DIY Investing: An Easy Guide To Investing Your Own Money
02.12.2023We’re back with a brand new season of Whiteboard Friday episodes for your viewing pleasure. First up: SEO expert Cyrus Shepard shares his top 22 tips for successful Google SEO in 2022. Watch to find out what to prioritize and what to look out for in the year ahead! Click on the whiteboard image above to open a high resolution version in a new tab! Video Transcription Howdy, Moz fans. Welcome to another edition of Whiteboard Friday, a very special edition, our annual SEO tips of the year edition. This year it is 22 smart SEO tips for 2022. I’m going to be talking about some of the most talked about things in the SEO industry over the past year plus a few tips from last year that we wanted to pull over because they were just that important. Because we’ve got 22 of them and we don’t want this video to take forever, we’re going to be going through these pretty quick, but for you we’ve linked to some resources in the transcript below so you can explore all of these topics further if you want. All right. Without further ado, let’s get started. On-page SEO tips for 2022 1. A/B testing I’m going to start with some on-page topics. Tip number one, A/B testing or simply testing. We’ve seen a lot more testing tools pop up in the last couple of years, which is awesome because SEO is not make a decision and implement it and you’re done. SEO is implement, evaluate, and then make decisions or sometimes course corrections. Is this something we need to pull back? Did C perform better than D? Which one would we choose? All the tips we’re talking about today can apply to this testing mentality. SEO is incredibly complex, and the old-school idea of best practices just doesn’t cut it anymore. So in ’22, develop a testing mentality with your SEO. 2. Author pages Number two, author pages. I really love this because Google this year updated some of their advice around author pages and their schema markup. It’s an important part of my strategy and a lot of websites that I use. A good quality author page helps Google evaluate your authors, which can be used for E-A-T and other things, and helps link them with their expertise. So linking your articles to a good author page usually includes links to other websites, author profiles, links to the articles they wrote, some biographical information. It can help establish your authors as expertise in a certain space. So take a look at your author pages and try to improve them and make this a task. 3. Google title rewrites Google title rewrites, number three. I don’t think there is any topic more discussed in 2022 than Google rewriting titles. A lot of studies, including one I did, showing Google rewriting 60%, 70% or 80% of a site’s titles. It can be frustrating. But what we’re finding is a lot of people aren’t evaluating those Google title rewrites. When you do, you can learn a lot about your own titles. Why is Google rewriting it? Is my title too long? Am I missing important keywords? Do I have fluff in there that Google doesn’t like? Or in some cases you can go back and try to correct the title that Google rewrote if they’re doing just a terrible job. So Google title rewriting, do an audit of those Google titles and learn what you can do. 4. Nuke the «fluff» Speaking of fluff, this may be the year that you want to nuke the SEO fluff. You know what I’m talking about with SEO fluff. It’s those flowery keywords. It’s those descriptions and it’s recipe pages. «Oh, I was walking along the Irish countryside thinking about my bread and biscuits.» That is your fluff. We’re finding that it may not be necessary, and it may even be detrimental to your SEO. Glenn Gabe wrote a great case study where they reduced a lot of their fluff on category descriptions and they actually saw an increase. Google is removing fluff from title tags. So this marketing, flowery, SEO writing stuff, it may not be helping you, and, in fact, it may be hurting you. Today Google is rewarding sites or seems to be rewarding sites that provide quick answers and more direct engagement. Better engagement, it’s usually better for your customers as well. So experiment with losing the fluff in 2022. 5. FAQ schema Number five, FAQ schema. So last year we talked a lot about different schema types, how-to schema, FAQ scheme, different things. If there was a clear winner in 2022, it was FAQ. The reason FAQ is the winner is because so many sites can qualify for it, it’s easy to implement, and if you win a FAQ schema in SERPs, you can gain a lot of Google real estate. So there are a lot of articles that talk about how to optimize for FAQs. You can get links, deep links in FAQs. There are a lot of things you can do. We’ll link to those in the transcript below. But take a look at your FAQ schema if you’re not currently using it: How to Optimize Your FAQ Schema to Maximize Positive OutcomesWhat Google’s FAQ Schema Update Means For Your SEO Strategy6. Tabbed content Last year we talked about tabbed content, bringing your content that is in tabs, in navigation and bringing it out. This year, we’re getting a little more advanced. Our friends at Merj did a study about types of tabbed content and how easily Google can extract and render and index different tabbed content. So if you still have content in tabs, it doesn’t necessarily mean you have to take everything out, but you should research if Google is able to index and rank those appropriately. There are better resources this year to try to do that. So take a look at your tabbed content. 7. Faceted navigation Along the same lines, faceted navigation. We’ve been talking about faceted navigation for years, but this is the year to get a little more strategic with it. In certain ways, faceted navigation has always been like a set of rules, like if it has green dress, we are not going to index this or crawl it, but if it is size 12 or higher, we will index it. Today, smart SEOs are getting a lot more savvy about what they index, don’t index, and crawl with faceted navigation, and these tools are becoming increasingly available for sites like WordPress and things like that, where you can actually look at the traffic each page receives and index, crawl, faceted navigation on a page by page level, and these broad rules aren’t necessarily as necessary. You can get down to the nitty-gritty and increase your traffic that way, with fine-grained tools. So both tabbed content and faceted navigation, old-school concepts, but we’re getting much more sophisticated with them in 2022. Link building tips for 2022 All right, let’s talk about everybody’s favorite subject, links, because you need links to rank in SEO. But what a lot of smart SEOs know and talk about is you need links to rank in SEO, but you probably don’t need as many as you think. 