Equations Work Both Ways! Why FIRE May Be on the Losing Side of the Safe Withdrawal Rate Equation

Equations Work Both Ways! Why FIRE May Be on the Losing Side of the Safe Withdrawal Rate Equation

The FIRE movement…

So red hot in the news. It’s the stuff of fantasy, like winning the lottery. You put money away and then one day you tell the CEO of the hospital to cram it and you spend the rest of your days playing ukulele on the beach.

FIRE- which stands for “Financial Independence Retire Early” is a movement, especially amongst young high-stress and high-income employed individuals. The general idea is to save a large amount of money, invest it relatively conservatively, and when you have enough squirreled to live off of 4% of the total annually, you go ahead and retire.

The Safe Withdrawal Rate. The Rock on which to build your early retirement.

One of the main ideas behind FIRE is the “safe withdrawal rate” or SWR. This is the amount you could take out from your saved and invested assets annually and have a 90% or greater chance of never running out of money, even if the economy tanks. Usually it is calculated over 30 years, but some have pushed the analysis further. Depending upon your source, the amount is somewhere between 2.5% to 5%. Most people use a 4% withdrawal rate as the standard.

There are a lot of “anti-FIRE” bloggers out there. They hate the concept of a safe withdrawal rate. Suze Orman is probably the best known. They mistakenly believe that that the SWR research does not take bad economies or bear markets (often called sequence risk) or the possibility of outliving your savings into account. This is exactly what the SWR was designed to answer and it does it with reasonable reliability. Of all the research available, the SWR concept is about as solid as it gets. Cajun Bob says that if the SWR were ice, he’d drive his truck onto it. And he loves that old truck.

The Safe Withdrawal Rate Equation.

As much as the SWR concept has been discussed, there is one element that no one looks at. It sets up a simple mathematical equation: Dollars saved x 0.04 (or 4 percent) equals Annual Income. Save 100 dollars x 0.04= 4 dollars annually in income.



Looking at this closer sets up a very interesting equation. For every 25 dollars you save, you can get 1 dollar in retirement to spend annually. Neat, right? Really makes things easy when you are setting up your savings goals.

The Depressing Reality of the Safe Withdrawal Rate Equation.

Now, revel in how cool this idea is before your get super depressed. Cause, you will get super depressed… The reason is that every equation works in reverse. That’s what the equal sign means. 3+5=5+3.

Let’s say you want to withdrawal $10,000 annually for your retirement. You may need that for your property taxes when you retire, depending upon where you live. That means that you need to save $10,000 x 25= $250,000.

You’ll want to be able to get medical care after you retire early. Last time I looked, to privately insure my family of four it will cost $24,000 annually plus a $6000 deductible. So, I need $30,000 minimum to be covered, $30,000 X 25= $750,000 squirreled away at least until Medicare kicks in.

Of course, I need to eat, heat the house, run the electricity, have internet, buy clothing. You get the idea. And, if you still have a mortgage (you should never retire with debt, but many people still do) you are looking at over $1,500,000+ saved just for the basics of survival. That’s before you even start thinking about the fun stuff you could do in retirement, like vacations or a second house on the lake.

Depressing, right? You need to save a huge chunk of money to generate the income for the most basic survival. Of course, it can be done. And, many people have claimed to do it. But, to realistically retire in a manner that seems enjoyable you’re talking about millions saved. While, at the same time, paying off student loans, raising a family, sending your kids to school, paying off your mortgage, and caring for your parents (who probably don’t have two dimes to rub together and have no plan for when they can no longer care for themselves).


Living on next to nothing is an option, but do you want to age that way?

Of course, you could go the minimalist route and there’s nothing wrong with it. You move to a cheap house in the Midwest. You chop your own firewood for heat. You eat at home every meal. You’re young and healthy and so the idea of needing medical insurance is foreign. You ride your bike to the local farm commune. Vacations are camping. There is something liberating about giving up on the consumer treadmill. But, that’s for the young. Most “minimalist or LEAN FIRE” bloggers are young. They have no idea how difficult and expensive it is to age.

Doing the LEAN FIRE route reminds me a lot of when I was young. When I moved apartments, I’d rent a truck. My friends would come over and they’d help me pack and unpack. I’d pay them in pizza. The next few days, my back would be sore. Can you imagine calling my friends at my age now to move? Or, if one of them called me to help pack a truck and move a table upstairs? Not a chance! As much as TV may claim otherwise, aging is a real thing.


At my age, I have no interest in skateboarding through the snow to the supermarket to go food shopping. And health care is profoundly important and expensive as you age. You really need to put a lot aside. Even a moderate injury like a rotator cuff tear costs a fortune. Most young FIRE advocates are way underprepared for medical expenses or the effects of normal aging. Quite frankly, most of them are one platelet away from financial ruin…

Here’s the good news!

The power of one earned dollar is 25 dollars saved!

