BiggerPockets Money Podcast - If No One Follows the 4% Rule, What IS the Right Withdrawal Rate?

Episode Date: May 23, 2025

Most people assume the “safe withdrawal rate” for retirement (or early retirement) is 4%. But, if that’s the case, why is it SO hard to find anyone who’s gotten to their FIRE number, quit their job, and lived entirely off of the 4% rule? If the 4% rule is so safe and backed by solid math, why are so few FIRE followers confident enough to actually use it? We don’t know. So we asked Karsten, AKA “Big Ern,” from Early Retirement Now to help answer! Karsten has done the math, and the 4% rule checks out. But even he, an early retiree, doesn’t follow it. So, instead of the safe withdrawal rate, what’s the comfortable withdrawal rate early retirees should be following to FIRE on time and with less stress? And with turbulence in today’s stock market, and rising prices (which cause your spending to rise), what does the right FIRE portfolio look like? Karsten walks through how your portfolio should change as you approach FIRE. He explains why hedging with cash-flowing assets may be a smart move, how much cash to keep on hand, and whether those reserves can actually protect against sequence risk. Plus, should you pay off your mortgage on the path to FIRE? Scott and Karsten offer two different perspectives on whether it’s smarter to pay off your mortgage or invest that money instead. If you’re planning to FIRE, this is info you need to know! In This Episode We Cover Is the 4% rule math or myth, and why doesn’t anyone actually trust it enough to use it? The optimal FIRE portfolio for less risk and higher potential returns  Cash reserves and emergency “buckets” to limit your sequence of returns risk  Should you pay off your mortgage early or invest that money instead? One smart hedge to protect your portfolio against a stock market downturn  And So Much More! Check out more resources from this show on ⁠⁠⁠⁠⁠⁠⁠⁠BiggerPockets.com⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠https://www.biggerpockets.com/blog/money-643 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email ⁠⁠⁠⁠⁠⁠⁠⁠[e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

Is your retirement plan built on financial quicksand? With inflation surges, market volatility, and economic uncertainty dominating headlines, the traditional 4% rule for retirement withdrawals may be more myth than math. Today, we're cutting through the confusion with a deep dive into what withdrawal rates are actually safe in today's economy. Oh, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen, and with me as always is my mathematics enthusiast, co-host Scott Tritch.

Thanks, Mindy. Great to get into another conversation with you and all the derivatives. Today, here with Big Earn. Bigger Pockets is a goal of creating one million millionaires. You're in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. We are so excited to be joined today by Karsten Yesker, or Big Earn, an expert on safe withdrawal rates. Would you mind just quickly introducing yourself and your body of work to those who need more

of an introduction to you here in the Bigger Pockets money community? Yeah, thanks for having me on the show. It's a big honor to be here. And yeah, so I wrote a lot about safe withdrawal rates because I was planning to retire and I wanted to do the hard work and see how to do it right and how to do the math right because I'm a very math-oriented and math-influenced person. And so doing the math-right gave me the confidence to finally pull the plug in 2018. And so, yeah, a lot of, work on my blog is centered around the safe withdrawal rate series. But I write about some other stuff too, about economics, about options trading, about general fire and personal finance stuff too. Awesome. Well, I look forward to getting into a wide range of subjects here with you. But I think one of your one of your kind of taglines or I guess the motto or worldview that drives a lot of what you do is this concept that you think that people can't afford to not retire early, I believe. So can you walk us through what that means and what you think about that?

Right. So I have a little bit of this reputation in the fire and personal finance community that I want to talk people out of retiring, right? Because I sometimes caution people don't be too aggressive with your safe withdrawal rate, especially over very long horizons. But, I mean, I was actually surprised that even over very long horizons and even if you had historically retired at some of the worst possible times, right, to say, right before the blow up before the Great Depression or in the 1960s and 70s, there were some very bad historical retirement cohorts where the 4% rule looked really shaky. Even at the worst possible time with a very long horizon, it's not like you can't retire at all.

So maybe you just retire with a little bit lower withdrawal rate, but it would be a terrible loss and a terrible opportunity cost if you just can't. kept working. And so I mean, some people say, well, okay, 25X annual spending might be too aggressive. And well, then they go up and they go to 30 and 35 X and 40x and 50X. And then they ask me, well, now I'm at 50x, can I retire now? And well, and then I tell them, well, you should have retired at 28x. So just because I said 25X is too aggressive doesn't mean that you have to go that conservative. So it goes both ways. You don't want to be too conservative. and you don't want to be too cautious because it's a huge opportunity cost for not retiring.