8. Internal link optimization If you only have a few good external links, one of the best ways to leverage that is optimize your internal link optimization. We’ve seen a number of new tools and processes talking about internal link optimization. We’re talking about pages that have too few links, under optimized anchor text, pages that have great opportunities that aren’t ranking that should. So if you haven’t done an internal link optimization audit in a while, this is the year to do it and this is the way to leverage those internal links that you’re getting. 9. Deep linking Speaking of which, deep linking. In the old days, if you linked to a page, you just linked to the URL. But we’re seeing an increase in deep linking, linking to specific passages, text fragments, things like that, navigation, jump links. This is increasingly becoming a popular strategy to get people deeper into the page and give Google and other search engines signals about very specific parts of pages. This seems relevant as Google has recently introduced passage ranking, where they’re not just evaluating the whole page. They can understand individual passages as well. So making deep linking part of your strategy, as opposed to just linking to the URL, seems to be a great way of moving forward. 10. High ROI link building High ROI link building. I watched a great presentation from Ross Simmonds this year, the Coolest Cool, on link building with assets and determining the ROI of each of them, because everything you build links with, whether it be a tool, a blog post, a free PDF, it has a cost and that cost has an ROI. Ross found that certain things have higher ROIs than others. Tools have an incredibly high ROI, but they’re also expensive to create. Pages with stats on them, not that expensive to create, but also a really high ROI. I’m going to link to that video. It might be a paid subscription. I apologize about that. But it’s awesome. It was voted number one at MozCon. If you do link building, it’s definitely worth watching and definitely worth the cost. High ROI link building, know the cost of everything you’re producing and how much value you’re getting out of it. 11. Reduce redirects Let’s go old school again. Our friend Nick LeRoy tweeted not too long ago about reducing redirects. This is really old school, but a lot of people are forgetting it these days. If you have a large site and you have thousands or millions of redirects all sending confusing signals, 301 jumps to a 302 jumps to a 404, what is that? Looking at your redirect chains and reducing them to a single redirect with a clear directive can help reduce canonicalization errors. It can improve crawling efficiency, and at scale it can influence your rankings. So if you have a large site or even a small site with a lot of redirects, this is the year you want to do a redirect audit. Get on it. Audit, on it. 12. SEO for affiliate links How about SEO for affiliate links? We don’t talk a lot about affiliate links here at Moz, and Google traditionally hasn’t talked a lot about it either. But this year we saw Google introduce specific guidance for affiliate sites, which is something they really haven’t done before. Specifically for review sites, Google talking about what a good review looks like, talking about the good and the bad part of the product, the fact that you should link to multiple merchants so consumers have a choice. We haven’t seen this from Google before. So if you do SEO for affiliate sites, you do review sites, this is the year to review those Google documentations and make sure you’re creating sites that Google rewards and actually following Google’s guidance on it, which is something in past years I didn’t think I would be able to say about that. So it’s awesome to see. Google SEO tips for 2022 13. Reputation research All right, moving on to different topics, reputation research. My friend Lily Ray talks about reputation research a lot in terms of E-A-T. The idea that Google can evaluate your site based on what other people say about you. So if you’re Dr. Mercola and an anti-vaxxer and everybody is saying all these terrible things about you on other websites, Google can disappear you from search. Reviews, what are other websites saying about you in terms of reviews? Google quality raters often look at other websites to get reputation research, and it’s supposedly believed that Google can do the same thing algorithmically. So making reputation research part of your SEO audit process, what are other sites saying about you, is it incredibly positive, is it incredibly negative, this is especially important for your money or your life sites, sites that are going to be more impacted by E-A-T algorithms. So if you sell things or dispense medical advice, reputation research is a little bit more important for those sites. 14. Core Web Vitals — minimums Boy, last year we talked about Core Web Vitals a lot. One of my happiest things is that we are talking about it much less. Google announced a big update. It was a big hooplala. It didn’t quite work out the way Google kind of explained that it might. What happened was Google released Core Web Vitals, and some sites saw a boost, other sites saw a decrease, but it wasn’t as intense as we thought it might be. A lot of sites did improve. But we’re finding in 2022 maybe we don’t need to worry about it as much as we thought. My colleague Tom Capper did a study that showed that slow sites were still ranking and fast sites were ranking even higher, but the effect wasn’t as much. The one thing Tom did find though, that was important, was sites that failed all three Core Web Vital requirements were definitely in the dumps. So we should optimize for speed always, but perhaps in 2022 we don’t need to obsess over it as much as possible, based on Google advice. Speed is awesome. You should make your sites as fast as you can. But Core Web Vitals, don’t sweat it as much as we were in 2021. 