[Retire Early]
The 3 Big Numbers for Early Retirement: Four, Two and Zero

The 3 Big Numbers for Early Retirement: Four, Two and Zero

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This article was posted January 1, 2019.

[Retire Early]

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I'm now in my 25th Year of Early Retirement. When people ask me what's the most important factor that allows one to retire early, I tell them that it comes down to three numbers: four, two, and zero.

The 4% rule

The 4% Rule is the well-worn retirement planning advice that one can take a first year withdrawal of 4% from a reasonably well-diversified portfolio (e.g., $40,000 from a $1 million portfolio) and then adjust that annual withdrawal for inflation in subsequent years with considerable safety. The concept is buttressed by several academic studies using historical stock market returns.

About the only people who have a problem with the 4% rule are those representing Wall Street or insurance industry interests. (e.g., Study from 'Professor of Retirement Income' Dr. Wade Pfau shows you can double your income by dumping your financial advisor. )

Which brings us to the "2% rule".

The 2% rule

The 2% Rule for Retirement Savings

If you can hold on to most of the 2% per year or so that the average mutual fund and financial advisor skim from their clients annually, you'll only need to save about half as much money for retirement.

This may be more of a cultural thing. If you grew up in a wealthier family where people had financial advisors, you may think it's just the right thing to do. But the arithmetic of losing 2% per annum to a financial advisor over 50 or 60 years is pretty clear -- they're going to take half your money, and you're going to have to save twice as much to retire.

Maximum income required for a $0/month Obamacare Plan

Americans currently pay more than double the per capita cost for health care than any other large industrialized nation and get poorer results to boot. This sad state of affairs is the result of political bribery in the form of lax campaign finance laws, a lack of any regulation to force price competition among medical providers, and a good dose of price gouging plus outright fraud.

Fortunately, early retirees living off an investment portfolio who focus on capital gains in preference to interest and dividend income don't have to sit still while they're mauled by Big Healthcare. Even a retiree with a multi-million dollar nest egg should be able to arrange their retirement withdrawals to minimize income and maximize their Obamacare tax credit.

There's a big difference in health insurance costs between the Red States and Blue States. If you live in a Red State that hasn't done the Obamacare Medicaid Expansion, your state isn't getting billions of dollars per year in Federal Funds, your private insurance premiums are being jacked to make up the shortfall, and rural hospitals are closing. If you live in one of the largely Blue States that are taking advantage of the Trump Administration's dysfunction on Obamacare by loading the burden of Cost Sharing Reductions (CSRs) on their exchanges' Silver Plans, you can get your health insurance much cheaper. In my zip code in Deep Blue Washington State you can now get a $0/month Bronze Plan with an income of more than $40,000/year. That's a 4% withdrawal from a $1 MM+ portfolio.

When I lived in Texas, I expected to be paying about $20,000/yr for health insurance at age 60. My 2019 Obamacare premium in Washington State at age 63? The princely sum of $1.63/month -- less than $20/year.

What to conclude from these observations?

"The Man" is working against you in your efforts to retire early. Don't let the financial services industry suck your investment accounts dry with fees. And choose your state of residence wisely -- the full cost of a private health insurance premium for a 60-year-old is more than most peoples' mortgage payment. Paying attention to the big picture will make it easier for you to retire early.

Resources for more information

The Investment Company Institute 2016 Fact Book - reported that for 2015 the median US equity mutual fund had an annual expense raio of 1.24% while the top 10% most expense funds had expense ratios of 2.05% or more. The median bond fund had an expense ratio of 0.85% with the top 10% at 1.65% or more. (See Figure 5.7 in the report.)

The Hidden Costs of Trading -- NYU Stern School of Business

Issues in Assessing Trade Execution Costs, Journal of Financial Markets Bessembinder, H.

Evaluation of the biases in execution cost estimation using trade and quote data Peterson, M., and Sirri, E.

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Copyright 2019 John P. Greaney, All rights reserved.

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