justostash, there is no set rules that determine with certainty if you are ever FI or not. Any “rule” that comes from historical analysis, such as the 4% rule, is based on statistical methods that aim to reduce the likelihood of the portfolio running out during your lifetime. When looking at historical data, even portfolios with a 4% withdrawal rate fail (even though it happens a small fraction of all of the simulated runs).
Further, there is the chance that the market’s past performance will not accurately reflect the future. For instance, the market could continue to climb and climb, and a 4% withdrawal rate could be overly pessimistic. Or it could crash for longer than it ever has crashed before, making the 4% rate too optimistic. We can’t know this until it happens.
Anyway, the way I think about this is that it is about building the confidence that you are FI.
I’ve been studying the historical success method recently, and I think there are some things that could help you determine if you feel confident enough to call yourself FI.
1. long retirements are less likely to succeed than early ones. So someone who is 30 is more at risk for “failed” portfolios than someone who is 50, given the same start year, portfolio, withdrawal strategy, etc. Looking at “extreme” situations makes this very clear: given $1,000,000, you could probably withdraw 50% of the portfolio and not run out of money if you only plan to FIRE for 2 years. This same idea (just less exaggerated) applies to longer retirements as well.
2. retirements that begin right before big stock market crashes are the ones least likely to succeed. So if you think the market is due for a correction, then maybe this is worth factoring in.
3. folks who can adjust their spending when there is a market downturn (i.e.; going for 3% or 3.5% inflation-adjusted withdrawal rates, rather than 4%) are more likely to have a stash that lasts as long as they do. How well do you think you would do living on 3% of your portfolio for a few years? Would that be too difficult for you to do, or do you think you could pull it off?
With all of this said, I don’t want to scare you into thinking that 4% is risky, or anything like that. The presence of risk doesn’t make something risky (a lot of risk is what makes something risky). The 4% withdrawal rate is a conservative estimate, and has a high rate of success independent from the above factors.
These are just some things to consider that may help you adjust your confidence level.
One more thing: there are “smarter” withdrawal strategies than the 4% rule. Right now, I prefer a slightly modified version of the
Hebeler autopilot method. My modification is to put a cap on withdrawal rates during good years. Going from a 4% withdrawal rate to something like a 10% withdrawal rate, and then back down to 4% sounds like it would be very annoying to adjust to. I’d rather my spend rate be a little more consistent.