15. Ditch AMP? Other things we might want to consider not sweating, AMP. 2021 was the year that we’ve seen a lot sites start to ditch their AMP. This is because Google no longer requires it as a ranking factor in their top stories. It does provide some speed benefits. It’s kind of a neat technology. We know people who work on it. It’s really cool. But a lot of companies were stressing out trying to maintain two different versions of their website to get that ranking boost. A lot of sites are starting to like, «Well, we don’t want to have two different versions. It’s a lot of overhead. It’s a lot of engineers. What if we just got rid of it?» They’re finding it really doesn’t make a difference. They can just work with one platform and still get as much rankings as they want. So if your company is struggling with AMP, this might be a year to experiment with ditching it. Or keep it if you like. It’s great, but a lot of people seem to be walking away. 16. Google Discover On the flipside, a lot of people are flocking to Google Discover. Google Discover is interesting. It’s not traditional SEO traffic, where you research a keyword and people are converting. It’s a little bit more like social media traffic. In fact, social media sharing seems to be one of the ranking factors that can influence how much traffic you get from Google Discover. But what we’ve seen in the last year is some publishers are optimizing for Google Discover, publishing those stories, and seeing huge amounts of traffic for that. Great for like news sites, blogs, popular things, things that talk about popular topics. We’ve gotten some Google Discover traffic here at Moz. We’re going to link to a couple of articles to show you how to optimize for Google Discover. But if you haven’t tried it yet, it may be a channel for you to explore in 2022. 17. Local SEO GBP categories We’ve got to squeeze in one local SEO tip. We’re doing this for our friend Darren Shaw, who publishes the Local Search SEO Ranking Factors every year, doing an awesome job at it. If you have a local site and you just have five minutes to do one thing, the number one SEO tip for 2022, get your GBP categories in order. Ranking factors studies show that it is the number one thing that can influence rankings. Do an audit of your Google Business Profile categories. Darren has a lot of tips over there with that Local SEO Ranking Factors. I would encourage you to look at it. Also Joy Hawkins is doing a lot with experimentations. I’d encourage you to look at her site as well. 18. Favicon review My tip, the tip that I’m going to die on this hill — favicon optimization. Why favicon optimization? I talked about this last year, but I don’t think people took me seriously enough. Over 50% of search results take place on a mobile phone where your favicon shows, and people are not optimizing those favicons. A good favicon can draw attention. It can zero you in on a very busy SERP, and it does it with just a few pixels. A good favicon can raise your click-through conversion rate one or two percent, which is awesome. How does it work? What do you notice on this screen? You notice the tip with a favicon. A good favicon is usually bright, it’s usually high contrast, and it draws your attention to your search results. So optimize your favicon, folks. I’m dying on that hill. SEO career tips for 2022 All right. So I want to spend a few tips on talking about your SEO career, because I don’t think we talk about this enough. What should you be learning this year, aside from Python because everybody loves Python? 19. Learn GA4 This might be the year that you want to finally familiarize yourself with GA4. GA4 is the product that’s replacing traditional Google Analytics. You’re going to see it in a lot more client accounts. It can be a little confusing to people. Some of the metrics aren’t there. It’s got some cool things in it admittedly, like they basically got rid of bounce rate and replaced it with engagement metrics, which is great because a lot of SEOs are a little too focused on bounce rate and engagement may be more representative, a holistic way that Google views your website. Our friend Dana DiTomaso has a course on LinkedIn that you can check out. But familiarize yourself with GA4 so you can walk into those meetings and you can present those reports and know what you are talking about. 20. Attend virtual conferences Conferences. COVID moved a lot of conferences virtually online. People attended them. A lot of people are getting burnt out on virtual conferences. But looking back at all the virtual conferences of 2021, there’s some great value there. Here at Moz, we had MozCon. We had some tremendous speeches. It also makes it more affordable for people all over the world. Traditional conferences, you pay $1,000 to $2,000 just to attend the conference plus travel and all that. But with virtual conferences, oftentimes they’re free or just $100 or $200. You can attend virtually and focus on the content and the learning and advance your career, and do the networking, reach out to the speakers. There are lots of opportunities there. So I would commit in 2022 to attending two or three virtual conferences and make that part of your career advancement. 21. Charge more Finally, the last tip on the career, charge more. 2022 is the year to charge more for your SEO services. Our friend John Doherty at Get Credo publishes his annual salary report or agency fee report. If you’re an independent consultant or agent, you can check to see what you’re charging compared to your peers. But, in general, SEO services are in high demand all over the world, especially high-quality SEO services. The power is in your hands to charge what you are worth, not undermining yourself. If you’re working in-house, it might be time to evaluate your salary and make sure you’re getting paid what you deserve, especially if you’re not getting paid as much as your colleagues or you’re part of an underrepresented group. Charge more in 2022. Make more money. And finally… 22. Be the last click Final tip of 2022, this was the final tip of 2021. It’s my favorite SEO tip of all time. Be the last click. That means satisfy your users. When someone is searching Google or any other search engine and they’re presented with a list of results, they’re clicking around, looking for what they want to be, make sure you are the last site that they click. Why? Because when they clicked to your site, they found what they were looking for. You satisfied them so much that when they see your site again, you’re going to be the first one that they click on because you gave them the answer. Provide awesome experiences for your users. Think of them first. Give them everything they want. Give Google no excuse not to rank you number one in the search result. All right, 22 tips for 2022. That’s all I’ve got. I would love to hear your tips. Please leave them in the comments below. Reach out to me on social media. If you liked this video, please share it. Thanks, everybody. It’s been fun. Video transcription by Speechpad.com
02.12.2023[ad_1]
For those of you without cushy pensions, I’m sorry folks. The 4 percent rule is outdated. It is now unwise to follow the 4 percent rule as a proper safe withdrawal rate in retirement, especially if you are part of the FIRE movement.
