“Would you do anything differently if you were retiring in today’s economic environment?”

“What do you think of the 4% rule for people planning to retire soon?”

Let’s go through both of those questions.

If I Were Retiring Early Today…

Loosely and nominally, the SP500 is down 20% YTD and 15% over the past 12 months. In real terms it is down an additional ~9%.

Headlines are very doom and gloom… INFLATION! DOW JONES! WAR! HOUSING MARKET! GAS PRICES! I even saw one headline or another that said 2022 was the worst stock market performance year to date of any year in history.

Based on all of this… what would I do differently?


The 4% Rule

The 4% Rule is a rough guide that says you can (probably) spend 4% of your initial portfolio value each year, adjusted for inflation, and have your retirement savings last at least 30 years.

A lot of retirees (early and otherwise) use this as a planning tool.

But why is it called the 4% Rule and not the 5% Rule or the 6% Rule? Using data going back to 1871, spending 5% of a portfolio would have worked 75% of the time. 6% would have worked more than half the time. Even 9% would have worked on occasion.

But 4% worked through the worst times in economic history with a 96% success rate.

Inflation. Pandemics. World wars. Depressions. Recessions. Through all the bad times… even the worst of times… the numbers come out to ~4%.

Add in Social Security and this is the closest thing you can get to guaranteed.

The 100% Guarantee

“I don’t want the closest thing to a guarantee. I want a 100% guarantee!”

OK, no problem. With complete certainty… you will die. And pay taxes*.

This isn’t meant to be crass, we are just talking probability… read the post, You Will Die Before You Run Out of Money… for important perspective.

Death is guaranteed – Source

There are no absolutes here, but the 4% rule with Social Security is pretty dang close.

* or maybe not.

Worse than the Worst

This doesn’t mean times are good, of course. Headlines aren’t just made up nonsense (most of the time.) Maybe you personally feel the squeeze of rising prices.

So the question we need to ask ourselves is this… “Do I expect the future to be worse than the worst we have ever seen?”

Think about it for a minute…

If you answered yes… retirement probably isn’t for you. Or at least not right now. Retirement is an optimistic act.

If you answered no… we can at least be comforted by the knowledge that we agree.

Either way… it doesn’t mean things are going to be easy.

How would you feel if early into retirement your portfolio was worth half its starting value? When the markets fall fast and hard, it hurts, and our withdrawal rate doesn’t have much impact.

With 30 to 50 years to go… you have only 12 years worth of savings remaining with a current 8% withdrawal rate? (4% = 25 years of savings.)

This has happened multiple times in the past…. 1929, 1965, 2000 (See: How are the 2000 and 2008 retirees doing?)

Maybe 2022 will be on that list. We have no way of knowing until after the fact.

2012 Flashback

Back in 2012 it certainly wasn’t clear what the future would hold.

Here are some headlines from that era:

“The global economic outlook isn’t pretty”

“2012 forecast: anaemic growth in US at best”

“Debt hangover in the aftermath of the Great Recession”

“Gas prices at record highs”

“Slow recovery in the job market”

“Fiscal cliff looms.”

It seems the case is always, death on one side and doom on the other… with our retirement plans caught in the crossfire.

The Plan

10 years after the fact, it looks like most of those headlines were intentionally gloomy to drive clicks and engagement.

Maybe some of that is still true today (low unemployment, prediction markets have inflation dropping substantially, strong US dollar, US oil production at highest level since the pandemic, travel demand through the roof, the markets are not the economy, markets down but really only to 2020 levels, etc…)

But… we can only know for sure with the benefit of hindsight.

We must hope for the best and plan for the worst (or continue to work/save.)

Which is why, from my post on the 4% rule (read at least the part on a Foundation for Long Term Success), we had formulated this plan:

That still looks like a solid plan to me, I see no need to change or update it.

Retracing our steps

In late 2012 we flew to Mexico City with a plan to spend a year traveling throughout Mexico, Central, and South America. 6 months later we were still in Mexico…

The dollar is much stronger now, buying 19.x pesos vs 12.x pesos back in the day. A nice looking guest house in La Ciudad on hotels.com is $19/day… whereas I think we spent $25/day for a fairly dumpy hotel when we first started (that option also still exists for ~$25-$40.)

Mexico City guest house, $19/day (photo from hotels.com)

We then headed to San Miguel de Allende, arriving by bus with a reservation for one night in a hostel. Today that costs $25/night… I think about the same. Tuition for the Spanish school we attended is $420 for a month which also seems about what we paid 10 years ago.

I just browsed through some online menus in SMA… prices are higher but you can still get an entree at a mid-range restaurant for $6-$10 (and this is for restaurants that have websites and an online menu, which is not the norm.) Two of our favorite meals were a bowl of pazole or a torta de carnitas from little hole-in-the-wall shops. Lunch for 2 = $2. Maybe lunch is now $3, no big deal.

This has got me thinking… perhaps we should pack up the kids and head to Mexico! This looks fantastic!

In any case… “spend less in the early years” seems completely reasonable and achievable while retracing our footsteps. By continuing to LBYM we allow the portfolio to continue to grow and/or weather any storm.

But… what if it was a requirement that we stay in the US and live the American dream… pushing our budget hard to 4% with minimal wiggle room?

… in that case, based on current economic conditions I would probably continue to work for awhile longer… which is the same as in 2012 or any year.

What can I say, I’m conservative.


“Would you do anything differently if you were retiring in today’s economic environment?”

Nah – viva la Mexico!

“What do you think of the 4% rule for people planning to retire soon?”

It depends… retirement is an optimistic act. There is no way of knowing what the future holds.

The 4% rule with social security is incredibly robust. It’s walked the walk and got stories to tell, and it is still here.

If you think today’s economic environment is worse than the worst we have seen, it’s probably not a great time to retire.

If you absolutely have to spend 4.01% to meet the bare minimum standard of living you are entitled to and you are 25+ years away from social security… also probably not a great time (same as every year.)

But if you have a more sophisticated perspective and a reasonably conservative plan, as we did in 2012… I would personally be fine taking the plunge.

Would you retire in in 2022? Please share your view.