Disclaimer: I am not a financial advisor. None of this is financial advice. I encourage you to do your own research.

Around this time I started to think about early retirement. I looked at my budget and I compared it to my healthy portfolio now bursting at the seams. I had been working towards financial independence for a while now, basing my plans for early retirement on the Trinity Study. I recalled from reading JL Collins, that based on the study, you can safely withdraw 4% of your portfolio annually, indexed to inflation, and you will have a 96% chance of not running out of money over a 30 year time period (source). For example, if you have $1,000,000 invested in a mix of stocks and bonds, based on the study you can safely withdraw 40k/year and let your portfolio do the heavy lifting while you’re frolicking in fields of dandelions, enjoying early retirement (source).

While I didn’t quite have a million, I did have 650k, more than I ever thought I would at the young age of 38. By consistently saving half of my paycheck every two weeks and investing in low-cost broad-based index funds I had grown my wealth by 550k in just six years. My company pension had also grown, putting my total net worth around 800k. And I had some equity in our house too, although at the time I wasn’t looking at the house as an investment, despite the countless Sold – over asking! signs popping up like daisies in front of everyone’s garden. I hoped that, when we did sell the house two years from now, we would at least get our down payment back. I have never trusted real estate as a solid investment, and although the housing market was on fire, 2023 was still a long way away. I couldn’t control the future housing market.

There was one thing that I could control though, which was my everyday cost of living. Somehow, I had cultivated a modest monthly budget of $2,150 per month, just under 26k per year. Our mortgage payments were affordable, and because we couldn’t go to restaurants and the take-out options in North Bay were limited, I made all our meals at home. Every Friday morning, I would look at the Sobeys flyer, see what was on sale and meal-plan accordingly. I would freeze leftovers. I never threw out any food. I was thriving in home economics. Some may argue that thriving as a glorified housewife made me a bad feminist, but I truly felt fulfilled being the one to manage everything in the home from meal planning to the budget. And as I continued to see man after man at work get promoted into management roles my company had promised me for years, I began to think that this financial independence thing that I had been working on for so long, may very well be what paid off for me in the long run.

And pay off it did. When I applied my budget and portfolio to the Trinity study I saw that 4% of 650k was indeed my annual spend of 26k/year. I was officially financially independent! I could quit my energy-draining job tomorrow and spend my days going for walks in the sun, reading in the backyard, cooking healthy meals, just….living! But although I was technically financially independent, I still wondered if 650k was enough to support me for the rest of my life. I still had a mortgage. What if the markets took a dive and I couldn’t make my immediate mortgage payments? What if interest rates rose along with my monthly payments? Surely the next market crash was right around the corner. Skeptical of the 4% rule, I started researching where it came from, to see if it was even possible for me to live off my portfolio.

I learned that the 1998 Trinity Study, based off initial 1994 research by a man named Bill Bengen, has faced its share of criticisms (source). In a 2008 paper a team of Stanford researchers argued that the study advocates for a consistent withdrawal against a “risky, volatile investment strategy”, meaning your withdrawals remain the same regardless of how your portfolio fluctuates. This can lead retirees to accumulate too much money during the good times, and spend too much of their portfolio when markets fall (source). The Trinity Study is further criticized for not taking emergencies into account like major home repairs (Gordon B. Pye, The Effect of Emergencies on Retirement Savings and Withdrawals. Journal of Financial Planning. Vol. 23, no. 11. pp. 57–62.)

Despite its criticisms, Morningstar’s director of personal finance and renowned personal financial journalist Christine Benz has maintained for years that a 4% withdrawal is a reasonable guideline provided you consider the following (source):