Instead, I highly recommend lowering your safe withdrawal rate for the first year or two after you retire, especially if you retire early. Retirement life will likely be much different than you expect. You may be filled with uncertainty and doubt. As a result, the proper safe withdrawal rate should be more conservative.
The idea of having a low safe withdrawal rate once you retire is to train you to live off less. The first couple years is a big adjustment period. By lowering your safe withdrawal rate, you will also be encouraged to do things you enjoy that may generate supplemental retirement income.
I “retired” in 2012 at age 34 with about $80,000 in passive income investments. However, after a year of traveling and wondering whether this was all to life, I went back to “work” growing Financial Samurai. Early retirement life was not for me. I needed purpose.
Today, I still don’t have a day job. But I am still writing on Financial Samurai. I’m paying $2,350/month for unsubsidized healthcare. Further, I have a couple young children to raise in San Francisco. In other words, I’m sharing with you firsthand experience of life after work, during retirement, and post retirement.
I’m not pontificating what retirement life is like as a gainfully employed employee. Instead, I’m living this reality every day.
The Proper Safe Withdrawal Rate
The Federal Reserve and the Central Government have made reaching financial independence and living off only retirement income more difficult. Interest rates have come way down. This means it requires a lot more capital to generate the same amount of risk-adjusted returns.
As a retiree or soon-to-be retiree, taking on more risk is exactly the opposite of what you should do. Once you have won the financial game, your goal is to never go in reverse again. You should focus on capital preservation.
If there’s one thing to remember from this article, it’s this Financial Samurai Safe Withdrawal Rate (FSSWR) formula: 10-year bond yield X 80%.
For those of you who want to leave a legacy after you are gone, the FSSWR is the way to go. Conversely, for those of you looking to spend all your money before you die, feel free to increase your safe withdrawal rate closer to the traditional 4% or maybe even higher.
The right safe withdrawal rate in retirement will depend on your risk tolerance, any supplemental income you earn, your investment returns, and your life expectancy.
The Proper Safe Withdrawal Rate Has Changed
Due to a record amount of stimulus created in a record short amount of time, interest rates have dropped faster than a cement block tied to a dead body thrown off a boat in the middle of Lake Tahoe by one of Capone’s capos.
The 10-year bond yield is at ~1.7%. Although the rate has come up from its 2020 lows, it will likely stay at depressed levels for a long time.
At a 1.7% risk-free rate of return, $1 million will only generate $17,000 a year in risk-free, pre-tax income. As a result, you need a lot more capital today to retire than you did in the 1990s when the 10-year bond yield was at 5%.
Below is a chart that illustrates the sad drop in risk-free income from $1 million over the years. At least the 10-year bond yield has rebounded from a low of 0.51% in August 2020.
If you’ve got your home paid off, your health insurance covered, and your kids all grown up and independent, $17,000 + Social Security will provide for a very simple retirement lifestyle.
Even if you got the maximum Social Security monthly payment of about $2,900 a month or $34,800 a year, you’ve only got $51,800 a year in income. You’re not popping Cristal off your yacht with only a $1 million net worth. You’re living a comfortable life without debt. But you must watch your dollars.
Unfortunately, the average Social Security payment is closer to $1,500 a month instead. Therefore, we’re really talking about an average annual Social Security benefit of $18,000.
Once you’ve reached financial independence or retirement, your risk profile goes way down. This is why using a safe withdrawal rate closer to a risk-free rate of return makes sense.
Assets Returns Are Intertwined With The 10-Year Yield
Returns in the stock market, bond market, and real estate market are all relative to the risk-free rate of return. If the risk-free rate of return declines, so do overall returns for risk assets ceteris paribus.