So you just said don't be too aggressive with your safe withdrawal rate. What does too aggressive mean to you? Right. So I mean, obviously, and I watched your other episode obviously while you were talking about the 4% rule. If you have a not too concentrated portfolio, you have a little bit of stock bond diversification. Four percent rule would have worked or would have worked most of the. the time, you really have to look almost with a fine comb to find cohorts historically where the 4% rule would not have worked, right? You would have retired right at the peak before the Great Depression

or you would have retired right at the peak in the 1960s or 1964 or 5 in 1968. And maybe your withdrawal rate, but even with a 3.8%, you would have made it. So maybe the 4% just failed you, but very, very slightly and you would have run out of money only after 29 or 28 years. But again, it wouldn't have been safe over 30 years. But then again, this is for traditional retirees, right? So I am

catering more to the early retirees or at least slightly early retirees. So maybe I mean, there's one field in the fire community, right? They try to outdo each other, right? And they say, well, now I'm retiring at 32. And then somebody else comes around at 30

and then somebody else comes around at 22 or something. like that. But these are exceptions, right? The normal early retiree who doesn't run a blog, a podcast, who truly wants to retire and completely leave the workforce and both spouses leaving the workforce, normally these are people that are retiring, say, between their mid-40s and mid-50s, and now you have a little bit of a longer horizon, right? You can't plan with a 30-year horizon.

and if you go from a 30-year horizon to a 40-year horizon, you have to scale back that withdrawal rate a little bit. So if 3.8% sometimes runs out over 30 years, then if you have a 40- or 50-year horizon, then you have to scale down the safe withdrawal rate even a little bit more. Or you would risk then having higher failure rates. So failures would then become much more frequent than in the Benin study or in the Trinity study,

or in some of the blog posts that I wrote about. I love this line of thinking here. And I have not really dived heavily enough into the research of very long time horizons. And one, I just want to state this very obvious point that I think a lot of people miss about the 4% rule. It's a 30 year withdrawal time horizon. And if you were to reduce that to, for example, 3.3%, you get to a very silly situation where, of course, if you withdraw less than one, 30th of your portfolio, it should last 30 years in there, on there. And I think that that's like, 4% is so close to that 1 25th per year that you only have to, you know, creep out a beat to

inflation by a little bit to make that happen. But when you start getting down to truly absurd numbers like 3.3%, you get to a very silly situation. That is less silly when we start talking about a 40, 50, 60, 70 year time horizon for our 22 year old retiring at the 4% rule. And that's, that's the work that sounds like you're passionate about. Right. And again, I mean, don't poo-poo the 3.3% too much. So, for example, what you were just referring to, if you could guarantee a 0% real return in your portfolio, right, then, yeah, you could withdraw 3.3%. Well, you buy a bunch of gold. Yeah, but then again, it's that nothing is guaranteed with gold, obviously, right? And definitely gold has had a little bit of even a real return. So gold performed a little bit better than just

CPI. But, I mean, you don't even have to go. as exotic as gold, right? I mean, you can just set up a tips ladder. All right. So, treasury, inflation protected securities, they are now yielding somewhere around two and a half percent for the 30 years. Actually, probably a little bit more than 30, a little bit more than 2.5 percent. And yeah, even at zero percent, you could already wing it and have 3.3 percent. And with something like in the two and a half to three percent, you could go well. about 4% was just a tips letter. And of course, the disadvantage is that you would absolutely predictably exactly exhaust your portfolio over 30 years. If you live three years longer than 30 years,

well, you ran out of money. If you have loved ones who, well, you probably want to give some money along the way or at the end, it will be exactly zero left for them. Of course, if you die after 15 years and there's still a ton of tips left in that tips letter, well, then, well, that would go to your loved ones. And so you still have a pretty sizable request. But, but you're right. So first of all, if you have a longer horizon, 40, 50, 60 years, first of all, tips don't reach that far, right? And then basically this typical amortization math kicks in, right? The longer you go, even if you had a 60 year tips at 2% well you probably have to have to scale down your withdrawal rate a little bit. And so even with today's tips rates, this safety first approach of having zero, zero risk to

your retirement is going to cost you in terms of your safe withdrawal rate. So in that sense, maybe you should over very long horizons, you should still take a little bit of equity risk and then squeeze out a much higher safe withdrawal rate that way. Yeah, I completely agree. And in no world would I ever, you know, say, here's my time. In 30 years, I'm going to go into tips, draw it down to zero or buy a large stack of gold and sell bits and bits of it to fund my lifestyle for a very period of time. It's just, it's just that's where the math begins to get a little, like, like at a

conceptual level, people forget that 3.3% is 130th of a portfolio. And so saying it will last 30 years is kind of a little silly. at that point in my opinion. But I can show you a cohort. So for example, I think the greater pressure and in the 1960s, there would have been cases where if you had been 100% equities, you would have a safe withdrawal rate less than 3%. So even though equities did actually relatively well

over the entire 30-year horizon, I think from 1968 to 1998, you had very decent returns, over 6% real, almost 7% real equity returns. So it's the sequence of return risk issue, obviously, right? So returns in the beginning were so poor that the first 15 years were basically flat with actually a lot of drawdowns in between. If you had withdrawn from that, even the eventual recovery where I think the second 15 years would have been some of the most spectacular equity return, something like 12% annualized.

But that didn't do enough to save you. and you would have run out of money with 100% equity portfolio. So there's nothing magical about 3.3% with enough sequence risk. You run out of money, even with a 3.3% withdrawal rate, if your portfolio is risky enough. And so that's that sequence risk for you there. All right. So, Biggern, you've heard me, I think, say this before in the past. But I am the biggest believer in the 4% rule.

