Block Woman stands at the start of a blurry game board of Life.

You have millions of dollars. You’re 40ish years old. You’re financially independent. At least, you think you are. But that all depends on not taking too much money out of your investment portfolio. So, how much can you spend and still be “safe”?

We work with a lot of young(ish) people who became financially independent (more or less) through IPOs. They confront a question most people don’t confront for a few more decades: “I have lots of money. I think I can live entirely off of my investments. But how much can I safely spend from it?”

[Please note that in this blog post, when I talk about “spending,” what I really mean is “withdrawing money from your investment portfolio.” If you have additional sources of income, then spending <> withdrawals. I address the idea of living partly on portfolio withdrawals and partly on job income in this other blog post. In this blog post, spending and withdrawals are synonymous.]

That question is hard enough when you’re 65 and your retirement time frame is more…”normal.” But when you’re 35 or 40 or 45, it sort of hurts your brain.

It turns out, I don’t think “How much can I safely spend?” is the best question for people at this stage of life. There are other questions that are more helpful in making (especially big) spending and portfolio-withdrawal decisions!

The Usual Way to Determine How Much You Can “Safely” Spend

In “traditional” retirement (i.e., planning to live off of your portfolio for 30 years, usually ages 65-95), there’s this thing call the “4% rule,” which is not actually a rule and instead a finding, based on reviewing historical data, that you can withdraw 4% of your portfolio in Retirement Year #1, adjust that dollar amount up for inflation in each subsequent year, and not run out of money after 30 years. (I talk about it more in this post about how important it is to be flexible when you reach Financial Independence when you’re still quite young.)

I also mentioned in that post that, if your retirement will be decades longer than 30 years, that 4% “safe withdrawal rate” likely needs to be adjusted downwards. By how much? Again, there is a rule of thumb:

Adjust that safe withdrawal rate down 0.5% for each additional decade you want to live off of your portfolio. If you were retiring at 65 (30 year time frame) with $1M, you could withdraw $40,000/year (4% withdrawal rate). If you were instead retiring at 55 (40 year time frame), you could withdraw $35,000/year (3.5% withdrawal rate).

If you’re retiring in your 30s (three decades prior to age 65), your withdrawal rate, if we even think we can extrapolate that rule of thumb out that far (I’m not aware of any research for timeframes that long, and I’m also not sure if historical data over such a long time period would even be useful), would be 2.5%.

The amount you can “safely” withdraw is getting preeeeetty low at this point. Though, hell, if a 2.5% withdrawal rate is enough to support the kind of life you love and gives you meaning, more power to you! You’ve really made it!

Our Clients Are Spending Much More. Is It Still “Safe”?

Some of our clients in their 30s or 40s, living off of their investment portfolios, withdraw far more than 2.5%, 3.5%, or even 4%. In fact, in some years, they’ve withdrawn over 5%.

One thing we can confidently say: They can’t rely on withdrawing that much every year for the rest of their possibly 100-year-long lives. (By contrast, the whole point of the 4% safe withdrawal rate is that you can confidently withdraw that much every year, for a 30-year time frame.)

We have recurring conversations with these clients about withdrawal rates and dollars. We frequently hear, “Is it okay for us to withdraw this much? Would you recommend it? What do you think?”

I often say Yes, even though that withdrawal rate isn’t sustainable. (At least, we can’t rely on it being sustainable. Years in the future, if we have good stock and bond market returns in the right years, we might discover that they could have indeed withdrawn 5%+ each year and still have plenty of money! That’s the essence of “safe withdrawal rates”: they solve for safety in advance of knowing how your investment portfolio will actually grow.) 

Why do I say Yes? How can I say Yes?

Because there is One Huge Difference between “retirees” in their 30s and 40s and retirees in their 60s and 70s:

The younger you are, the more easily you can go back to work and earn meaningful income if things don’t work out as well as you’d hoped and planned.

A Different Mental Framework for Being Financially Independent When You’re Young

Most people still have a career+retirement mental framework that has us working working working…until we don’t anymore:

Most of our clients are in a stage of their lives where everyone wishes they had more time and money to spend on Not A Job. There are houses being bought. Babies being had. Children being raised. Aging parents being enjoyed or taken care of. Travel being travelled. Degrees being attained.

Maybe you, too, are in this phase of life.

I therefore invite you, especially if you already have meaningful wealth (which gives you more security and more flexibility), to instead think of your career+retirement this way:

(And before any fellow planners get shirty with me (I know you’re out there!): Yes, we should all recognize that even that second trajectory is still a simplistic way of representing our lives and careers.)

My main point is that getting significant wealth earlier in life can help you more easily reorganize your work/life/retirement chronology starting at a very early age. If you accept the “Rinse and Repeat” part of this chronology, then you can probably afford to “go harder” during the Leisure/Life/Family/Spend part.

Ask Yourself These Questions Instead

If we accept that your ace in the hole is the ability to return to work for meaningful income, and that you don’t therefore necessarily have to abide by “safe withdrawal rates,” then the question “How much can I safely spend?” is kind of a non-starter.

Especially when it comes to making big spending decisions, try these questions:

  1. How important is it that you never have to work again?
  2. If you went back to work, how quickly could you earn enough to cover this spending? Would that be worth this thing/experience you want to buy?
  3. Let’s say you spend this money. Describe the kind of life will you have afterwards.
  4. What gives you a sense of purpose or meaning in your life? How would this spending help you support that? and perhaps my favorite:
  5. Imagine that it’s five (ten) years from now, and you didn’t spend this money (to buy this thing or experience). How is your life different? What, if anything, have you missed out on? How do you feel?

I know it is hard to take a lot of money out of your investment portfolio when you’ve been given this amazing gift of significant wealth at such a young age. And I’m definitely not saying you should! Retaining wealth means retaining flexibility and safety. Those are very good things.

I believe that figuring out what would (or could) bring true meaning and happiness to your life, and thinking through how you can respond if the finances don’t work out as well as hoped, can help you make the right spending choices for you now, while still taking care of you years in the future.

If you want to ask better questions to help you design a better life—even amongst all the uncertainty!—reach out and schedule a free consultation or send us an email.

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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.

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