American Funds Article "Can I Really Retire at 40?"

[Sarah Saverdink]

https://www.americanfunds.com/ria/insights/can-i-retire-at-40.html

Who's ready for a dose of pessimism? They feel the 4% rule is way too risky and recommend saving 36 times annual spending before FIREing at age 40. I'm all for conservative planning, but this is a bit extreme. Might as well save $10M "just in case"...

[Davnasty]

I don't agree with a 2.7% withdrawal rate but it's not an unreasonably conservative amount either.

[spokey doke]

hmmm...I wonder who all benefits from having more people save and invest more...???

[Indexer]

They feel the 4% rule is way too risky and recommend saving 36 times annual spending before FIREing at age 40.

Well considering how expensive their funds are you probably should save 36 times if you have them managing your money. ;-)



Spending an extra 1% on fund expenses for all your investments is like having a 1% higher withdrawal rate! Let's say you wanted a little cushion so instead of 4% you aim for 3.75%. To compensate for their high ERs you need to cut 1%, which gets you a 2.75% withdrawal rate, or 36 times expenses!

[Jsn]

Yup. You nailed it. For this magazine to accurately assess a 4% SWR, they’d have to undermine the entire industry they’re catering to.

They feel the 4% rule is way too risky and recommend saving 36 times annual spending before FIREing at age 40.

Well considering how expensive their funds are you probably should save 36 times if you have them managing your money. ;-)



Spending an extra 1% on fund expenses for all your investments is like having a 1% higher withdrawal rate! Let's say you wanted a little cushion so instead of 4% you aim for 3.75%. To compensate for their high ERs you need to cut 1%, which gets you a 2.75% withdrawal rate, or 36 times expenses!

[PhilB]

What a surprise, if we arbitrarily take away 20% of your portfolio at 75 your odds of running out of money by 95 increase.
My only takeaway for the paper was that the expectations for lower market returns long term still come out at 4.59% real for equities (or probably higher as I suspect the 3% inflation number was picked out of the air) so that's eased my fears about that somewhat.

[soccerluvof4]

Pretty obvious what there goal is too when they say " need sharp pencil of a financial planner"  so since we got that covered were all good! :-p

[kpd905]

Sadly, my MIL was conned into American Funds by a door-to-door Edward Jones salesman.  I had to show her the numbers of what the front-load and expense ratio would do to her over time.  I'm not sure of the exact fund she was invested in, but it had a 5.75% front load fee and around 0.7% expense ratio.

She is around 60 years old, so not really looking at a 40+ year time horizon, but a 40 year timeline could look like this.

Investor A

Invests $500 per month in Vanguard index funds at 0.05% expense ratio, gets 7% return for 40 years

Investor B

Invests $471.25 per month ($500 minus front load fee) with American funds, gets 6.35% return (0.7-.05) for 40 years

Investor A ends up with $1.257 million, and Investor B ends up with $996,000 over the 40 year period.

[chasesfish]

Good to see you on these forums Sarah!

I hope you don't get crucified, that article being from a fund group that notoriously charges 5% front loads and 5x Vanguard's expense ratios claiming people need to save more. 

This was a good writeup.  The only thing it didn't bring up is almost every 40 year old will still end up earning something between age 45 and 70 and a lot of their assumptions are all about sequence of return risk in the first 5-10 years.  If a 40 year old makes it to 50 without any major spending shocks or market drops, they'll have more money than they ever need.

[Sarah Saverdink]

I do find it entertaining that a company notorious for high-fee funds is proclaiming that everyone needs to save more money (to pay for their funds!). It's entirely possible that future market returns will not be as high as past returns, but there are many ways to adjust.

My take on the 4% SWR as I am planning to apply it:

• A 4% withdrawal will fund a nice lifestyle with a number of luxuries. If the market has a severe downturn, we will adjust our spending if necessary. If a 4% SWR represents that absolute minimum you need to withdraw to maintain a basic standard of living, there is much higher risk, as there is no flexibility to cut back on expenses. We are not willing to accept that level of risk.
• There will be many small opportunities to earn side income over a prolonged retirement if desired.