I know the math is sound. I know that the research backs it up over virtually every backtested period that we have data for. I also know that there's a little bit of a uselessness to the soundness of the math in practice in the FI community for a couple of reasons. One is we have interviewed so many people over the course of our history and essentially nobody is actually retired in the 4% rule. We put a call out and we got some responses back to that. We even had a guest come on the podcast and it turns out that all these things come up like they have so much more wealth than they need that they're not really redact with. at the 4% rule. And they've got a rental property portfolio. Oh, and or the spouse works. So they're really just Wi-Fi, which is one of my favorites on there, you know, including the benefits and

those kinds of things. Another example is the founder of the 4% rule, a godfather of the 4% rule, whatever we refer to him now these days, William Bangin, who we've had here on Bigger Pockets Money, himself went to cash, 70% to cash two years ago because he couldn't handle the stock market at that point. I believe that's, I'm paraphrasing what happened there, but that is generally the situation with him. And so the answer that I've kind of arrived at after all that is there has to be a huge margin to safety and that in practice, few will actually retire early unless they're able to generate harvestable, spendable, perhaps taxable cash flow from their portfolios

and spend a minority or at least substantially less than the cash flow generated by their portfolio. And what's your reaction to that? Knowing that we'll get into the math that argues that you don't have to do that, But which response to that observation? That's exactly one of the recommendations from my blog. You want to personalize your safe withdrawal rate analysis. And there may be some people as the closest person I've ever come across who probably doesn't want to do any additional sidegigs.

There's a couple that wants to live on a boat for six months of the year. And it's hard to do sidegicks while you're on the boat. But maybe they can do something. doing the six months there on land. But yes, yes, you're right. We should factor in these additional cash flows, right? Social Security later in retirement. You might have some additional side gigs.

I had this very nice setup where after I left, I still had three years' worth of deferred bonuses that got paid out from my old job. So that helped. It didn't pay all my bills, but it was a pretty good chunk. of my expenses every year for the first three years. And I make a little bit of money from my blog. But yeah, so factor in these additional cash flows and see how much of a difference it does in your withdrawal rate analysis, right?

And so what most people will realize is that if you retire in your 40s and you factor in Social Security later at age 67 or 70, it's not going to make that much of a difference, right? because there's a time value of money. This is so far in the future that, yeah, you may make $3,000 a month from Social Security 30 years from now, but how much additional impact does that make in my initial safe withdrawal, right? Especially because sequence of returners. That happens in the first five, 10, 15 years of your retirement.

So yeah, I agree that this is this should be factored in. And by the way, I also always defend Bangen's work and the Trinity study and then my blog work. When you do these kinds of safe withdrawal rate research, you can't just start with something too specific. It has to be very generic. So the generic example is 30 years retirement, flat spending, no additional cash. of course, no retirees like that. But of course, I also say we shouldn't throw out the baby with the bathwater, right? So instead of then just saying, well, 4% rule is all nonsense anyways,

and then I'm just going to retire and I withdraw 5% because I have all of these additional bells and whistles, well, maybe the best approach really is to factor in all of these additional earning potential cash flows and see how much of a difference it does. in not necessarily a safe withdrawal rate, but your safe consumption rate. So because every every month you withdraw something from your portfolio, it may not be what you actually consume that time because you have that additional income. And then also maybe reflect a little bit on, well, you know, if you have this additional side gig, right, and you really need that side gig to make your retirement work, well, is this

still really a fun retirement, right? Does this build up pressure again? Does that put pressure? Do you have sleepless nights if you have a recession and a bear market early in retirement and you might lose this earnings potential, right? So it could be some kind of a corporate consulting gig or it could be a blog or podcast, maybe advertising revenue goes down if we go through a recession. So I would, obviously I factor in my future cash flow, something like social security. I have a small corporate pension. But what I make from the blog, I don't really put this into my retirement spreadsheet as a guaranteed income, certainly not for the next 30, 40, 50 years, right? Because this might go away.

I might lose interest or people lose interest in me. It goes both ways, right? or so for me basically there's a little bit of blog income that's just pure extra and I don't really take this for granted but yeah I absolutely support this idea you should personalize your safe withdrawal rate analysis and and factor in these these additional streams from from side gigs and corporate gigs consulting gigs blogs yeah absolutely now we need to take a quick ad break. But listeners, I am so excited to announce that you can now buy your ticket for BP Con 2025, which is October 5th through 7th in Las Vegas.