Please also be aware that if interest rates stay too low for too long, asset bubbles may form and explode. Therefore, in our current low interest rate environment, investors should take extra precaution as well.
No matter how you want to construct your retirement portfolio (60/40, 50/50, 30/70, etc), returns are likely going to be structurally lower going forward. If you don’t believe me, you can check out Vanguard’s return assumptions for stocks and bonds over the next 10 years.
Let me share some examples of how asset returns are connected to the risk free rate:
Example #1: A company looking to raise money to fund operations isn’t going to issue a corporate bond that pays 8%, unless it’s in dire straits. Instead, a company will probably discover that adding a 2% – 3% interest rate premium to the 10-year bond yield will garner enough demand. A company’s goal is to raise capital as inexpensively as possible.
Example #2: A company has historically paid a 60% dividend payout ratio. During the ups and downs, the company’s dividend yield has range between 3% – 4%. The company has always wanted its shareholders to earn at least a 1% premium to the 10-year bond yield. With the 10-year bond yield down below 1%, the company can now cut its dividend payout ratio and provide closer to a 2% yield. The company can then keep more retained earnings for growth and operations.
Example #3: Let’s say you want to take advantage of potential distressed asset opportunities in commercial real estate. One common way commercial real estate professionals measure is the spread between cap rates versus the 10-year bond yield. The wider the spread compared to the historical average, the more profit potential there is.
With the coronavirus, the current office cap rate vs. 10-year treasury yield spread is at its highest in history. As a result, you sign up for CrowdStreet for free, one of the top real estate marketplaces to get alerts on any upcoming deals to take advantage.
CrowdStreet and sponsors are actively looking for distressed deals for you before they are profit-seeking like you.
Plan Financially Beyond Yourself
Using the 10-year bond yield as a barometer for retirement income generation is conservative. However, I also believe the ideal withdrawal rate in retirement doesn’t touch principal so long as your estate is below the estate tax threshold.
One of the big reasons why Americans are in so much financial trouble is because most only plan for themselves. When you start planning for your children, you are forced to at least put on your oxygen mask before helping others. The FSSWR is mainly for those if you who are planning beyond your short lifetime.
If your estate is above $11.58 million per person, feel free to increase your withdrawal rate to whatever you want. Paying a 40% death tax rate on every dollar above the estate tax threshold is a crying shame. With Joe Biden as president, he will likely try to cut the estate tax threshold in half.
Why The 4 Percent Rule Is Outdated
The 4 percent rule was first published in the Journal Of Financial Planning in 1994 by William P Bengen. It was subsequently made popular by three Trinity University professors in 1998 called the Trinity Study. Inflation and interest rates were much higher and pensions were common. The 4 percent rule is the most common safe retirement withdrawal rate cited.
Some like to naively claim that they are financially independent once they achieve a net worth equal to 25X their annual expenses. But if you think logically, there’s a big problem with the 4 percent rule.
Let’s look at where the 10-year bond yield was back when the Trinity Study was published in 1998.
In 1998, the 10-year bond yield was between 4.41% to 5.6%. Let’s say the average 10-year yield rate was 5% in 1998.
Therefore, of course you’d likely never run out of money in retirement following the 4 percent rule. Back then, you could earn 1 percent more on average risk-free! And if you looked at the 10-year bond yield in 1994, it was even higher.
If you had a classic 60/40 stock/bond portfolio, the historical return was about 8%. You were golden. Going forward, I’m not so sure with both bonds and stocks at all-time highs. Valuations for both asset classes are expensive.
See the historical chart of the 10-year bond yield below.
I really hope people who blindly follow the 4 percent rule or the 25X expenses rule realize this very important point. Everything is relative when it comes to finance. To use a rule today that was created when the 10-year bond yield was much higher is irresponsible.
20X Gross Income Net Worth Target
If you want to follow a more reasonable net worth target goal, then try to amass a net worth equal to 20X gross income. Only then, do I believe you might be able to declare yourself financially independent.
With my 20X gross income rule, you can’t cheat by simply lowering your annual expense budget. The 20X gross income rule forces you to accumulate more wealth as your income grows. It also makes you better decide whether you want to continue your way of life.
That said, even the 20X gross income rule may still not be high enough if you want to ensure that you don’t run out of money in retirement.
The New Safe Withdrawal Rate To Follow
If you provide a similar 9% to 28% discount to the 10-year bond yield to come up with a safe withdrawal rate back in 1998, then the safe withdrawal rate in 2021+ is equal to 10-year bond yield X 72% – 90%.
In other words, the new safe withdrawal rate in 2021+ is even lower than just withdrawing based on the 10-year bond yield rate. And you thought my withdrawal rate was too conservative.
When the 10-year bond yield was at ~0.7%, a safe withdrawal rate was actually closer to 0.5% – 0.63%. When the 10-year bond yield was at its low of 0.51%, the safe withdrawal rate was equivalent to 0.36% – 0.46%.
To make things simple, the new safe withdrawal rate equals the 10-year bond yield X 80%.