[RetirementInvestingToday]

https://www.americanfunds.com/ria/insights/can-i-retire-at-40.html

Who's ready for a dose of pessimism? They feel the 4% rule is way too risky and recommend saving 36 times annual spending before FIREing at age 40. I'm all for conservative planning, but this is a bit extreme. Might as well save $10M "just in case"...

UK based investor.  I've settled on 40x annual spending (2.5% WR) plus investment expenses as being the right number for me.

[Maenad]

Spending an extra 1% on fund expenses for all your investments is like having a 1% higher withdrawal rate! Let's say you wanted a little cushion so instead of 4% you aim for 3.75%. To compensate for their high ERs you need to cut 1%, which gets you a 2.75% withdrawal rate, or 36 times expenses!

It's actually not that bad - Kitces ran the numbers and I think it turned out that every 1% in fees results in a 0.4% higher WR. Still not good, but not quite 1:1.

[Slow2FIRE]

https://www.americanfunds.com/ria/insights/can-i-retire-at-40.html

Who's ready for a dose of pessimism? They feel the 4% rule is way too risky and recommend saving 36 times annual spending before FIREing at age 40. I'm all for conservative planning, but this is a bit extreme. Might as well save $10M "just in case"...

The 4% rate likely is more risk than someone should want to take over a 50-60 year retirement especially if you are a "barebones FIRE" type of person who is only looking to cover their expenses now (i.e. no significant "fun money" line item that they can cut back on in hard times).  3.5% was Bengen's original finding for a retirement of that length with no failures.  I believe his updated analysis finds that around 3.5% (or a little higher) is still accurate for 50+ year retirements.

[chasesfish]

Spending an extra 1% on fund expenses for all your investments is like having a 1% higher withdrawal rate! Let's say you wanted a little cushion so instead of 4% you aim for 3.75%. To compensate for their high ERs you need to cut 1%, which gets you a 2.75% withdrawal rate, or 36 times expenses!

It's actually not that bad - Kitces ran the numbers and I think it turned out that every 1% in fees results in a 0.4% higher WR. Still not good, but not quite 1:1.

Probably explains why an American Funds investor requires a higher number :)

[The_Dude]

There is a lot more pessimism or at least negativity in this thread than the article. 

The article excludes fees, so everyone claiming duh, they charge higher fees therefore you have to save more is perhaps overly critical or dismissive of the article.  I'm an indexer with a large portfolio in vanguard but I can't get over just how much the two largest American Funds have outperformed index funds since index funds were created in the 70's.  So I don't get too worried that I'm forced to buy American Funds in my 401k.  Also helps that their retirement fund options don't charge a sales load and have a lower ER.

What I took from the article was that if inflation remains lower than 3%, and future returns aren't 15%+ lower than historical then my own 30-33x ratio wasn't too far off base.  Based on lots of time with cfiresim and working in an industry that won't let me ever re-enter at a high wage after an extended break, I've always been a bit more conservative than the 4% rule / 25x.

[Bateaux]

I don't believe 4% is an unsafe amount depending on your stash amount.  If you're single 1 miilion at 4 % probably pretty safe or even 750k at 3%.  For a couple I'd say 3% on a million or 4% on 1.5 M.  I think it can scale higher at higher net worth.   A couple with between 2m and 3m you can probably get 5 or 6% and still be safe.  The smaller the stash the less room for belt tightening and more risk from an unforseen oh shit.   

[fattest_foot]

I feel like 4% works indefinitely as long as you're flexible. If we're all robots, sure, it might be suspect.

But if the market is down and you can adjust spending slightly, or pick up a part time job for a year or two making at least $10k, you should be fine. I'd rather do that in the 5-10% of scenarios where the 4% rule didn't work than work an additional 3 or 4 years full time to get to 3%.

Did you work at least 10 years? You'll probably have a safety cushion with Social Security, too!