Want to Retire Early? Here's How to Make Your Portfolio Pay You FOREVER

So, you’ve been grinding away, saving and investing, dreaming of the day you can clock out for good and live off your portfolio. Maybe you want to retire early, travel the world, or simply scale back work hours to focus on what truly matters. Whatever the dream, the goal is clear: make your money work FOR YOU so you don’t have to.

How Long Can Your Portfolio Last?

The Trinity Study, which is pretty much the bible in these matters, examined the likelihood that a portfolio could sustain fixed continuous annual withdrawals like 3%, 4%, 5% over periods of 15, 20, 25, and 30 years.

The researchers defined "success" as having at least $1 left in the portfolio by the end of the period. (Talk about setting a low bar, aey?)

The result: If your portfolio has at least 50% stocks and you stick to 4% withdrawal rate, the chances of your money lasting 30 years are over 96%. 

Not only that, but there’s a solid chance your portfolio might actually grow.

I present to you the famous 4% rule.

How It Works in Real Life

Let’s say you’ve built a portfolio worth $1 million. Congratulations, motherlover!

According to the 4% rule, you can safely withdraw $40,000 in your first year of retirement.

Adjust this amount annually for inflation, so if inflation is 3%, you’d withdraw $41,200 in year two, and so on.

Sounds simple, right?

But now we have some new evidence which can shake this whole thing up.

A Fresh Take: 2024 Research Shakes Things Up

Fast forward to May 2024, when researchers revisited the Trinity Study with a more extensive dataset spanning from 1871 to 2023. They also looked at retirement periods longer than 30 years.

Here’s what they found:

• For retirements up to 30 years, the original 4% rule holds strong. No issues.

• For periods beyond 30 years, a 4% withdrawal rate isn’t as “safe.” Lowering it to 3% or 3.5% increases the odds of success.

But here’s where it gets spicy. Success rates don’t tell the whole story. Imagine you’re planning for a 50 year retirement.

Which would you prefer?

• Option 1: A 98% success rate, but there’s a chance your money runs out after 20 years.

• Option 2: A 96% success rate, but your money lasts 48 years before running out.

Most of you would pick Option 2, and you’d be right. Context matters!

DO NOT MAKE THIS MISTAKE

Now, some of you might think, “I’ll just go all in on stocks. Maximum growth, baby!”

Hold up. If the market crashes right after you retire, you’re not just taking a hit, you’re pulling money out of a sinking ship. That’s a double whammy that makes recovery much harder.

A better move? Consider a 75% stock and 25% bond portfolio. Why? Because bonds give you a safety net. In a market downturn, you can sell bonds and buy stocks at a discount. That way, you’re not only protecting your portfolio but also setting it up for a faster recovery.

Not exciting, but VERY smart.

Don’t Forget Taxes

Here’s the part most studies don’t cover: taxes. When you withdraw from your portfolio, some of that money will be subject to federal and even state taxes. Translation: less cash in your pocket. To account for this, you’ll either need a larger portfolio or a lower withdrawal rate. Plan accordingly.

My Bottom Line

Retirement isn’t a one size fits all game.

Your plan will depend on multiple factors, including whether you have rental income, a pension, or other assets. The shorter the period you need your portfolio to support you, the higher your “safe” withdrawal rate can be.

Remember, the 4% rule and other guidelines are just starting points, not gospel. Use them to figure out how much you’ll need, how much you can withdraw annually, and how to structure your portfolio. At the end of the day, it’s your money, your life, and your plan.

Got it? Good. Now go make that dream a reality.

Tom.