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even they have the wind at their bottom. backs. I couldn't. I know it's been several minutes. I had to reach back there. I cannot help myself on these items here. So how do we think about this? How do we think about the 4% rule with terrible transition there? How do we think about the 4% rule and withdrawal rates in the context of changing macro conditions here, especially when we get to extreme outlier scenarios, which I would argue we are in here today in 2025, especially back in February, if you want to take a particular item there, where stocks were valued at, I think, 37 times the Schiller price to earnings ratio. So not all time highs, but all time highs since, you know, the 1990s, and we all know how that turned out. The real prospects of interest rates staying flat or going up, that will, that, you know, it's one thing for those valuations to be there when interest rates are zero. It's a totally different one for them to be there when interest rates are higher than zero or a normalized interest.

environment, is there, is there anything that would happen in in terms of macro conditions with interest rates or any price too high for equities that would change your allocation or the what you recommend for folks entering into retirement in terms of how they think about their portfolios? Yeah, you bring up an important point, right? So that was the issue in February, right? We had these maybe not record high, but close to record high equity valuations. And, and even today, as we record this in late April, even though we've had a drawdown, we're now in a correction, not quite a bear market yet. Even now, equity multiples are still very expensive. And I always think that using equity valuations as a timing mechanism to shift between stocks and bonds

can be a very frustrating task. Because I used to work in that space when I worked in finance. I did this kind of gig between 2008 and 2018. And so it's very hard to time stocks versus bonds for professional investors. It's extremely hard for timing stocks versus bonds for retail investors. So especially, I mean, I've heard people

basically they were 100% equities and then they went from 100% equities to zero percent equities, moved everything to cash and then missed the boat getting back in. So actually professional investors would do this very gradually. So if you, and even professional investors will have a very hard time getting this right over the business cycle. So I don't think that retail investors and amateur investors should play the stock versus bond allocation too aggressively. But I think the one knob that you should turn in your safe withdrawal rate analysis is the withdrawal rate, right? When equities are this expensive,

basically they are as expensive as before the dot-com crash, they are as expensive, actually more expensive than before the Great Depression. And actually quite vastly more expensive than before the 60s and 70s that had some very nasty retirement experiences in those cohorts. So this is definitely a warning signal that you don't want to be too aggressive with your safe withdrawal rate. And people always say, oh, well, but isn't the stock market a random walk, right? Nobody can predict the stock market. And that's absolutely true for next day returns or week or month or maybe even the next year. But there is definitely a very strong correlation between these equity valuation metrics, whether it's the PE ratio, the trailing PE ratio, the forward

PE ratio, or the Schiller Cape. Or I wrote a blog post where I make a few adjustments to the Schiller Cape to make it a little bit more comparable across time. And so it doesn't matter what kind of equity evaluation metric you use, there is definitely a very strong correlation between today's valuation and say the next 10 years of real returns. And so, and this has been the case for the last 150 years, basically. So that's one of the contributions from Robert Schiller to economics and finance, by the way. By the way, I've invited Robert Schiller, Professor Schiller from Yale University to come on the Bigger Pockets Money podcast. If anybody knows him, please. reach out, let him know that we would love to chat with him. I literally titled a recent presentation

Irrational Exuberance 3.0 based on his work after rereading it. So Robert Schiller, you are amazing. I use your work all the time. We would love to have you on Bigger Pockets Money. I don't know him personally, but yeah, I think he would be a great guy and he's a very insightful person, obviously. So don't try to time stocks versus bonds as a retail investor. That can go really haywire. but obviously you should the high equity valuations should guide you towards a little bit more cautious approach on your safe withdrawal rate and then obviously bond yields are now more or less normalized right so you got the you got the tens and the 30s in the in the 4% plus range and also looks like well the federal reserve now has enough basically dry powder to lower rates if something were to go wrong with the economy again.

So if the stock market were to tank because of some bad macro event, the Fed would have enough room to lower rates and there would be good for bonds. So this could be now a good time to check your allocation. I don't be too aggressive on the stocks. And again, I'm not saying that you should time stocks versus bonds. But my warning was always when bond yields were at, at 1% or sometimes even below 1% for the 10 year. Yeah, you might as well try your luck with equities.

There's not a lot of room to grow with bonds. But now that bonds are again yielding quite nicely at 4% plus. And these are just the totally safe government bonds. When corporate bonds, they will have a little bit higher yields even. So look at your portfolio. I mean, you should be at least in retirement, you should be at least 25% bonds, maybe even 40% bonds initially. But if over very long horizons, say 40, 50, 60 years of retirement, you probably don't want

to be too bond heavy, at least not for the entire period, because you need the engine of equities. You need that return engine to generate the expected return that you need to make it over that very long retirement horizon. So I think that's right, right? Like, there's no world where I would be 100% into bonds because you know you're going to lose to inflation or not, you know, that's a huge risk to the portfolio over a very long period of time. And, you know, there's a risk in the short term that the stock market does not go where you need it to go to sustain a comfortable first couple of years in the early retirement phase, the sequence of returns risk. But you know that in 30, 40, 50 years, the stock market's going to probably revert to the mean with normalized, you know, real returns over that period of time. one answer that I've come to, and I know this is not everybody's cup of tea on it,

