Chapter 3 — Making Money Last Forever

This chapter explains the 4% rule — a simple, research‑backed way to estimate how long your money can last once you stop working. You’ll learn what the rule means, why it works, and how to translate it into real‑world numbers. This chapter is about understanding sustainability, not building a portfolio. A single‑ETF example is included only to show how simple the underlying idea can be.

Preface

Most people who want to retire — or semi‑retire — aren’t actually asking, “How do I get rich?”

They’re asking a much more human question:

How do I make sure I don’t run out of money?

This chapter gives you the simplest, most reliable tool we have for answering that question: the 4% rule. It’s not magic. It’s not a guarantee. It’s not a promise of perfect markets. It’s a framework — a way to think clearly about how long your money can last once you stop working.

What the 4% Rule Actually Says

The 4% rule comes from a study that looked at every 30‑year period of market history going back to the early 1900s. The question researchers asked was simple:

If someone retired with a portfolio of stocks and bonds, how much could they withdraw each year — adjusted for inflation — without running out of money?

The answer, across almost every scenario, was:

Withdraw 4% of the portfolio in the first year
Then adjust that dollar amount for inflation each year after

That’s it. For example, if you retire with $1,000,000:

Year 1: withdraw $40,000
Year 2: if inflation is 3%, withdraw $41,200
Year 3: adjust again
And so on

The portfolio is expected to grow enough — on average — to support those withdrawals for 30 years or more.

The "Water Tank" Analogy (The 4% Rule)

Imagine you have a massive water tank in your backyard.

Your savings is the water inside.
Your investments are the rain that falls into the tank.
Your 4% withdrawal is the faucet at the bottom.

If you open the faucet too wide (taking 7% or 10%), the tank will eventually run dry, especially if there’s a "drought" (a bad stock market year). But if you only let out a steady trickle (4%), the rainfall usually replaces what you use. The tank stays full, and you have water for life.

Why It Works

The 4% rule works because of two forces:

Long‑term market growth

Over long periods, broad stock markets have historically grown faster than inflation. Not every year. Not every decade. But over the long arc, growth has outpaced withdrawals.

The balance between withdrawals and returns

If you withdraw too much, the portfolio can’t recover from downturns. If you withdraw too little, you’re unnecessarily restricting your life. Four percent turned out to be the sweet spot — historically low enough to survive bad markets, but high enough to support a real life.

What the 4% Rule Doesn’t Mean

This is where people get confused, so let’s be clear:

It is not a guarantee
It is not a promise that markets will behave
It is not a rigid rule you must follow
It is not a reason to chase high‑yield investments
It is not a replacement for judgment

The 4% rule is a planning tool, not a prediction. It gives you a starting point — a way to estimate how much you need and how long it might last.

Translating the Rule Into Real Life

Here’s what the 4% rule means in human terms:

A $500,000 portfolio supports about $20,000 per year
A $1,000,000 portfolio supports about $40,000 per year
A $1,500,000 portfolio supports about $60,000 per year
A $2,000,000 portfolio supports about $80,000 per year

These aren’t goals. They help you understand the relationship between portfolio size and lifestyle. If you know your annual spending (from Chapter 1), you can now estimate the portfolio needed to support it.

A Simple Example Portfolio

You don’t need a complicated portfolio to understand the 4% rule. In fact, the research behind it often used very simple allocations. If you wanted the simplest possible illustration, a single broad‑market ETF — something like VTI or SCHB — historically produced the kind of long‑term returns the 4% rule is based on.

This is not a recommendation. It’s just a reminder that the underlying idea is simple. You don’t need 27 funds and a spreadsheet that looks like a NASA launch sequence.

The Real Purpose of the 4% Rule

The 4% rule gives you something most people never get: a way to think about the future without fear. It tells you:

Roughly how much you need
Roughly how much you can spend
Roughly how long your money can last

It turns retirement from a vague hope into a plan you can actually understand. And once you understand it, you can start shaping your life around it — whether that means retiring early, working part‑time, taking a sabbatical, or simply knowing you’re on track.

📘 How We Know the 4% Rule Works (The Short Version)

Researchers tested the 4% rule using every 30‑year period of market history going back over a century. They also ran thousands of Monte Carlo simulations — randomized market paths that model good years, bad years, and everything in between. Across almost all scenarios, withdrawing 4% in the first year and adjusting for inflation kept the portfolio intact for 30+ years. You don’t need to run the math yourself — the point is simply that the rule has been tested under conditions far worse than most people will ever face.

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