In my first post, I briefly talked about the concept of FIRE (Financial Independence and Early Retirement). We’re going to further explore the FIRE concept and find out how to make your nest egg last, and why you want to invest it instead of just saving it. The general idea can be summed up as follows:

Spend Less Than you Earn. Invest The Rest.

Making The Nest Egg Last

Imagine this scenario:

You are finally retired at age 65 and have expenses of $50,000/year. You have diligently saved up the $1,000,000 that you thought would provide you with a comfortable retirement for the next 20 years (based on your future predicted life expectancy)

But you never invested because you thought it was too risky.

A big problem with this approach is that the future is unpredictable. You don’t know how long you’ll live for or what your future expenses will be.

Another major issue is that once you have your X amount saved for however long you had planned to be retired for, the money is not growing. Therefore, the principal will be regularly drawn down each year in retirement until it reaches zero.

Sounds great? Sure, if you no longer need any savings at that zero point (i.e.: death). But what if you live to age 87 or 90. Maybe 95? You will need additional savings that you didn’t originally plan for.

And then there’s the inflation monster to deal with, who will continually “eat away” at your nest egg year after year, guaranteed! That 1 million dollars you saved up for by age 65 will have significantly less purchasing power as more time goes by.

Don’t believe me? Check out the Bank of Canada’s Inflation calculator: $1,000,000 of goods in 1999 would cost $1,450,000 in 2019 dollars. So if you plan to retire at 65 (or earlier) by relying on savings alone, you will need an even BIGGER nest egg to begin with!

The only way to combat this is to either:

  • (A) work until you die (nope!)
  • (B) work until you have CRAZY amounts of money (some “experts” recommend having several million in savings…. Really!?!?, that’s also the “work until you die” plan for most people)
  • (or C) Invest (Yes!)

Investing your money will not only grow the principal, but also help keep it in line with inflation so your money will not lose purchasing power. Over the long term, inflation will consume 2 to 3 percent of your money per year, while investing it will provide average returns of 8-10% per year before inflation. Savings accounts provide zero returns!*

Investing Fears

“But I don’t know how to invest?”, ” I know people who invested and lost all their money in the market!”, “I’m afraid! I’ll never be able to save a million dollars.”, “Everything is too expensive!“, Etc, etc.

There can be many fears about investing. Some valid, some not. There are also ways to mitigate those fears. One of the main ones is through understanding and knowledge. Investing is much less complicated than it is made out to be. And as a bonus, the less complicated your investments are, the more successful they usually are.

For the average person, it generally boils down to having an asset allocation mix of stocks and bonds that is appropriate to your individual risk tolerance and emotional stability.* Yes, there are other investment vehicles out there, but those are the main two that anyone really needs.

There are several sites here that are all filled with really good information. But in particular, JL COLLINS’s stock investment series is a really great read in regards to overall investing philosophy, understanding and mitigating any fears you may have. It is written from a US viewpoint, but the overall premise is applicable to Canada and elsewhere.

For further knowledge specifically on Canadian investing, Canadian Couch Potato is among the best. It has great articles, tools, and explanations, and it is based on the only plan you need to use; the Couch Potato Strategy. Moneysense is another good site to explore.

If you’ve got some extra time to read, here are some introductory links to check out:

So let’s get back to the question of investing and how to make your nest egg last for a long time; for as long as you need it… and then some.

The Trinity Study

In 1998, there was an experiment done called The trinity study*. Its goal was to determine how much a person could safely withdraw from their retirement portfolio each year so that their nest egg would not run out; also known as the “safe withdrawal rate”. The nest egg would have to last 30 years to be deemed successful. (based on retirement at age 60).

The researchers examined all the “30 year” time periods in the stock market from 1925 to 1995. (ie: 1938-1988, 1939-1989, etc). They used several different asset allocation mixes (ie: Stocks/Bonds 100/0, 75/25, 50/50, etc) and different withdrawal amounts from the portfolio’s principal (ie: 2%, 3%, 4% per year, etc.) to see what percentage of the time that a “30 year” retirement portfolio would last the entire 30 years.

Now keep in mind there were some terrible times in the stock market during those years, the Great Depression Era (1929-1932 crash), 1937 Recession, 1962, Black Monday (1987); however, even with some rocky periods in the past, their results found that an annual 4% withdrawal rate from a portfolio comprised of 75% stocks / 25% bonds was the most successful combination. That asset allocation survived the “30 year” period in 95% of cases, and actually thrived in the majority of them! Hence, they called it the “4% percent rule”.

FIREcalc results: 95% success rate (number of 30 year periods above the red “zero” line)

Risky Behaviours

“That’s not 100% successful… It’s too risky!“

Nothing is without risk.

Driving to the grocery store is risky because of car accidents. Not exercising regularly is risky because of developing chronic life shortening health diseases. Keeping money under your mattress is risky because it might get stolen or your house could burn down. Keeping all your money in a savings account at your bank that pays little or no interest is extremely risky because inflation will destroy it 100% of the time.

So we have 100% failure rate (because you never invested) vs a 95% success rate. I don’t know about you, but I’m betting on the 95% success one. Granted, past results aren’t indicative of future performance, and using historical data is limiting because of the length of the period examined.

With extra early retirement starting in your 30’s, 40’s or 50’s, you will likely need a longer lasting portfolio than 30 years. Financial blogger GoCurryCracker has recently investigated how a potential 60 year retirement using the 4% rule would possible work and it’s well worth a read.

In Conclusion:


4% (Four percent) is considered a relatively safe withdrawal rate for your retirement investments (assuming a 75%/25% stock-bond ratio) and your nest egg will last and outlive you in the majority of cases (95%). If you don’t invest your money and just take out 4% per year (ie: 40,000 of 1,000,000), by year 25, you won’t have any money left in 100% of cases.*

To attain the amount needed for the 4% rule to work, you’ll need to have saved and invested 25x your yearly expenses (4% of 100% equals 25). So if your yearly expenses are 40k, you’ll need $1,000,000 saved. Alternatively, if you only spend 25k/year, you’ll only need $625,000 saved.

This provides an incentive to reduce your yearly spending because then you won’t need to save as much. Once you hit that 25x amount, you should be good to go for being financially independent and retiring at a moment’s notice!






*There are savings accounts that do provide more than zero interest, but the rates are usually so pathetically low (like 0.05 % that it’s basically as good as zero percent. Essentially little breakfast nuggets for the inflation monster. Occasionally you can find some non big-bank offshoots that do pay somewhat descent interest rates, like 2 – 3%, but those are often only for very limited times with limited amounts, at which point they will default back to a much lower rate

*Emotional Stability is one of the most if not the most important and complex factor to successful long term investing, as it help direct rational over irrational thinking and decision making processes.

*For the original paper on safe withdrawal rates, see here. (Be warned, it’s a bit dry of a read though.

*In fact, more than 100% because inflation will decrease your principals value even sooner.

*Taxes, social security, and pensions haven’t been included to help keep things simple. However, some people may not have access to pensions or other societal safety nets. Nest eggs therefore become even more important.