but obviously we're bigger pockets, and we talk about real estate on here. And if I forget leverage and also other stuff, a paid off property that generates a 5% net operating income should appreciate with inflation and the income stream should grow with inflation because it's literally a third of inflation housing costs in the CPI. And so how would you factor in that? simple analysis into a portfolio plan for those willing to think about real estate. And obviously there's work and there's some part-time stuff as you can call the retirement police. But what's the theory behind? Yeah, I'm a huge fan of real estate myself. But my wife and I, we don't have the bandwidth to manage our own real estate. So we outsource that and we have about 20% of our

financial, of our real portfolio is in real estate. But it's all managed by price. equity funds and that's usually multifamily. And yeah, I'm a big fan of that asset class exactly for the reasons you mentioned, right? It's cash flow. The cash flow is inflation adjusted. If you don't let the the property decay and you keep up the property, it should appreciate in line with inflation. You might even make the case that real estate is going to do a little bit better than CPI. And just historically, rental inflation has always run a little bit harder than the CPI and then some other inflation components like tech gadgets. They, by definition, almost they have lower CPI rates, sometimes negative CPI rates. So yeah, so I'm a big fan of that. And if you

have a paid off property, you don't even have to worry about what what the average lazy retiree has to worry about, right? If you just have a purely paper asset portfolio and you're dealing with sequence of return risk and volatile equity markets. Now, the question is what happens if you mix the two, right? So nobody is 100% equities or most people, some people are 100% equity bonds. But on the real estate side, not everybody is just 100% real estate. right, you have probably a mix of the two. And yeah, so what you could do is, and I have this toolkit, right, where you can model supplemental cash flows.

So you can obviously model this in my spreadsheet and then factor in, well, how much do I gain from this paid-off property? And then the other thing you can do is, so that's obviously the best possible scenario, right? you have a paid-off property. But usually if you're 45 years old and you retire early, most people don't have paid-off properties, right? So they still have properties that have mortgages on them. And then the mortgages, maybe they are paid off after 15, 20, 25 years, depending on when you bought the properties.

And that beautiful 5% yield comes in only deep into your retirement. And so what do you? you do along the way, right? So what you could do is, obviously, you could deplete your paper asset portfolio over that time, right? Because you have this cash flow problem. And then by the time all the properties are paid off, then you just live off of your real estate portfolio. So, I mean, that, and this is obviously, it's too specific to any particular person's situation. But I've, I've seen cases where people faced exactly this problem. They were very, very asset rich, but the cash flow is totally mismatched for what they need in retirement. That was my,

that was my dilemma in February, right? I've been investing in real estate for a decade, but the stock market has been, because I work at bigger, irony is because I'm the CEO of Bigger Pockets, I own a lot less real estate than I otherwise would have, because I would have aggressively built an active portfolio in there, right? So I put all the, savings into stocks over a very long period of time. And so my real estate portfolio was highly levered and I was so heavy in stocks. And so I was like, all right, I'm just going to sell it, put it up, put it into some paid off real estate on there as part of that analysis on it, which I think is a move that is not

going to be replicated by the vast majority of people because it's such a weird one, right? And sell off a huge chunk of stocks, put it into one quadplex and pay it off and being harvesting it. But that was for me, what I felt helped me kind of get to this situation here, where now my portfolio is much more balanced across stocks, a little bit of, tiny bit of bonds, real estate and cash in there. So that was, I don't know. What's your thoughts on that? No, I mean, that's smart. And so you got out right at the peak. So that's amazing market timing.

But let's talk about that in the context of today. here. One of the things I'm worried about for a lot of our followers and listeners is I believe that in the five community, many people who think that there are a few months or a few years away from fire are essentially 100% in U.S. stocks with their portfolio, have no diversification to other asset classes. And I think that despite all of the warnings that you are giving here about bond allocations and those types of things and having that in there and despite what we talked about, nobody's going to do that. Are very people going to do that? Because they can't, there's too much, they're too aggressive.

They're too, you can't listen to Bigger Pockets money 600 times. And people who do that, instead of listening to, you know, you know, Cardi B or whatever on the drive to work, they're going to take more risk with their financial portfolios because they're highly mathematically oriented, aggressive, want to retire early. How, what are things that we can help them do that would be more palatable I couldn't do it, put it in all into bonds, personally.

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So thank you for subscribing during that break. Thanks for sticking with us. I've written about this issue. What should you do on the path to retirement? Is it defensible to be 100% equities all the way until retirement? I don't think it's a good idea to be 100% equities in retirement. As I mentioned earlier, you could run out of money with 100% equities, even with a 3% withdrawal rate if sequence risk is to,

is not in your favor. But I think so you could pull it off to be 100% equities until retirement. The question is, what do you do on the day of your retirement? Do you then suddenly sell 25% of your portfolio?

Do people have the appetite to do that? Right? Because there's always this fear of regret. Because definitely in retirement, you should be a little bit more diversified. So have 75, 25, maybe even 6040. And if you think that 6040 is too meek, you could do 6040 initially, but then slide back into something more aggressive again over time.

But you could make the case that on the path to retirement, if you have a little bit of risk tolerance and a little bit of flexibility, you could actually pull that off. Because obviously, stocks have the highest expected return. And well, if you plan to retire and just that year we have a bear market, well, then maybe you delay your retirement by another year. If you have that flexibility, I think it's not a bad idea.