We can call this the Financial Samurai Safe Withdrawal Rate (FSSWR) if you’d like. This is my proprietary methodology of estimating a proper safe withdrawal rate.
We’ll use an average 20% discount to the 10-year bond yield to come up with the safe withdrawal rate. The 20% can be viewed as a buffer in case of financial emergencies. Sometimes there are bear markets every 10-15 years. Other times, we have poor spending habits. You just never know.
Thanks to a steady decline in interest rates, the 4 percent rule from the 1990s has declined by over 85%. In other words, we should change the name of the 4 percent rule to FSSWR.
As a rational believer in the new safe withdrawal rate percent rule, you have a desire to not run out of money in retirement. You also want t leave some of your wealth to your kids and various charitable institutions.
If you’re OK with spending all your money and leaving nothing, then the 20X gross income rule as a net worth target before retiring is probably good enough. If not, carry on reading.
Proper Safe Withdrawal Rates
To make things easy, I’ve put together the proper safe withdrawal rates in retirement. Given the 4 percent rule was popularized when the 10-year bond yield averaged 5 percent in 1998, we can multiply various 10-year bond yield rates by 80% to come up with an appropriate safe withdrawal rate.
Realistically, we are likely never going to see a 10-year bond yield above 5% in our lifetimes.
The New Safe Withdrawal Rate Rule Is The Reality
Although the new safe withdrawal rate rule may sound extreme, it is based on financial reality today. 2021+ is a very different time than 1998. Inflation is much lower and risk asset returns will likely be structurally lower for a while as well.
Further, you’ve got to account for a potential bear market after such tremendous growth. Believe it or not, stocks do go down or nowhere for years e.g. the 1970s and 2000s. Have we all already forgotten what happened in March 2020?
We can certainly take more risk by investing in riskier assets with higher potential yields. However, once again, if you are close to financially independent or financially independent, you should invest more conservatively. Going financially backwards is terrible because time is so precious.
Thankfully, none of us are zombies. We don’t aimlessly follow a safe withdrawal rate rule until we die. Instead, we adjust based on economic conditions.
If we feel more risk-averse, we will lower our withdrawal rate. We will also save more money or figure out ways to make more money. If we feel like sticking our heads in the sand and ignoring logic, we can stick to a 4 percent withdrawal rate. We can also choose to work for life.
There is not a better chart that shows we can change if we want to change than the chart below. All it took was a global pandemic for the typical American to finally save over 30%! We are adaptable.
The New Safe Withdrawal Rate Rule Provides A Net Worth Stretch Target
With the 4 percent rule, you multiply your annual expenses by 25 to get a target net worth. With the new safe withdrawal rate rule, you adjust. Let’s say the 10-year bond yield is at 0.7%. Then the new safe withdrawal rate is 0.5%. You would then multiply your annual expenses by 200 to get a target net worth.
Following the new safe withdrawal rate rule to obtain financial independence is difficult. For example, I’ve challenged myself to generate $300,000 a year in passive income. The goal of $300,000 has been carefully calculated to pay for ~$240,000 a year in after-tax expenses.
Therefore, in order to proclaim true financial independence using 0.5 percent as a safe withdrawal rate, I would need to amass a net worth of between $30 – $40 million ($150,000 – $200,000 in annual expenses X 200).
As two unemployed parents, amassing a $30 – $40 million net worth appears next to mission impossible. We’ve only got Financial Samurai to help us generate active income at the moment. However, at least I have a stretch net worth target to shoot for.
Now we’ve got to figure out whether it’s worth both of us trying to find day jobs again and forsake our kids all day for more wealth. It might be worthwhile given there should be more work from home opportunities. But it’s hard to go back to the salt mines after being away from work since 2012.
I suggest calculating your financial independence number using the FS Safe Withdrawal Rate as well. Divide your annual expenses by 80% X 10-year bond yield to come up with your net worth stretch goal.
Now that you have your net worth stretch goal, you will be more proactive in figuring out ways to accumulate more wealth. Below is a another chart that highlights how much more capital you need as interest rates decline.
The #1 Way Around The New Safe Withdrawal Rate Rule: Supplementary Retirement Income
If you find the FS Safe Withdrawal Rate to be unreasonable, then all you’ve got to do is earn supplemental retirement income. Your supplemental retirement income fills in your income shortfall.
For example, let’s say you want to live off $100,000 a year in retirement income. This would equate to having a $20 million net worth if the FSSWR was 0.5%. Unfortunately, you’ve been blindly following the 4 percent safe withdrawal rule. Therefore, you thought accumulating $2.5 million was enough.
You now realize the 4 percent rule was developed in the 1990s when the 10-year bond yield averaged 5%+. After cursing out the Federal Reserve and the Central Government, you calm down and figure out the gap.
Your $2.5 million can only safely generate $12,500 a year in passive income using the FSSWR. Therefore, your retirement income shortfall is $87,500 ($100,000 desired retirement income – $12,500 your true retirement income).
