1 Engineer On FIRE

The 4% Rule

It only seems right for 1 Engineer On Fire to start with the 4% rule. Why you ask? Because an engineer developed the rule! In 1994 Bill Bengen, a former aeronautics engineer turned financial planner, published an article describing his 4% rule. He used historical stock market data to estimate a “worst case safe withdrawal rate”. Safe meaning a high probability of success of not exhausting a portfolio over 30 years.

The Trinity Study

If you really want to dive into the numbers, I suggest looking into the Trinity University study. In this study they used historical 30 year rolling stock market data, various rates of return and various asset allocations to calculate a percentage of success! If you are nearing your FI number and considering retirement, take a good look at the data found in the Trinity study.

In my reading I find many financial advisors and bloggers tend to oversimplify the 4% rule. Like so many numerical simulations the assumptions are critical. Variables like length of retirement, your asset allocation, rebalance frequency all play a huge role in the result. Data analysis is an awesome tool but must be understood completely to avoid misleading conclusions. Bengen used a 50/50 allocation rebalanced annually but again look at the Trinity study for wider variation on the subject.

The 4% Rule Modified

In 2006 Bengen raised the 4% rule to 4.5% and spoke of even higher average rates. In an Oct 2020 interview, he updated the rule to 5% but also considered an updated portfolio allocation (30% S&P 500, 20% US small cap and 50% intermediate treasury bonds). He warned the rule is not a law of nature it is empirical. Meaning it is only based on the data we have available.

What does all this mean?

I believe the work done to determine the safe withdrawal rate was some of the most important for modern day investors and people seeking FIRE! It’s really a rule of thumb giving people a data-based benchmark to start planning. So many variables to consider for every individual case. If you are new to your FI journey, just use 4% and keep investing. As you get closer (5 years) to your FI number, dig into the data and realign your goals to your comfort level.

What did I do?

In my twenties I just put away every penny I could spare (401-k and mutual funds) and didn’t worry about it. I tracked my progress monthly and targeted double-digit growth.

In my thirties I maximized my 401-k and bought more mutual funds in IRAs. As life turned more complicated with family and work my monthly tracking turned to quarterly.

In my forties I could see the light at the end of the tunnel and began making serious projections. I used 3% inflation, 4% withdrawal rate and no Social Security. I ran projections with growth percentages from 5-11%. I realized my personal and professional responsibilities took more and more of my time. I had amassed a pile of different mutual funds and began to lose focus in my portfolio. I decided to seek the help of a professional advisor. When I had little money and plenty of time, I managed everything myself (no load mutual funds were the index fund of the era). When I no longer had the time, I searched out the best help available. I selected Merrill Lynch and their analysis confirmed my plan was sound.

At age fifty I realized I liked my job and the people but the commute and politics were wearing on me. I decided to work until 55 and made a shift in my planning. I had reached a Lean FI number but wanted to target a lower withdrawal rate. My wife and I started expanding our leisure activities in preparation for retirement. I realized my focus was always on accumulation and I knew practically nothing about withdrawals!

My brother-in-law, also an engineer, introduced me to “Can I Retire Yet” by Kirkpatrick (another engineer!) and I found “You Can Retire Sooner Than You Think” by Moss. Both books confirmed I was in good shape financially. I decided I never wanted to go back to full time work so I added a buffer to my FI number. I calculated 25 times my annual budget (4% withdrawal) and added 40%. Why 40% you ask? Over my investing life my worst year was -32%. If I suffered a 40% drop in the market the day I retired, I would still have my full FI number. 😊

1 Engineer On Fire

What rule do you use for planning?

Introduction To 1 Engineer On FIRE

Engineering is a science that teaches one to make decisions based on available data. My working career involved mechanical gizmos but the same methodology applies to everything including money. I used that methodology to build my financial portfolio and retire early. Today everyone calls that Financial Independence or FI. Whatever the name, it gives you the freedom to do more of the things you enjoy.

FIRE, Fast FIRE, Slow FIRE, Coast FIRE, Chubby FIRE… Money, time, happiness, goals or “sticking it to the man”. It’s really all about freedom. Freedom to work where you want, when you want, how much you want. Freedom to sleep in, travel, spend time with friends and family. It’s also about time and how you spend it. Early in our working years we trade our time for money.

Engineers work hard to improve efficiency in everything they do. If one efficiently converts time to money, he can create more money. The best way to do that is to invest in yourself making your time more valuable. Become an expert, get that degree, training or certification, be known as the best in your market.

In the U.S. we have a culture of more. If I just could get a nicer car, home, apartment, phone… I’ll be fine. I always said “Money is only a problem if you don’t have any.” I grew up in this materialism culture. Success was defined by how much stuff you have and the more the better! My wife and I followed this materialistic middle-class culture – Good grades, University, Job, Career growth, House, Cars and more Stuff. BUT we did it a bit differently. We never stopped investing.

At first, we were “all-in” on spending every penny to build our first house. I mean we built it with hammers and nails. We worked every day after work until dark for nine months. We didn’t know it at the time but that house would become our foundation for financial independence. Our mortgage was 1/3 of our contemporaries. Now we had money to invest. We continued to drive our used 100,000 mile+ cars and invested the savings. Our home culture shifted from building to education as we continued to invest in ourselves with degrees that brought us promotions and pay increases.

The old fashion pension plan was closed very early in my career and replaced by a 401-k. I maxed out my contribution, collected the company match and maxed out our IRA’s. We were lucky that both our parents were conservative savers, we grew up in that culture as well. My parents spoke openly about finance and investing and included me in most discussions. Back then there was no investing community to share and learn from, heck there was no internet! I found books on investing, taxes, insurance and read everything I could find.

Sure, we fell into the trap of spending on nicer things but we had plans, goals and a written roadmap for success. We kept on investing. We continued to live life on an increasingly better scale. I wanted the stuff and my wife wanted the experiences (She did manage to teach me to enjoy the journey). Our careers accelerated and the stress of management began to consume us. We refocused our roadmap to early retirement. We accelerated paying off the mortgage. We started exploring our favorite vacation leisure activities. Retirement became a 5 yr. goal and my wife retired from her primary career and only worked her “fun” job.

We kept investing. Our nest egg had grown to the point that contributions were nearly insignificant as the power of compounding had taken over. We had created the “money making machine” we needed and further investing would just be added insurance. I retired from corporate life in 2020 and my wife retired a second time early in 2021. We reached Financial Independence in our 50’s.

Looking back, we could have achieved FI faster. We have zero regrets. We feel our success is due to communication, having goals and a written plan. We lived, we learned, we were not afraid to change course along the way.

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