But that's not usually how people tick, right? So normally people have this retirement date and say they, they, finish their 20 years of federal government service and they're sick and tired and they want to retire and they want to hedge a little bit this risk that you might be retiring right at the bottom of the bear market, you probably have to shift out of equities already on the path to retirement. And probably you don't want to do it as conservatively as, say, what a target date fund would do Because many target date funds, right, they start at 90% equities, 10% bonds. And then 20 years before retirement, you already start shifting out of this and then slowly go into something like 55% stocks, 45% bonds.

And that doesn't really do it for fire people, right? Because that means your entire fire path, you already have way too much bonds. So, yeah, so I think it's defensible if you have a little bit of flexibility. and high risk tolerance to be 100% equities. But most people say at least something like two, three, four, five years before retirement already start preparing to accumulate a little bit of a bond portfolio. Have you ever sold an equity position to fund consumption? That is a great question.

And I have to admit, no, I have never even sold any equity positions. I still have all my tax lots from, I still have tax lots in my fidelity. mutual funds from 2009 that I bought when the S&P 500 was at at somewhere around 700 points. And so now it's at, well, it went to over 6,000. Now it's a little bit below that. But yeah, so I have never sold anything. And it's not coming from sidegicks or anything like that.

So I have a taxable account. And the taxable account, I have a good chunk. of my fixed income portion in that taxable account and that pays dividends. I have a lot of preferred shares. So the preferred shares, they pay actually qualified dividends. So it's not ordinary income. So it's tax advantaged. And then I do a little bit of option trading, which is a topic for a whole other podcast.

So I do this every morning and every afternoon, do a little bit of trading there. It's not day trading. I don't have to be in front of the screen, the entire trading window. And if I don't want to do it one day, I don't have to do it one day. It's fine. And yeah, so just with these two income streams, it's the preferred share income and the option trading income. I never had to sell anything.

And I agree. I am also one of these people, you know, you have this fear of actually liquidating positions. And maybe this gets better with age. I hope maybe when I'm 85, I can actually, I have the comfort level to actually liquidate some equity holdings that I have. I'll bet you a large amount of money, no, it will never be that way. What will happen is because you never liquidate your positions, your portfolio will go to such a size and the compounding in real terms of the cash flows will grow so large that that need will just completely fade away on it. But what do you think? Yeah.

So, of course, at some point, you will have to liquidate something. And at the latest, obviously, when, so, so I told you about this taxable account. I also have retirement accounts. I have four, I have two 401ks. And I, yeah, I don't touch them. I did a little bit of, of Roth conversions. So. Well, those will have to be distributed, right?

But they won't, but I, like, I just imagine, like my situation, right, that I'm never going to spend comfortable. I'm never going to sell my stock portfolio. to buy a hot tub. You know, like, I'm not, like, I'm not going to do, like, that's just not going to happen personally for that. I would generate cash and buy a hot tub or whatever, whatever luxury I was looking for on it, you know, on there. I'd spend the dividend income if it was large enough, but because I'll never sell it,

most likely in practice in the way that my portfolio works out, I will just, those cash flows will just continue compounding and the equity values will grow and the underlying cash flows will grow for 30, 40 years. And that's the power of FI and that, because I'm so conservative. like the rest of the FI community on it. And I think that's the kind of conundrum we get into and that means I worked a lot longer than I really needed to to get to fire on there.

But that's the circular and that's the challenge we all want to solve, I think, as a general sense for the community because it's so hard. For me, it's also the income I get from what I'm generating right now just in that taxable account is enough to cover all of our expenses

and actually a little bit more. So I don't have the need. Of course, we could just start buying more luxury goods, right? So we're driving a pretty under the radar screen car. Maybe we'll upgrade that at some point. Tesla's are real cheap right now. I made some good investments in my life bigger, but the Tesla and Q4 was not a good one.

Not among them. I think at some point, I will probably be okay to liquidate a certain portion of the equities. So basically, what you could do is, so imagine you have this equity portfolio and at least take the dividends out, right? I mean, but the dividend yield right now is somewhere around maybe a percent and a half. It's is really pathetic in the S&P 500. But I think you should be able to take out. So why don't you just apply the 4% rule to your equity portfolio, right? So because equities grow, well, on average, they should grow by

about six and a half percent in real terms over the very. very long term. You take 4% out. I mean, you can still tell yourself, well, that chunk is still going to grow faster than inflation, but you take 4% out. And, yeah, it's going to be some volatility, right? You take 4% out of your portfolio earlier this year. Well, that's a pretty nice chunk. If we were to go through a big, bad bear market, well, maybe we'll go down again by 30, 40%, depending on how this whole tariff thing works out. And you still take 4% out of that decimated portfolio, but that's still a big chunk of money.

