Circumstances: Your individual spending habits, tax situation, and potential income sources (e.g., social security, part-time work) significantly influence your retirement needs and the sustainability of a 100% VTI strategy.
What are the advantages of 100% VTI?
- Simplicity: Easy to understand and manage.
- Low Cost: VTI’s low expense ratio minimizes investment fees.
- Diversification: Provides exposure to the entire U.S. stock market.
- Potential for High Returns: Historically, stocks have outperformed bonds and other asset classes over the long term.
What are the risks of 100% VTI?
- Sequence of Returns Risk: Negative returns early in retirement can severely damage your portfolio’s long-term viability. If you experience a significant market downturn shortly after retiring, you may be forced to withdraw a larger percentage of your remaining assets to cover your expenses, accelerating the depletion of your portfolio.
- Lack of Diversification Beyond U.S. Stocks: While VTI offers broad U.S. stock market diversification, it lacks exposure to international markets and other asset classes like bonds, real estate, or commodities.
- Volatility: As mentioned earlier, the stock market’s inherent volatility can cause significant swings in your portfolio’s value, leading to anxiety and potentially poor decision-making.
What are some alternative approaches or considerations for a more conservative early retirement strategy?
- Asset Allocation: Diversify your portfolio with a mix of stocks (VTI or similar ETFs) and bonds. Bonds tend to be less volatile than stocks, providing a cushion during market downturns. Adjust the stock-to-bond ratio based on your risk tolerance and time horizon.
- Lower Withdrawal Rate: Consider a lower withdrawal rate than 4%, such as 3% or 3.5%, to increase the longevity of your portfolio.
- Contingency Planning: Create a plan for unexpected expenses or market downturns. This might include having a cash reserve, delaying large purchases, or considering part-time work to supplement your income.
- Monitor and Adjust: Regularly review your portfolio and adjust your withdrawal strategy as needed.
- Consult a Financial Advisor: Seek professional advice from a qualified financial advisor who can help you develop a personalized retirement plan based on your specific circumstances.
Conclusion:
While a 100% VTI strategy coupled with the 4% rule might seem like a straightforward path to early retirement, it’s crucial to understand the associated risks and limitations. It’s essential to conduct thorough research, carefully assess your individual circumstances, and consider diversifying your portfolio to mitigate risk and increase the likelihood of a successful early retirement. The path to early retirement is a marathon, not a sprint. Planning, discipline, and flexibility are key to achieving your financial goals.
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Would definitely not retire with 100% Stocks or 100% USA stocks. But could certainly justify it during your working years for the time being.
If a 90% crash happened could you not just eventually unretire within like 5 or 10 years. You would in theory be young enough to start working again.
Holding too many bonds also lowers the probability of success in long-term retirements. You need the growth from a portfolio concentrated in stocks to ride out the low points. Long retirements are qualitatively different than a 30-year retirement since surviving a 30-year retirement with a portfolio 25 times expenses (a 4% safe withdrawal rate) barely requires beating inflation.
This is really weird and skewed information. It’s a disservice. Please listen to information from those in the FIRE community who have actually been successfully retired for many years for more realistic information. This guy just seems like he is trying to sounds like he knows something without actually understanding the information. It’s dangerous and damaging. You can definitely retire early with whatever method of the 4% rule you choose to follow and your portfolio will last your lifetime as long as you are flexible with spending during the down cycles. Or even willing to get part time supplemental income to keep your base if there is a really long down turn. But, do actual research yourself. Listen to a podcast like ChooseFI to truly understand how to manage your investments and for information on tax efficiencies, valueist spending philosophy, financial and life optimization. Good, fun information. Go take control of your own life and live your best life.
Do you count the dividends as part of the 4%
I’d do Vti BND and Voo
Rob, Do you use "The Brain" software regularly? Is the $299. annual subscription worth it? thank you.
It's VOO, SCHD, VT, and VGT for me
International makes no sense. It has failed to keep up with inflation, has underperformed bonds, and provides very little real additional safety as most US companies are already international. Apple as an example generates nearly 70% of their sales outside the US. The problem with a 4% rule is it's not based on what people actually need. The traditional advice assumes most people increase spending in retirement but most people actually spend less. If you're following good financial planning, you should be debt free in retirement.
I retired for 5 years but went back to work in my late 30's. My quality of life suffered in retirement. I became so lazy that it was even hard for me to shower in the mornings. My anxiety level skyrocketed. I just didnt want to do anything. I am much happier working a 40 hour a week job and look forward to the weekends and I feel soo much better and younger.
then it begs the question what do you need to retire at an earlier age? could you make a video about that?
Great video! That's someone who has accumulated $2mm at age of 49, a greater achievement for sure compared to many Americans. If he can't make it through his retirement years, what about most of us? Social security benefits will still be around and can add a big portion towards his retirement when he is at age 67. He also has the flexibility to retire abroad(nice life for only $30k a year in many countries) or just scale down his expenses per year to may be $60k, which is also a pretty decent amount to spend.
