Dreaming of retiring early and living life on your own terms? You‘re not alone. The FIRE movement (Financial Independence, Retire Early) has been gaining steam among millennials and others seeking an alternative to the traditional 40+ year career path.
But achieving FIRE isn‘t easy. It requires diligent saving, investing, and planning. This is where the "Mad Fientist" and his unconventional strategies come in. The Mad Fientist, Brandon, is a software developer who retired at age 34. He‘s become one of the most prominent voices in the FIRE community, known for questioning established rules of thumb and developing innovative early retirement techniques.
In this comprehensive guide, we‘ll explore the Mad Fientist‘s unique philosophies and models for optimizing your savings rate and withdrawal strategy so you can retire decades earlier than the norm.
The Limitations of the 4% Rule
The traditional foundation for retirement planning is the "4% rule." Developed in the 1990s, this rule states that if you withdraw 4% of your portfolio annually, adjusted for inflation, your money should last for 30+ years. So if you have $1 million saved, you could withdraw $40,000 in year one, $41,200 in year two, etc.
This rule works well for a traditional 30 year retirement. But for early retirees, it has some serious flaws:
- It‘s oversimplified – the "4%" figure is not a magic number appropriate for everyone. The safe withdrawal rate depends heavily on the individual‘s spending needs, portfolio, and ability to cut expenses in downturns.
- It‘s too conservative for a flexible early retiree. Studies show much higher withdrawal rates are often perfectly sustainable.
- It ignores discretionary vs necessary spending. Early retirees have much more flexibility to cut back expenses to preserve their portfolio if needed.
Brandon took issue with retirement planners relying blindly on the 4% rule without considering individual factors. He decided to develop alternative models more appropriate for the early retirement crowd.
Categorizing Expenses
The key insight Brandon had was that all expenses are not created equal. He divided spending into two categories:
Necessary Expenses: Bills and other expenses that are difficult or impossible to eliminate, like:
- Housing
- Utilities
- Transportation
- Food
- Insurance
- Minimum debt payments
Discretionary Expenses: Any spending that is easier to cut or eliminate like:
- Travel
- Entertainment/dining out
- Hobbies
- New vehicles
- Gifts
- Large charitable donations
This small shift makes a world of difference. It allows us to separate essential lifestyle expenses from those that provide joy and fulfillment but aren‘t critical. During market downturns, discretionary expenses can be reduced to stretch portfolio withdrawals while continuing to cover necessary costs.
Take Pete for example, a hypothetical early retiree with $700k saved. Using the traditional 4% rule, Pete would withdraw $28,000 annually. But Pete actually spends far below that on necessities like housing, food, transportation, etc.
By categorizing expenses, Pete realizes he only needs $18k/year to cover his basics. This means he has $10k available for discretionary spending on whatever makes him happy. When markets decline, Pete can choose to reduce discretionary spending temporarily until conditions improve. This added flexibility and control allows Pete to safely withdraw more than 4%.
Focusing on Savings Rate
When pursuing early retirement, the secret weapon is having an exceptionally high savings rate – well over the standard recommendation of 10-15% of income.
Savings rate is simply the percentage of your income you‘re able to save rather than spend each month. A high savings rate dramatically accelerates reaching financial independence.
Let‘s say Pete earns $60,000 gross income. After taxes and necessities, Pete has $18k in necessary annual expenses as calculated earlier.
- With a 15% percent savings rate, Pete would save $9k/year
- With a 50% savings rate, Pete would save $30k/year
See the difference? At 50% Pete is able to bank more than triple the amount compared to the standard recommendation of 15%. This sends Pete racing down the path to financial independence faster than he ever thought possible!
Achieving a sky-high savings rate requires some serious lifestyle adjustments for most: decreasing housing costs, driving used cars, eliminating debt, controlling discretionary spending, earning extra income, etc. But the payoff can be retiring 10-20 years earlier than the traditional path.
Creating a Customized Withdrawal Rate
Armed with these strategies for cutting expenses and accelerating savings, let‘s revisit withdrawal rates. Remember that the foundation of the 4% rule does not apply well to early retirees. By considering individual spending habits and having a flexible budget, Brandon determined much higher withdrawal rates were possible while still protecting the portfolio over the long-term.
He laid out guidelines for determining your personalized safe withdrawal rate based on your fixed essential expenses and ability to control discretionary spending. The higher your guaranteed income (pensions, social security etc.) and lower your necessary expenses, the more cushion you have for volatility and the higher withdrawal rate you can safely stomach.
As a starting point, Brandon suggests early retirees work backwards from their essential living expenses, plus a discretionary "fun budget", to calculate their withdrawal rate. This rate could safely be in the 5-7% range in many cases. Some ultra-lean early retirees even report safe rates closer to 10%.
Remember our friend Pete? He determined his essential expenses require about $18k/year. But Pete also wants to keep a $10k annual fun budget for travel and pursuing his passions. So Pete‘s total desired annual spending is $28k.
