August 2021 Portfolio Update
Wednesday 1st September 2021
Does the 4% rule really apply in Ireland?
Over the last few months, I have had a frustration when it comes to FIRE in Ireland. 50% tax rates kick in so early, we are forced to use pensions to limit the tax we pay. This is all well and good, but that then rules out early retirement, with no option to retire in our 30's or 40's, because we can't access a pension until we are at least 50.
While high taxes aren’t much fun, there are some other advantages to living in Ireland that I hadn’t fully factored in. When I started to look a little deeper, I realised that perhaps the 4% rule doesn’t have to be applied so strictly in Ireland due to a number of reasons:
1. We have this exceptionally generous state pension. While it may not be as generous in real terms as it is today by the time we hit traditional retirement, it's unlikely just to fall off a cliff. When we factor this from say age 68 to 70, then it makes a huge difference to your retirement plan.
2. We have free health care from age 70. Follow any US FIRE influencer and all you hear about is "rising health insurance costs". In Ireland (and Europe), we have the opposite - health care is typically free once you hit a certain age. Even if you have private health insurance the amount it can increase is capped. It's a cost we typically wouldn't lose sleep over!
3. We can always return to work before we hit our traditional retirement age. This is probably the biggest consideration. With FIRE our worst case scenario is that we return to work at some point. Imagine you retired early in 2007. A year later your portfolio is worth half of what it was the year before. Are you really going to stand by the 4% rule in this case, or are you more likely to pull up your socks and return to work? I know I would return to work if this happened, so perhaps we can be more aggressive with our withdrawal rate knowing that we won’t withdraw from our portfolio during a bad year.
4. We will likely work in retirement anyway. Keep in mind that so many people who achieve FI end up continuing to work in some form or another! Even a small income will make a huge difference to your withdrawal strategy. In my own case, I have income from passive income sources, income from hockey coaching and I will likely continue to freelance as a web developer even once I hit FI. Based on all of this, there is a good chance I could likely cover most of my living expenses anyway just from small consulting work, hockey coaching and some passive income.
5. We likely have some sort of inheritance due to us at some point. For many of us, we may benefit from their assets being passed on to us one day!
6. Our expenses will decrease as we get older. They say our spending is at its peak in our 30s and 40s, so it is very likely our spending will decrease as we get older. This is especially true if you have children. If you are basing your FI number on your current expenses with a monthly mortgage payment and children, it is very likely that your annual expenses will decrease significantly once your children are no longer financially dependent on you and your mortgage is paid off.
Based on all of the above, it is likely that we don’t really need that much to hit our traditional retirement portfolio. Even a small pension of anything over €200k would likely be more than sufficient to live off once you factor in the state pension and an inheritance. So what if we aimed to withdraw 4% once we hit traditional retirement age and be a little bit more aggressive before then, knowing we can always return to work if there is a major market correction.
As for what we withdraw before then, well it's largely up to you and your own personal situation. I suspect adjusting your withdrawal rate to 4.5% or 5% would work in an Irish context - especially if you are flexible on working here and there as needed.
As for my own personal situation, I have been thinking recently that I could adopt a 5% withdrawal if I were to look to retire before age 55. This would allow me to cover the extra expenses from my children being dependent on us financially, before scaling back to the standard 4% rule after age 55.
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