Mixing Maroons - Spend Less, Save More … Get Marooned!

Mr. Maroon

January 21, 2014

Four Percent

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Within the financial strategy of each “super saver” exists a key tool often referred to as the Four Percent Rule.  Simplified, the rule specifies that an investment will allow a withdrawal rate of four percent of the principal balance in perpetuity, all the while accounting for inflation.  Obviously, there are certain caveats that cannot be accounted for, such as a complete stock market collapse or frugal living during recessions, and the rule is more predictable for long term investing.

So, Why $1.5 Million?

For us, annual spending of $40,000 works out to an investment balance of $1,000,000.  My comfort level implores me to have a Factor of Safety of 1.5, so I’m shooting for an investment balance of $1,500,000.  Theoretically, I could draw $60,000 annually and continue to grow my balance, but if I continue to strive for $40,000 spending annually (or less), then I effectively have a Two and Two-thirds Percent Rule, which gives me a buffer of $20,000 per year to account for “Aww crap!” situations.

So, we’re reminded of the goals we started with:  1) reduce and control spending, and 2) increase savings and grow wealth.  But, is the Four Percent Rule really achievable for us?

Peace of Mind

It turns out that we didn’t have to search very far to quench our doubts.  A classmate of mine from Texas A&M recently passed and Mrs. Maroon informed me that, to honor her legacy, the family created an endowed scholarship at Texas A&M.  The scholarship structure is simple:  a $25,000 donation establishes a $1,000 annual scholarship.  There it is:  The Four Percent Rule!  Right there in Maroon and White!

Granted, it’s not a reason to simply abide by the Four Percent Rule, but it demonstrates the practicality of the rule.  And, it gives new investors, such as the Maroons, confidence that our recently learned techniques aren’t just harebrained ideas some amateur financial advisor plugs to get traffic on his blog.

~Mr. Maroon

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