Given Pete‘s investment portfolio of $700k, his safe withdrawal rate works out to 4% ($28k / $700k). But since Pete has flexibility to cut discretionary expenses in down years, he decides he can safely withdraw 5.5% – which works out to $38,500. This gives Pete an extra $10k per year to enjoy!
By considering total expenses (necessities + discretionary spending) Pete created his own higher, but still safe, withdrawal rate. Even better, he has full control to reduce discretionary expenses any year if needed to prevent excessive portfolio withdrawals during declines.
Adjusting Spending Throughout Retirement
Brandon took the flexibility concept one step further by developing specific guidelines to scale back discretionary expenses in different market environments:
Within 10-20% of market peaks: Make minimal or no changes to discretionary spending. Enjoy your standard budget.
20-30% below peaks: Time to trim discretionary budget by a reasonable amount, maybe 20-40% reduction. World cruise will have to wait.
Over 30% below peaks: Aggressively reduce discretionary spending, even eliminate it completely if necessary, until the storm passes. Stick to essentials.
The ability to make minor or major adjustments to discretionary spending allows the portfolio to heal faster after market drops. This avoids decimating the principal too severely and allows withdrawals to restart to normal levels more quickly than a fixed budget would.
Our case study Pete implements this advice appropriately when markets get turbulent. When his portfolio drops 20% from highs, Pete skips his annual international vacation to keep withdrawals reasonable. If things continue to deteriorate further (over 30% down), Pete eliminates his fun budget entirely for 1-2 years while still paying necessities from his portfolio.
When markets recover, Pete can again increase discretionary spending back to or even above previous levels. These ongoing budget adjustments enable Pete to withdraw and spend significantly more over retirement‘s course without the fear of running out of money – a triumph compared to rigid traditional budgets.
Pulling It All Together: How to Retire Earlier
The strategies discussed lead to a simple but powerful formula to accelerate financial independence and retire earlier:
Step 1) Categorize expenses to understand true necessary vs discretionary costs
Step 2) Fanatically cut expenses and boost savings rate
Step 3) Develop a personalized withdrawal rate based on essential costs and discretionary spending goals
Step 4) Adjust discretionary spending based on market fluctuations to prevent over-withdrawal
Implementing this approach requires assuming more risk than the standard retirement doctrine – but the payoff is leaving your job for good 10+ years faster. It‘s important to run various projections with different returns and market environments. And having 2-3 years living expenses in cash reduces sequence risk in case of an extended downturn right after retiring.
But the principles are mathematically and historically sound. By being flexible and controlling spending, studies show much higher withdrawal rates are indeed sustainable over long periods. Combining this with extreme savings rates and cutting wasteful expenses allows certain individuals the possibility to retire decades earlier than previously imagined.
Common Questions
Still have doubts about whether chasing early retirement is viable or safe? Let‘s explore some frequent questions.
Q: Aren‘t lower withdrawal rates always safer? Why take the risk?
A: It‘s true that ultra-low withdrawal rates like 3-4% are less likely to fail. But this isn‘t the right metric. The goal of extreme early retirement is to achieve freedom and financial independence sooner, even with more risk. To do so, high savings rate is necessary, as is determining the maximum withdrawal rate one can reasonably sustain through market ups and downs while maintaining flexibility on discretionary expenses.
Q: I‘m risk averse and don‘t want to constantly adjust my budget. What should I do?
A: That‘s completely reasonable! A lower withdrawal rate around 4% would certainly require fewer lifestyle adjustments and less stress. The tradeoff is it will likely take longer to build the portfolio necessary to retire early. But you have to decide based on your personal preferences – there‘s no one-size-fits all answer.
Q: What if there‘s an extended down market early in retirement?
A: You‘re correct that the dreaded "sequence risk" – experiencing losses soon after retiring – can rapidly eat your principal and sustainability even with budget cuts. The best defense against this scenario is having 2-3 years worth of living expenses in safe liquid assets as you start retirement. This helps avoid selling into declining markets until they recover. Income from part-time work, Social Security, or other guaranteed sources also helps weather storms without tapping as much principal. There are no guarantees of course, but redundancies like this make success far more likely.
In Closing
Achieving financial independence and retiring early remains outside the norm – but hopefully this breakdown of the Mad Fientist Rule and associated strategies makes it seem far more attainable. By maximizing savings, developing an appropriate personalized withdrawal rate for your situation, maintaining adequate cash reserves, and staying flexible on discretionary expenses, you can shave years or even decades off the traditional retirement plan.
Of course, early retirement isn‘t right for everyone. You may prefer less risk, a more indulgent budget, or simply working towards a standard timeline. But for certain motivated individuals, taking control of your savings and post-career lifestyle years ahead of schedule is absolutely possible. Stop blindly trusting old assumptions and safe withdrawal rates. Crunch the numbers, get your expenses dialed in, and shock yourself with how attainable early retirement really can be!
So when will you start putting these principles into practice for yourself? The four percent rule and 40 year career is clearly not the only choice. Be skeptical, be flexible, be frugal, and you too could join the ranks of early retirees pursuing maxi freedom.