Sounds crazy right? But think about it this way, if you want to live like a millionaire earn $40,000! That’s right. Your $40,000 income equals the SWR income a millionaire can pull from their savings. If you get healthcare benefits as part of that job, it’s probably worth 1.75 million dollars! That middle-class income producing job almost makes you a multimillionaire! That’s the power of earned income. Yes, no one wants to be pounding it away at a job when that could be on a beach. But, the trade off in value is tremendous.


What are some of the implications of reversing the SWR equation?

  • You need to save a lot of money to retire. I mean a lot. You need to start from day one. I blog about  how much you need to save here.
  • If you bring in even a modest income, you can live like a millionaire. An actual millionaire. The kind that generates $40,000 in SWR annual income from their investment. Not the Scrooge McDuck kind in cartoons. A million bucks just ain’t what it used to be. It’s certainly isn’t champagne at sunset from the railing of your yacht.
  • Medical benefits from employment are incredibly valuable. They are the equivalent of $750K or more in savings withdrawn at the SWR. This could be the single most important reason to remain employed
  • Debt of any kind is a retirement killer. For every dollar that you need to pay in debt service, you’ll need to save 25 dollars. That’s going to kill your budget before it begins. Why not just use that money to pay off your debt?
  • Any income you bring in allows you to withdraw less from your savings, a lot less. This allows your savings to compound and generate more income in the future. Instead of withdrawing $40,000 every year, work part time and let the $40,000 be reinvested and compound. A few years of extra work will pay off handsomely in a future retirement income.



The sacrifices to FIRE are quite costly.

Probably greater than needed to enjoy a fulfilling career and excellent lifestyle.

The other thing to consider is the sacrifice you make to save that large pool of early retirement money. To get a decent income stream of $80,000, you’ll need to save $2,000,000. Great if you can do it. But, if you are like most typical people, saving $2 MM will take a lot of work and sacrifice. If you goal is to have that much at age 55 or 60, it’s not too bad. If you want to retire at 38, you are going to have to scrimp.

There is a Middle Road.

Use the reverse of the Safe Withdrawal Rate to your Advantage.

Since every dollar earned is worth 25 dollars saved, you could take a middle road. Instead of saving at 60-70% and then retiring to a questionable financial future or saving 10% and working until 70 or beyond, you could split the difference.

The ages I mention are simple general guidelines. You may hit them later or earlier. Life will get in the way of everyone’s best intentions, so it’s best to try to enjoy the ride. I was able to hit “loosen up” at about 44 and victory lap at 50, mostly because I was able to negotiate contracts at the 85th-90th percentile starting with my first contract renegotiation way back in 2002. The extra income probably knocked 12+ years off the timeline. 

From age 30 to 50 or so, you can put in a great work effort.

You are young and hard work can actually be enjoyable much of the time. Do locums and moonlight. Ask your spouse to work. Aim for a 40% savings/investment rate. Live in a modest house, buy a modest used car, and go on modest vacations.

You set as your goals to pay off all student debt, pay down your mortgage, save for your kid’s education, and set aside a good-sized retirement fund.  You also want to master your field, obtain a reputation as an excellent physician, and negotiate pay raises and contracts to earn at least in the 75th percentile.  It won’t be a life of fantasy wealth or consumer consumption, but it will be a very nice upper middle-class existence. One that you can take great pride in. 

Starting at age 50, you loosen up a little.

You chose one thing that means a lot to you. That may mean working less hours, taking a less paying but more meaningful job, or spending more on something you really want like travel or a dream home. Your goal here is bring in enough income to max your pre-tax vehicles, invest 25% or more, and allow your savings to grow without having to tap them. You really want to get some personal and meaningful enjoyment at this stage… just not too much! Maintaining your benefits is vital, it’s the most important criteria.

Finally, you hit your victory lap age.

That age is a personal choice and may be based more on circumstances than a set number. Most people would use 55, 59 ½, or 62 based on various tax or social security laws. At this age, you really just do only what you want. You take a job paying much less than you are worth. Maybe you teach or open that bookstore. Maybe you set up a travel service. Most likely, you’ll stay in medicine, but have clinic 3 days/week and see new patients for a full hour.


Whatever you decide to do, you’ll want to bring in enough income that you do not have to withdraw more than 50% of your SWR. Ideally, you still make enough to continue to invest or at least max your IRA or 401k- that’s up to you. Again, since each dollar you earn is worth 25 dollars saved and as health care will be your biggest expense, you will need benefits from this job to really make this work.

Full retirement.

When you do finally fully retire, you will be debt free. Your savings will have been efficiently managed to give you a high-quality lifestyle. You will have used the 1 dollar earned to 25 dollars saved equation to smooth out any bumps or problems. You will have lived a high-quality and rewarding working life with just the right amount of sacrifice mixed with enjoyment.


No matter how you do it, the single easiest way to be financially successful is to earn more income.

And that means being able to negotiate your best doctor contract.  Don’t make the mistake of ignoring this vital skill. You could easily retire 5-8 years earlier if you successfully negotiate your physician contract to earn what you truly deserve.  Learn more


So, what do you think? Is the math on the SWR just completely depressing? Or, do you find it uplifting because at least you have a goal. What about the middle road? Does that appeal to you? Let us know in the comment section.

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