I have a quick question please.
What does it mean 4% adjusted for inflation?
Does it mean that I need to withdraw every year actually 4% plus the inflation percentage?
Thanks in advance!
Could you explain the effect of increasing rate on TLT and TBT? Thank you.
Ill be adding to my 100% portfolio as usual. These numbers are based in times where industrial manufacturing and technology were bot as growth oriented as todays world.
Rob, good analysis. A video capturing your thoughts on the Buffett Barbell would be interesting: 90% S&P 500 or VTI Index coupled with 10% Short (1-3 year) Treasuries. Idea is to draw on bonds in down markets and rebalance during up markets… Barbell with Javier Estrada twist
4% is a bit dangerous, I plan to use 2.5% withdrawals, but i got lucky with a windfall so there's that
The 4% rule is too rigid and impractical. I think it'd be much better to budget your income for this year based on last year's returns. Add to that a backup account to storm a few red years and you'll never outlive your money.
Put next 3 year distributions in ladder treasury and rest in MPT diversified balanced portfolio
Well people don’t realize it’s actually most foreign companies do out perform the United States, the problem is the taxes, bureaucracy, and corruption especially in “emerging markets” takes most of the earnings and so many times you’re only left with an average of 5 to 6 1/2% gains year on year. If the rest of the world was as efficient as the United States I think you would legitimately see some massive returns. Especially in like Brazil and China
Imagine if you drew 4% this year and adjusted for inflation of 7.5%…. Now realistically you could cut your lifestyle back a little bit and not really have to do this, especially because you probably would not have to worry about housing which increased 30%. But that would be a pretty interesting withdrawal
Interesting points. Could always cut back expenses during the "off" years, or look to other sources of income like a part-time job etc. Thanks for posting.
VTI has on average returned 9% since inception. So yes this guy could retire on 2m
That is why the 3 Lazy Fund Portfolio a.k.a the Bogleheads investment method is probably THE BEST method of passive investing, you need at least 1 Total US Stock Market which are proven to be the best index in the world right now, and you need another Bond ETF and International ETF
Now for me personally, since i live outside US, i pick VTI as my main Index investing and i buy Indonesian Bonds ETF ( since Indonesia gives the best bond rate in Asia, up to 8% ) and then an Emerging ETF called SCHE, because of the 2.3 something % dividend yield.
Sorry, but I am confused. What is the difference between 4% and 4% including inflation? Can you please give examples. I always assumed that 4% was just 4% per year of what you had every year.
What assumption is made for the growth of each years remaining balance of the VTI?
One thing that puzzles me, the guy said he wants to retire at 49. Generally, with retirement, you want to shift a majority of your investments over into bonds because they are more consistent in pay outs. I am not saying put all of them in bonds, but you definitely want a more consistent revenue stream. Another thing, that person wont be able to get social security until 62 at the earliest. So, during that time, they will have to pay 100% of expenses out of their portfolio. My plan is to start retirement at 59.5. And then once I hit social security age (assuming it it still around) help supplement the expenses with that.
Why are there VT haters? Genuine question. I'm a fan
@Rob Berger, Question. What would you recommend for someone like myself. I am 27 & I am trying to grow my Roth IRA & I don't want it to be a savings account. In my Roth IRA I am currently sitting at 100% VTI. Should I include anything else? When should I start to consider including bonds & what type of bonds? Lastly, should I consider the target retirement funds that M1 finance offers & which would you suggest? Thanks.
Read Die with Zero. No one talks about the opposite risk. Dying with too much money. If this happens, you could left work years earlier and enjoyed your strong, vibrant years instead of saving for a few more weeks in the nursing home.
Nice
I actually really like the 2 hour videos. Very relaxing way to spend an evening watching/listening to Rob while learning a lot about finance, investing, and sometimes chess. Most YouTubers are talking too fast and rushing to make their videos fit in a certain time window, but I like the relaxed nature of feeling like there are no time restraints and you’re just hanging out with Rob.
Instead of withdrawing money why not invest in dividend stocks and only use the amount of dividends you need, then reinvest the rest?
if you have a great pension then there is no issues with VTI
I like the short video format. I'm a relatively new watcher and subscriber, and have a quick question. You mentioned in another video as a throwaway comment that if you invest in REITs, you should only do so in a tax advantage account (ie, Roth), not a taxable account. Can you expand on that thinking, or do you have another video where you cover it?
Hey im 22 years old and I wanna get some bonds in my fidelity Roth ira. Currently I have a mix of FZROX and FZILX . I wanna add some bonds (contributions equal about 5% of my total investments ) but im having a hard time picking a bond fund. Any recommendations?
Great video as always! Do you have a list of "essential" books you recommend besides yours (great also!)… Thanks
Nicely done and very informative!