Since you don’t think you’ll ever get to a $20 million net worth, you need to find a way to make $87,500 a year in supplemental retirement income. Thankfully, there are multiple ways to make money from home nowadays.
Even William Bengen, the man who first published about the 4 Percent Rule has admitted in the comments section below that he is earning supplemental income as a writer and consultant post-retirement.
Depending on how much supplemental income you’re earning, your withdrawal rate could increase by a tremendous amount and your nest egg would still be fine.
Another Way To Use The New Safe Withdrawal Rate Rule
A less onerous way to calculate your retirement net worth goal is to add up how much retirement income you already have and subtract it from your desired retirement income. Just know there is always a risk your existing retirement income may decline.
For example, my current retirement income is about $250,000 a year. My goal is to have retirement income of $300,000 a year. Therefore, I’m $50,000 short.
Using a 0.5 percent safe withdrawal rate, I would need to amass another $10 million in net worth. $10 million comes from dividing $50,000 by 0.5 percent or multiplying $50,000 by 200.
Or, I can simply find a way to make an additional $50,000 a year in active income to live the life that I want. Ideally, you want to create active income after your career in an enjoyable way.
If it wasn’t for Financial Samurai, I would try to make at least $50,000 a year teaching tennis. If for some reason I couldn’t teach tennis, I’d self-publish another book or try and get a book deal with a traditional publisher. Tennis and writing are my two favorite hobbies.
Thanks to the dramatic decline in interest rates, the days of retiring and doing nothing all day are over. And this is not a bad thing. It’s great to stay active in retirement.
Your goal is to try and make income from things you enjoy doing. One of the key reasons why I’ve consistently published three new articles a week since 2009 is because it’s fun to help people see what’s financially possible.
Find something you’d be willing to do for free to have a wonderful post-career life. If not, you run the risk of running out of money and feeling empty.
Reach Your Target Net Worth, Then Choose Whatever Withdrawal Rate You Like
Let’s say you still think my new safe withdrawal rate rule of 80% X 10-year bond yield is absolutely unreasonable. You have the right to do nothing in retirement! Not only do you want to spend all your money before you die, you don’t want to leave any money to your children or to charity.
Therefore, don’t use my new safe withdrawal rate rule as a withdrawal rate. Use the rule only as a net worth target. Once you’ve reached your net worth target based on the new safe withdrawal rate rule, then you can change your safe withdrawal rate as you see fit.
For example, let’s say you are happy living off $50,000 a year in retirement. You don’t have a pension or any passive income. You’re also not including Social Security in your calculations. A 1 percent withdrawal rate says that you will need to amass a $5 million net worth. Let’s say you succeed in getting to $5 million by age 70 and expect to live until age 90.
With an expected 20 years left to live, you could divide your $5 million by 20 and safely withdraw $250,000 a year. Withdrawing $250,000 a year is equivalent to a 5 percent withdrawal rate. If there is a bear market or big unexpected expense during this time, you can adjust your withdrawal rate accordingly.
Reaching For Yield Can Be Dangerous
What lower interest rates have done is “force” investors to reach for yield. Since it’s too hard for most retirees to live only off my new safe withdrawal rate rule, most retirees don’t. To be able to sustain a higher withdrawal rate, the retirement portfolio must either generate higher yields, higher returns, or both.
Investors have been fortunate to make solid returns in the stock market, bond market, and real estate market since 2009. Will we be as lucky going forward? I have my doubts.
Ideally, if you don’t make supplemental retirement income, you want to have a portfolio that yields your desired withdrawal rate or higher.
Therefore, reaching for yield may consist of:
- Investing in a REIT ETF like VNQ, which has a yield of ~3%
- Investing in individual REITs like O, which has a yield of ~4.5%
- Investing in private eREITs (what I’ve been investing in recently) that have historically provided a ~9% return, even when the stock market is down
- Investing in individual dividend-paying stocks like AT&T with a forward yield of ~6.95%
- Investing in a dividend ETF like VYM with a ~3.75% yield
- Buying rental property
- Lending out hard money
- Buying an annuity
More Risk Means Greater Potential For Loss
However, when you reach for yield, your risk of losing money increases. If you were born in 1980 or later, please try not to confuse brains with a bull market or artificial support from the Fed. Risk assets do go down sometimes, which is what many opponents of the 0.5 Percent Rule seem to forget.
And to be clear, my new safe withdrawal rate rule encapsulates owning risk assets like stocks and real estate, and not just treasury bonds. It includes various retirement portfolio permutations such as a 60/40 or 50/50 stock/bond portfolio.
Remember, the 10-year bond yield is intertwined with all assets. It is the opportunity cost used to calculate the required premium necessary to own other assets. Only you can decide how much more risk you would like to take.
Retirement Life Will Be Different Than What You Imagine
As someone who left his day job in 2012 at 34, I’m providing you some firsthand retirement perspective. It is very easy to pontificate about the proper safe withdrawal rate in retirement while working.
