Vanguard, the 4% Rule, and the FIRE Myth

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Investment behemoth Vanguard recently published an article titled Fuel for the FIRE: Updating the 4% Rule for Early Retirees. I was excited to see FIRE on the radar of this institution where I hold my investments.

Vanguard has a long history of doing what is best for individual investors. I was curious what they would add to the conversation with the impressive team and massive amounts of data at their disposal.

Unfortunately, it quickly became apparent that Vanguard has bought into the myth that this is a community of naive investors and planners. It ignores the reality of what people who embrace this philosophy actually think and do. 

I’ll share my thoughts on some important points Vanguard raises. How can these concepts be applied in our real life scenarios as we prepare for early retirement?

What’s Wrong With The 4% Rule?

The Vanguard paper starts with a summary of the 4% rule. The opening section focuses on the 4% rule’s origins from a 1994 paper by William Bengen, the assumptions Bengen uses, and why following the rule creates risk for early retirees.

These are all valid points. The 4% rule is flawed for early retirees (and traditional retirees for that matter). 

The Vanguard paper focuses on all that is wrong with the 4% rule. Unfortunately, it brushes over THE vital point as it relates to how the FIRE community uses it and why the 4% rule has become so ubiquitous with FIRE.

What Is Absolutely Right With the 4% Rule?

In the Choose FI book, we noted that many people who have achieved or are on the path to financial independence cited the Mr. Money Mustache blog post The Shockingly Simple Math Behind Financial Independence as being life changing. 

That blog post uses the 4% rule as the basis of determining when you are financially independent. This is a great place to start determining how much you need to be financially independent. It forces you to focus on your personal spending. Your spending determines how much you need to be financially independent.

Having a specific goal can inspire massive, immediate, and life changing action in many people who previously were drifting along. I can’t emphasize this point strongly enough!

This is in stark contrast to standard investing advice. Most advice focuses on building the largest portfolio possible without considering how much is “enough” for you.  

The Vanguard paper is correct. The 4% rule “needs to be fine-tuned for the FIRE movement.”

However, achieving financial independence, even in the most aggressive scenarios, takes about a decade. That is plenty of time to continue to learn, grow, and adjust your strategies. This is exactly what I, and every other FIRE advocate I know of, have done.

As you progress, you can determine if the assumptions built into the 4% rule are too aggressive, or too conservative, for your specific situation.

Related: My Retirement Flexibility Scale for Choosing Your Safe Withdrawal Rate

F.I.R.E., the “Ubiquitous”  4% Rule, and Faulty Assumptions

The Vanguard paper states that “the 4% rule remains ubiquitous in financial planning, especially in the F.I.R.E. community.” They then address five important risks that the use of the 4% rule creates for early retirees.

The paper raises important points that are worth reviewing. However, I have serious contentions with the way they are presented.

The paper demonstrates that as FIRE is coming onto the radar of the broader personal finance world, there are still things they don’t understand about this community.

We’ll go through the five risks outlined in the Vanguard paper one at a time, dissecting what we can learn from them and how they actually apply to those pursuing FIRE.

Risk # 1: Reliance on Historical Returns

The first risk outlined in the Vanguard paper is that the 4% rule is based on past market returns. Expect future returns to be lower when stock valuations are high and interest rates are low by historical standards. Both are currently the case. 

Thus, we should expect future returns to be lower than past returns. Don’t blindly follow the 4% rule as it was originally described. Doing so increases the risk of running out of money in retirement. I have no criticism of this point. 

Where I do disagree is in the idea that this is news to the FIRE community in 2021. You have to look no further than this blog to find that Darrow presented this same information in a blog post titled, Is the 4% Safe Withdrawal Rate Obsolete? in 2012.

Around that same time, early retiree Todd Tresidder was also exploring these issues including this podcast with retirement researcher Wade Pfau and in an article titled Are Safe Withdrawal Rates Really Safe?

Countless other FIRE bloggers have discussed this topic since. For example, in 2018 I wrote a blog post titled Deciding to Retire With High Market Valuations and Low Interest Rates. In that article, I cite other early retiree’s blogs including Financial Samurai and Early Retirement Now who had also already been writing about these ideas.

Risk #2: Retirement Horizon of 30 Years

The second risk Vanguard raises is that the 4% rule was developed based on a 30 year retirement. Early retirees could have retirements lasting 50 years or longer. This increases the risk of running out of money.

Once again, I have no qualm with this point made in the Vanguard paper. My objection is in the idea that this is news to the FIRE community.

Karsten “Big ERN” Jeske’s Safe Withdrawal Rate Series is a deep dive into this topic. It is considered required reading among the FIRE community. 

His work is regularly featured in our monthly Best of the Web posts and on other FIRE blogs. Jeske has been a recurring guest on the ChooseFI podcast and his work on safe withdrawal rates for early retirees was featured in our Choose FI book

Jeske’s work on safe withdrawal rates for early retirees has transcended the FIRE community to the mainstream financial press, including the Wall St. Journal and Morningstar’s Longview Podcast. So to present the 4% rule as ubiquitous to the FIRE community, while entirely ignoring Jeske’s important work on safe withdrawal rates for those pursuing early retirement, seems negligent on the part of the authors.

