Why The 4% Rule Will Always Work (Hint: Its About Your Spending)

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I’m writing this after the Dow Jones industrial entered its first “correction” in over 24 months, experiencing a 10% drop from January 29th 2018 to February 8th, 2018.  I was walking through Costco this morning and remembered that feeling and a little bit of stress I had in 2009 about investing.   Our net worth just dropped by $80,000!   I don’t want to spend a dollar!    There have been a few other market pull backs in the last eight years, but we had less invested and the pain just wasn’t as much.

This really shouldn’t be a big deal, our Net Worth is back to where we were in November of 2017 and have only put a little bit in. It actually works out nicer if it stays low over the next few weeks because I’ll have a bonus payment to invest and it drops the tax hit on my restricted stock about to vest. Aside, I still found myself feeling just a little tighter…something I haven’t really remembered feeling since 2008-2009.  We’ve had other recessions, but we had a lot less invested and the pain wasn’t as large in nominal dollars.

This is a good reminder of something when it relates to the 4% rule:  Your spending will go down if the market goes down!   

Many of the studies out there include some sort of fixed withdraw rate, be in 4% of your ending portfolio value, 4% on year 1 then adjusted for inflation, or some combination of both.  The reality is you’re not going to be dead set on pulling the same amount each year, especially if the market takes a dive.   Lets look at some of the ways your spending will go down if we have an economic recession and asset values fall:

  • Discretionary Spending – Psychological: There is a psychological effect of scarcity.  The average person who makes it to early retirement and is relying on a portfolio already knows a scarcity mindset and can revert back quickly.   Delay replacement purchases, trade down on your food quality, buy second-hand, avoid discretionary expenses for a while.


  • Discretionary Spending:  Social acceptance.   When times get tough, people like Clark Howard get prime time television spots.  Saving money becomes “popular” and socially acceptable.  There’s less external pressure to go spend money, families are understanding at Christmas.  “Times are tight” becomes an acceptable response verses you being branded as a cheapskate.  People don’t argue with you, but instead reply “I understand”.
Pretty quick 10% drop in spending
  • Robust secondary market for stuff. – ie:  People sell stuff they don’t need to generate cash.   This may be reasonable purging of stuff people don’t need, or people unfortunately liquidating assets to survive.   Either way, they need a willing buyer on the other side to provide them with the cash they’re looking for.  People trade value for value, and there tends to be a better market for secondary stuff when times are tough.


  • Lower Input Costs:   The stuff we buy, discretionary or non-discretionary has input costs and falls in price.   Energy, labor, and food can all drop in price when the economy contracts.  Does anyone remember how gasoline prices collapsed from $4.10/gal in late 2008 to below $1.80 in early 2009?   It leveled out and took two and a half years to get back to its peak.  You get direct savings in food and energy, two of the largest expenses.  Have something break in your home?  It’ll probably cost less and things will be done quicker without as much new home construction going on.
That’s quite a drop back in 2009!


  • Less discretionary demand!   This is a big one, especially for those already retired.  Most early retirees are planning on spending more time doing discretionary things like travelling or pursuing  hobbies.  There’s a lot less demand out there if times get tough.    One of the best hotel deals we ever booked was in the middle of 2009 for a November 2009 trip.   A nice hotel in Hawaii had undergone an 18 month renovation that probably took longer to plan than that, but they re-opened and we got a deal.  Not only was it a deal, they even upgraded us to an oceanfront room due to lack of occupancy.   We looked at staying there again in late 2015 and the same room was 3x the price.   The average daily rate for a hotel in the US was $107.42 at its peak in 2008, fell almost 10% for 2009 and 2010, then slowly climbed back up to its 2008 price by 2013.  That’s five years of lower cost travel!


I can see the ocean from here!


What does this all mean?  The last bear market and recession was a painful experience and there’s certainly a risk of another one, but remember that the 4% rule should still work.   Your spending will drop either intentionally or unintentionally if we have a long bear market.   Stay the course, avoid selling stuff when its down, and you’ll be okay.


Additional Resources:

Doug Nordman on  The Mad Fientist Podcast talking about living through a couple recessions

Early Retirement Dude on the FIRE Drill Podcast talking about how his portfolio survived 2008 shortly after retirement.

Both of those interviews are excellent insights into handling a downturn after early retirement.




20 Replies to “Why The 4% Rule Will Always Work (Hint: Its About Your Spending)”

    1. If you’re one of the people fortunate enough to keep your job in a tough recession (which was 9 out of 10 people in the last downturn), you may also have a once in a decade investment opportunity. We both kept our jobs in 2009 and pouring money into our 401ks from 2009-2012 helped us reach FI.

  1. You’re right. There are so many options to vary your spending. Not only that, but most like people who are able to reach FI early have what it takes to start generating income. Some of us can’t help it!

    1. You’re spot on about the additional income – I once had a mentor tell me “making money is easy”, it didn’t quite sink in at first, but if you develop the right set of skills in life, money will find you with only a reasonable amount of effort

  2. I remember gas hovering over $4/gallon back in 08. I was a junior in high school, and that was the major expense that I was paying for myself. Filling up pretty much cost me my entire budget for the week haha.

    I already know with my personality (frugal to the MAX) that my spending would drastically go down in the even of market corrections/bear markets.

    Terrific analysis here, and thanks for sharing!

  3. Thanks for sharing all of these good points. Having some flexibility is key. As you said, don’t sell low and stay the course.

  4. Great summary.

    The safe withdrawal rate is such a contentious topic. Especially if all money is in tax-deferred accounts.

    In the U.S. we have the required RMD rate which starts at 3.64% and INCREASES each year. RMD hits 4% at age 73 (actually 4.05%).

    So, legally we are required to take out the RMD amount each year. Since the RMD increases each year, we must take out more money each year. Of course we are not required to spend it, but we pay taxes on it.

    If we start with $1,000,000.00 in an account and take out the RMD each year, and if the account does not increase, since the RMD percentage increases, the amount in the account decreases.

    Therefore, it is obviously better to have an account where we are invested so despite and RMD withdrawals, our balance in the count could increase. And we would not run out of money.

    Lengthly analysis in the name link.

  5. Great examples of costs beyond our control that may go down in a market down turn. It is so easy to think that only the stock market would go down (and not other items like the cost of fuel or the cost of travel).

    My wife and I learned about FIRE a year ago and we have all been about keeping our spending down. When I see the stock market go down a bit (like it did in February), my immediate reaction is to find ways to cut my costs. I didn’t even think that market forces might bring down some of my costs as well.

    1. Psychology plus market forces are real. Remember all major corrections are *slightly* different. Critics will point to the 1970s stagflation, which was really a monetary reset from going off the gold standard and a lot of lessons were learned. Thanks for reading!

  6. Great perspectives in this post. Just because you are following the 4% rule doesnt mean you have to withdraw the full 4% every year if you dont need it. And like the points you mention, I think most people will also adjust their spending if the economy goes down for a while. We all probably blow a bit more money on even smaller purchases that we could be more conscious of and cut back on. Many times stores, restaurants, and companies will start offering better deals and bigger discounts to keep customers spending so it can be a good deal if you can take advantage of that and it could save you money.

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