But I assure you, only when you and your partner no longer have a steady paycheck will you genuinely experience all the emotions that comes with being unemployed. There’s a lot of attention on the positives. However, there are also some negatives as well.
Until this day, I have yet to meet an early retiree who isn’t generating some sort of supplemental income. Some will end up generating a massive amount of supplemental retirement income. While some may just earn an extra few bucks here and there.
Going from aggressively saving and investing for years to suddenly withdrawing is an anathema. Therefore, the tendency is to not do so. There is a reason why William P Bengen admitted in my comments section, “I’m on my 4th career as a novelist/4% researcher.” Not even the creator of the 4% Rule is following his own rule.
Listen to anyone espousing the 4 percent rule with a grain of salt. Ask them these questions: Are they making a significant amount of supplemental retirement income? Are they telling you the truth about how much they are actually spending a year? Ask are they actually withdrawing 4 percent a year?
0 Percent Withdrawal Rate
Once I left work, I challenged myself to not withdraw any money from my retirement accounts. In other words, I enacted a 0 percent withdrawal rate. Instead, my goal was to allow my retirement accounts to compound as much as possible during a bull market. To survive, I would live off my severance package and supplemental active income.
I wasn’t comfortable withdrawing principal when I was already giving up a healthy salary. Many retirees feel the same way. Old habits die hard.
Today, I’m trying to consumption smooth and spend more money on a better life. As a result, I’m now OK with withdrawing at a higher rate to supplement my passive retirement income. However, once a bear market returns, I will have to reevaluate.
It is easy to come up with financial models to govern your future retirement. However, as an emotional human being, I promise you that your actions in retirement will be different from what you imagined.
Use The New Safe Withdrawal Rate Rule As A Guide
Don’t be mad at my new safe withdrawal rate rule. The 10-year bond yield has ticked up in 2022. At 1.7% on the 10-year bond yield, the FSSWR is now 1.36%. Now you can shoot to amass 73X your annual expenses to achieve financial independence.
But to clarify, the Financial Samurai Safe Withdrawal Rate is mainly a safe withdrawal rate guide. It is not a practical net worth target guide to shoot for before retiring. In retirement, you should have active supplemental retirement income, Social Security, or maybe even a pension.
The new safe withdrawal rate rule (80% X the 10-year bond yield) is just a net worth and safe withdrawal rate guide in this low-interest rate environment. Depending on how much of your wealth you want to pass on and how much risk you want to take, my new safe withdrawal rate formula may be too aggressive or too conservative. Only you can decide.
The best way I’ve found to follow my new safe withdrawal rate formula is to build enough passive income. As soon as you can build enough passive income to cover your desired living expenses, you won’t even need to touch principal if you don’t want to.
Think Logically And Differently
At the minimum, I hope most of you will at least agree that the 4 percent rule is obsolete.
Coming up with the 4 percent rule when you could earn 4.4% – 7.8% risk-free from 1994-1998 is as profound as saying the sun is hotter than the moon. It is as risky as saying Elon Musk’s children won’t starve to death. It is as deep as saying all organization charts look alike.
We don’t live in the 1990s any more. Lower your safe withdrawal rate percentage or shoot for a higher net worth target before retiring or declaring yourself financially independent. Alternatively, learn to live happily on less or find ways to make supplemental retirement income.
Finally, if you don’t believe me that returns could be lower in the future, Vanguard recently came out with its future 10-year expectations forecasts for U.S. stocks, bonds, and inflation.
If you have a blended retirement portfolio consisting of 70% stocks, 30% bonds, your annual return would be about 3.19%. Therefore, withdrawing at 4% would be too aggressive.
At the very least, I would conservatively follow the Financial Samurai Safe Withdrawal Rate formula for the first couple of years in retirement. After that, adjust accordingly.
Recommendations To Build Wealth
Track your net worth. If you now plan to boost your net worth further using the 0.5 percent rule, then I suggest tracking your finances for free with Personal Capital’s award-winning financial app. The more you can stay on top of your finances, the more you can optimize your wealth.
I’ve used Personal Capital’s free app since 2012 and have seen my net worth skyrocket since. The more you can track your finances, the better you can optimize your finances.
Take advantage of lower rates. Although lower rates have robbed retirees of their income-generating abilities, at the very least, take advantage of rock-bottom interest rates by refinancing your mortgage. Get free real quotes on Credible. Mortgage rates are at all-time lows. When lenders compete for your business you win.
Related posts about retirement and safe withdrawal rates:
How To Feel Rich If You Can’t Get Rich (a follow to address and help folks who are upset about the new FS SWR)
The New Three-Legged Stool In Retirement
No Need To Win A Financial Argument, Just Win By Getting Rich Instead
Readers, do you think the 4 percent rule is outdated? What do you think about my FSSWR formula? What do you think is the proper safe withdrawal rate in retirement? Why do we accept a safe withdrawal rate from working professors in the past who have never retired? Why do some get so angry that I suggest people be more conservative with their financial plans?
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