Risk #3: Absence of Investment Fees

The third risk outlined in the Vanguard paper is the absence of investment fees in the 4% rule’s assumptions. The authors point out that fees are an extra drag on a portfolio, increasing the chance you’ll run out of money in retirement. 

Fees need to be accounted for. However, fees are not limited to expense ratios as emphasized by the authors. The authors ignore the impact of investment advice fees.

Vanguard was founded on the ideals of John Bogle. He emphasized keeping investing simple and limiting all investment fees. In his Little Book of Common Sense Investing he wrote, “We investors as a group get precisely what we don’t pay for. So if we pay nothing, we get everything.” 

Unfortunately, Vanguard has been drifting from their core principles in an effort to stay relevant. Vanguard’s advisory services charge .3% of assets under management (AUM) to recommend holding a basket of index funds. I’m also not excited to see news of Vanguard’s recent corporate acquisition. According to the Wall St. Journal the acquisition “gives Vanguard another way to deepen ties with advisers.”

The premise of the Vanguard argument that fees matter is correct. You should keep investment fees and advice fees distinct and clear. When you need financial advice, pay for the advice you need and account for it like any other expense you’ll have to pay in retirement.

Related: 5 Reasons You Need a Financial Advisor

Paying an AUM fee on your investments is an unnecessary drag on your portfolio if you follow the principles of Mr. Bogle and keep investing simple.

Risk # 4: Failure to Diversify

The next risk Vanguard identifies for early retirees following the 4% rule is an overreliance on domestic stocks and bonds. They recommend diversification into international stocks and bonds to improve the odds of meeting your retirement income goals. The paper quotes Nobel Prize winning economist Harry Markowitz to emphasize their point. “Diversification is the only free lunch in investing,”

I generally agree with Vanguard’s premise. Over time a portfolio with international diversification should be less volatile with similar returns. Thus it should sustain a higher withdrawal rate over a long retirement.

Readers of this blog know that Darrow has shared his portfolio and I’ve shared my portfolio. Each are broadly diversified. In my reading of the FIRE community, lack of diversification is the exception rather than the rule.

More importantly, diversification is not necessarily a “free lunch.” Beyond a basic three-fund portfolio, the more asset classes you add to a portfolio, the less benefit you tend to get while adding complexity and cost. Any additional asset classes should be carefully scrutinized.

Vanguard includes an international bond index fund among its “Select Funds.” This fund has a higher expense ratio and lower yield than their domestic bond fund. If you use Vanguard’s advisory services, you’ll pay them an additional .3% AUM fee on your entire portfolio to be advised to buy and hold this fund. That’s not a free lunch!

Be careful before blindly following anyone’s recommendations, even an institution as reputable as Vanguard.

Risk #5: Fixed percentage withdrawal in real terms (dollar plus inflation)

The final risk outlined in the Vanguard paper is that “the 4% rule may not be efficient given the volatility of financial markets.” They offer an alternative dynamic spending approach.

Unfortunately, this is not a free lunch either. In exchange for an improved chance of not running out of money, a dynamic spending approach can mean materially altering your lifestyle during periods of market downturns.

This again is not a novel idea in the FIRE community. Jeske covered the pros and cons of a variety of dynamic spending strategies in his Safe Withdrawal Rate Series. Retirement researcher Michael Kitces has also shared more in depth strategies for a variety of flexible spending rules for early retirees

The dynamic spending approach proposed by Vanguard is only one alternative to following the guidelines that came from the 4% rule. It is not a magic bullet. Each approach has positive and negative attributes that need to be fully understood before choosing the best solution for you.

Missing the Mark

I was happy to see Vanguard’s acknowledgement of the FIRE community with this paper. However, after reading the paper I got the sense that they wrote it for a FIRE community they don’t understand. Or maybe the one that existed five to ten years ago.

The paper was addressing the mythical naive FIRE person who is motivated solely by the desire to retire as soon as possible. This FIRE monolith quits work the day their assets reach a multiple of twenty-five times their annual expenses, often with an artificially bloated portfolio due to owning only domestic stocks through a decade-plus long bull market. This mythical FIRE devotee then retires and starts drawing down their portfolio, blindly and rigidly following the 4% rule.

I’ve spent the last decade pursuing, reading, and writing about FIRE. I’ve never met that person.

Financially, we are literate… and very conservative. We achieve financial independence by living below our means. That’s because we are natural savers. Saving feels good, comes naturally to us, and provides a sense of security. 

Related: Retirement Mindset Shift — Saver to Spender

If you’re new to this community and aren’t familiar with the 4% rule, the Vanguard paper makes some valid points. You can also follow the links I included in this blog post for a deeper dive into each of them.

However, running out of money in retirement because we save too little is a relatively small risk for most of us pursuing FIRE. The real challenge I commonly observe among this community of savers is not realizing when we have “enough.” The real risk is being too conservative and not taking advantage of the opportunities provided by the money we work so hard to save and invest.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at]

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