That's probably still more than 2% of that portfolio at the peak. So maybe do it that way. And so it's a kind of this intermediate approach where it's enough to take out. So your money doesn't grow without bounds, right? So we have just one daughter. And of course, we want her to be taken care of where she will inherit some money that will make her comfortable and give her a good start in life. But we don't want her to be so rich that she becomes lazy and complacent. And so that's that's that fine line you have to walk there.

And yeah, so I, of course, I worry about. well, what if the market tanks and what if we have, say, nursing home expenses later in life? So that's a concern. But of course, the other worry is, what if, what if that money grows so much that we don't know what to do with it? Of course, well, you can give it to charities and it doesn't have to go all to your offsprings if you have any excess cash at the end. So it's a Warren Buffett said, right? I want my, I want my kid or my kids to have enough that they can do anything that they want,

but not so much that they don't have to do anything at all. So that's, I think that's, I paraphrased it. He probably said it more elegantly. Everything you said there is right. And I agree with all of it. And what I just grapple with so reason, what I'm grappling with recently in the last year or two is, is the reality that few of us are wired who understand this math to then actually pull the trigger and sell those equities and practice.

Like, Mindy, you ever sold an investment position to fund consumption, like a stock market position to fund personal consumption? No. And I should be the number one person being comfortable with it, right? Because I did all the research. And obviously, you have to liquidate your equity, the principle, not just live of the dividends, but you have to eventually liquidate. And even I didn't do it because, well, I'm right there with you. I published a ton of stuff on this thing, too, about all the theory with it. And I probably will never liquidate.

I don't know when I liquidate. It might be a long time in the future before I actually liquidate an equity position to fund personal consumption. I think it will be really hard for me mentally to do that as an investor. It's really hard to spend the principal. You don't need to. You have money coming in from other places. I haven't had to fund, sell my equities to fund my lifestyle because I have a job that kicks off more than I need to live. That's right.

So I think that's the fascinating piece to all of this that I think is just, What makes this job and the exercise and the analysis and the countless hours of math and work and spreadsheet of modeling that go into all of these decisions so fascinating. And there's the math and then there's the personal. And we can't do it. Right. We can't like we had to build a surplus so large that we never touch the principle in our portfolios with it. And I think that that's going to be the case for a lot of folks. That seems to be the case for a lot of folks absent the sailboat couple out there.

in practice. And that's the, that's the challenge is the math is of awesome. Like, that's the goal. That should be everyone's goal is to get to this mathematical position with a diversified 4% role portfolio and know that you will likely need some time, some creativity, some extra things on there to feel like you actually are ready to step back and live off that portfolio comfortably. And I think that's the takeaway for a lot of people in the FI community, or at least that's what I've been arriving at slowly over the years. And I should say, if I didn't have that additional income from trading options, I probably would have taken money out of actual investments.

Fair enough. Yeah. And there are people who do that in the community. We can't. These are not, this is not unheard of. It's not. It's not doesn't exist. It's just it's rare, I would say, uh, in the community. I think and in there. And I think that's that's the, that's the, that's the, that's the, that's the, that's been going on a long time with some really interesting subjects here. Uh, Carson, I have, I have thought about the mortgage in the context of early retirement here. And one of the conundrums with the mortgage is many people have a mortgage that is 4.5% interest or lower, and they have 15 to 20 years left on said mortgage, maybe more in many cases. There is very little in the way of math that I could produce

to suggest that investing in stocks will lead to a greater net worth position in 30 or 40 years. And yet, the amount of cash flow needed to pay just the mortgage payments on there requires a bigger capital base using a 4% rule math, a 4% withdrawal math, then the remaining balance in many of those mortgages. So have you, have, has that made that make sense to you? I probably lost some listeners on that. I can see that, yes. So how do you think about, you know, you've run all these math and simulations in here. I came to the conclusion because I bought a new house after rates were up that I'm just going to not have a mortgage because the capital base required to pay the mortgage at six or seven percent is absurdly higher than what is what is needed to fund the mortgage payment for the next third. years on a third year mortgage on it. And so it was bad fie math for me to get a mortgage in there, even though I would be undoubtedly richer if I had taken one out and put it all on the market.

How do you think through that problem in the context of earlier traditional retirement planning? Right. So for example, there is obviously the tax consideration, right? So if you, you could say, well, you have some people even have 3% mortgages, right? And now you can get something like 4% on a money market. at 4% or more. First of all, the 4% if it's in a taxable account, after tax, it's also back to 3%. And so it might actually be a wash. So if you have the money lying around, and I can completely agree that for the peace of mind, pay of the mortgage, and that creates a little bit more certainty.

And so especially, as we talked about earlier, right, sequence of return risk is is the risk that you have some bad event early on. And so you don't want to have too much front-loaded and really non-negotiable mandatory expenses right up front and they phase out over time. And so, yeah, I can definitely see that people want to pay off their mortgage. I can also see that people want to keep their mortgage, right? because you could say that, well, if you say, imagine you have a $1,000 mortgage payment. And so that's $12,000 times $300,000.