  1. Where is the money coming from? Rather than simply sell off 4% of my portfolio every year, Benz suggests retirees use a “bucket approach” to draw on different sources of investment income, such as bond and dividend income, in addition to selling securities (source). For example, if I am invested in Vanguard’s Balanced ETF Portfolio (VBAL), at the time of this writing it is paying 1.88% in bond and dividend income. A million-dollar portfolio invested in VBAL would allow me to collect $18,800/year in dividend and bond interest before touching my principle. I would then sell $21,200 from my principle to make 40k. If the markets are up, then selling $21,200 is unlikely to put a dent in my portfolio. If the markets are down, perhaps I can adjust my spending so as not to sell the entire $21,200.
  2. Proper asset allocation. The Trinity Study was based on a mix of at least 50% stocks to provide growth, and US bonds to provide balance. Further, the equities in the study were large-cap US stocks, similar to the S&P 500. I noted that my portfolio was a mix of Total US stocks (large, mid and small cap), Canada and International. Back when I did have bonds, they were Canadian bonds, not US bonds. Would these diverse assets keep pace with the S&P 500 and allow me to withdraw 4% every year throughout my life? As a Canadian investor, would I also need to take currency fluctuation into account?
  3. Time horizon. Both Bengen’s research and the Trinity Study looked at different time periods, the longest being 30 years. The findings showed, unsurprisingly, that those with longer time horizons could not successfully withdraw as much as those with shorter time horizons. At 38 years old I hoped to live a long, healthy life into my 80s or 90s. That meant I could very well have more than 40-50 years ahead of me. Would my small but mighty 650k portfolio be enough to move me into the nursing home of my choice? Suddenly I wasn’t so sure. I did have a secret weapon though. Having worked in the corporate world for 15 years I had a few different company pensions, the largest one being from the company I was currently with. I would be able to access that pension age 55. Although I had not been counting my company pension when I calculated my retirement plans, technically if my 650k portfolio started to decline, I could tap into my company pension in 17 years’ time. It was something to think about.

Right around this time, in 2021, Christine Benz and the Morningstar team re-evaluated the 4% rule. They forecasted future market returns rather than using historical data that Bengen and the Trinity Study authors had used. Their research concluded that a balanced portfolio would likely give me a 90% chance of success over a 30-year period, but they adjusted their safe withdrawal rate to 3.3%. Since then that number has changed. In fact, it’s become more generous. In 2022 the Morningstar team agreed that 3.8% was a good safe withdrawal rate. Then in 2023 they aligned on 4%. Then in 2024, after a strong year in the markets they settled on 3.7% (source). And of course, any time horizon after 30 years will change this number. The latest Morningstar data suggests that a 3% safe withdrawal rate will give a portfolio of 60% US equities and 40% bonds a strong chance of success over 40 years (source).

I thought again about little 80-year-old me. I wanted her to have enough money to not have to eat cat food. But I also wanted her to have a lifetime of memories. I didn’t want her to have too much money and wish she had spent it having more fun. While running out of money in retirement is indeed a risk, so too is not spending enough living your life. This is a choice that every retiree – young or old – must make. Should I save more? Spend more? Take that trip? One day there won’t be any more choices to make. I couldn’t predict the future, but having done the research for myself, there was enough data giving me faith that a safe withdrawal of 3-4% on a million-dollar portfolio was at least a good starting point. I could withdraw 3-4% depending on the year, cutting back if needed during a bear market or times of inflation. And as a back-up, I would have my company pension which would continue to grow until I was 55.

I also investigated ways to protect myself against future downturns in retirement. In his YouTube video Defensive Investing – How to Prepare for a Market Crash (In Advance), Financial Freedom expert and retiree Rob Berger offers the following suggestions for surviving a 50% bear market:

  1. Have as little debt as possible. “If I don’t have much debt,” Berger says, “I can survive a really ugly market, far better than a neighbor who’s got three mortgages and car loans and a loan for the boat…credit card debt.”
  2. Think about multiple streams of income, such as owning rental real estate or a side business.
  3. Keep your income-producing skills sharp. Could you go back to work if you needed to?

Berger’s video gave me a lot to think about. I decided I would continue working for now, at least until I no longer had a mortgage. Maybe one day we could even rent the house out for income when we got posted to another city. And I decided to stick it out with work. My job was giving me the opportunity to sharpen my skills in project management and communication, skills that would surely come in handy one day. And it’s a good thing I did, because while 2021 was a green, abundant year for the markets, 2022 pulled a one-two punch with a bear market that dropped 24.82 percent from its highs and ended the year at -19.44 percent coupled with hot inflation that reached over 8 percent in both US and Canada (source). In hindsight, if I had pulled the plug at 650k it wouldn’t have been nearly enough to cover my mortgage payments and bills, especially since my portfolio ended up tanking by 20 percent in 2022. By January 2022 the markets started to fall and by June we were officially in a bear market, which is marked by a 20 percent decline or more (source). The euphoria from 2021’s bull market was gone.