You don't really have to set aside $300,000 in your investment portfolio to quote unquote hedge this mortgage expenditure. And the reason for that is, first of all, this mortgage is not going to be, hopefully, for the entire 30 years. It's certainly not going to be for your entire, say, 40 or 50 year retirement for us early retirees. And then on top of that, the mortgage is a nominal payment, whereas the 4% rule is calibrated to have inflation adjustments. So your mortgage payments don't. go up inflation. In fact, they, over time, they will die out. And so in fact, if you still have a mortgage, you almost hope that we keep milking this high inflation for a little bit longer. And at 3% inflation, that's going to melt away pretty quickly. So you can't really compare

apples and oranges where you say, well, I have to set aside a certain investment portfolio to hedge these payments that I have to make for the mortgage, you will probably need a lot, a lot less than $300,000, depending on what kind of inflation assumptions you make and how long you still have to pay that mortgage. If it's only 15 years, you probably need something a lot less than the $300K. Yeah, it makes perfect sense. I've been grappling with that as a problem, especially in a higher interest rate. Like, if you're going to buy a house right now with 7% and take on a mortgage, you know, given what the yield of the stock market is and where bonds, yields are, I think a lot of people are grappling with, do I just, do I just throw everything at this

mortgage until further notice on it and pay it down on that front? And I think, I think that that's, that was what I came, that was the conclusion I came to last year when I bought this house, personally on it, there's puts and takes on the math, but I think, I think it's a real question in the context of current macro conditions for, for tens of millions of American homeowners and homebuyers. This has been fantastic to pepper you with questions. You are one of the uniquely brilliant minds in the financial independence world. Thank you for all the research that we had today. And I hope these questions, this conversation got the juices flow in and was fun for you as well. Yeah. Yeah. Thank you. Thank you. Thank you. Carson, thank you so much for your time. It's always fun chatting with you. And we'll talk to you soon. Thank you. All right. That was Karsten Yesker, or Bigern, as he's better known, on safe withdrawal rates and portfolio theory for, what was that, 60 minutes. That was a really fun one. Yes. I love when Carston is speaking because anybody can ask him any question and he has an answer. He's not like, oh, you know what, let me look that up. He just is such a wealth of knowledge and about these particular topics. I wouldn't ask him about knitting or baking. But maybe he's a great knitter or baker too. But anytime you ask him a financial question, he has the answer. He's just on. I love hearing him speak. He's certainly rolling in the dough and can weave in a lot of data into the conversation, Mindy, on this. Sorry, I couldn't resist.

You were just on fire today, Scott. Yeah. I did think, I did think that I actually got a good night sleep last night for the first time in a while with the babies. That's where I was going to say, don't you have a baby? That's not. That's a lie. Well, yeah, I had the, I had the, the midnight and then the early morning, the late morning feeding. So I actually got like a good six, seven hours feeling good. But anyways, the. the conversation, what I think is so fascinating about this stuff and I can't help it with J.L. Collins, with Big Earn here, with, you know, all these folks that really seem to have a depth on portfolio theory. We've had a couple more on top of those recently is this fact that, that I just believe that almost nobody in the space. We will find them. We will find the exceptions. But almost everybody must generate more cash flow from their portfolio. and spend either some fraction of it or perhaps even a minority of that cash flow before they're truly comfortably done, done, done with work. And that's the crux of it is all this portfolio theory in reality doesn't seem to boil down to the outcome that we pursue here because I think it's a rare bird in the space that's going to sell portions of their stock equity portfolio

to fund their consumption lifestyle on it. I think people just won't be able to do it after a lifetime of accumulating. I think that when the time comes for me to sell my stocks, I will be able to sell my stocks. But I also have income generating things that I like to do. I love being a real estate agent, Scott. I think it is absolutely fascinating the process of helping somebody buy a house. It is, it happens to pay me really well. I would probably do it for a lot less than what I'm earning right now.

But I'm not going to stop just because I'm retired, therefore I shouldn't work anymore. The whole purpose of pursuing early financial independence is so that you can go do the things you love. I love helping people buy real estate if you're in Longmont. Yeah, but for everybody else who doesn't love helping people sell real estate, I think that the spending of the portfolio cash flow is the challenge to, grapple with. And, and again, like email Mindy at Biggerpockets.com, email Scott at BiggerPockets.com. Tell us how you feel you are pulling from your portfolio with no other

income. And that's no, uh, no pension. Yeah, yeah. Just, just, let's pre-framing it. Email Scott at BiggerPockets.com or Mindy at BiggerPockets.com if you've ever sold an investment to fund consumption on a continuous basis. In a non-emergency, in a non-emergency situation, on there early in your journey, have you ever sold an investment in order to fund consumption? Let us know. Okay.

Challenge thrown down. I can't wait to see these comments coming in. I won't hold my breath for it. But let's see. Let's see. I wonder how many emails we'll get on there. I also put a poll out in the Bigger Pockets Money YouTube channel. Okay.

Well, let's. And if you answer in the Bigger Pockets YouTube channel, just email us and let us know so we don't count it. as twice. All right, Scott, should we get out of here? Let's do it. That wraps up this fantastic episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen, saying happy trails, beluga whales. That was a closing with a porpoise.