What's up, graham, it's guys here, so here's the thing: if you want to invest your money, build your wealth and earn enough passive income to never have to work another day in your entire life ever again, there's an easy calculation for that called the four percent rule. The last 30 years this has been the holy grail of financial independence, early retirement and always making sure you have enough money to spend without going broke. Although, as time went on, it became apparent that there was a problem just recently. New information surfaced from vanguard, calling out the flaws of the four percent rule that need to be addressed.

Charles schwab warned that our investment returns could substantially decline over the next decade and the inventor of the four percent rule himself says it's no longer valid and needs to be updated to reflect today's environment, where people are retiring sooner than ever because of meme stocks and Dogecoin, but now in all seriousness, the math behind the four percent rule could easily be the most important calculation you're ever gon na learn throughout your entire life, and it applies to nearly everybody. Investing your money, no matter who you are, how old you are, how much you have invested or what you're invested in so watch this one all the way through and i'll cover exactly what the four percent rule is, how you could use this to build your wealth, The problems brought up by both the inventor vanguard and charles schwab and then, finally, how you can avoid the biggest mistakes that could wind up, leaving you with nothing, although before we go into that, and why this mcdonald's ice cream machine led to a restraining order. I just want to say a huge thank you to the sponsor of today's video myself. Alright, there's actually no sponsor, but it would help me out a ton if you smash the like button for the youtube algorithm or commented anything down below.

That's it. Thank you guys. So much and with that said, let's begin all right. So all of this begins back in 1994, when the four percent rule was first invented and used as a method of calculation to make sure you never run out of money in retirement or basically, if you want an endless supply of passive income spilling into your bank, Account without you ever needing to get out of bed.

This tells you how much you need and how much you could spend. The objective was that if this calculation was done right, you would always have money left over, but for that to actually be a success, then two things had to occur. One they wanted to make sure you didn't spend too much money. In the event your investments didn't perform as well as you thought they would like investing right before the dot-com crash and still being down 50 10 years later or investing in corsair gaming, which come on, give me a break and two they wanted to make sure you Didn't spend too little to the point where you could have spent money on lambos and yachts, but didn't so as a result, your future children get to blow it all and influence or promoted nfts and random advertisements that they see on tick tock.

So, in order to calculate the precise amount of money that you need invested, they simulated every single 30-year retirement at various starting points from 1926 through 1992, and then they projected how much would have been left over at the very end of those 30 years. Assuming the worst possible case scenario, which is you retiring at the peak of the market and then slowly watching your investments, plummet and value, while you have to constantly sell them off to pay for a lifestyle, you thought you could sustain, but couldn't when you finally put Away your pride to go back to your old employer to try to get your job back. You find out that they filled your position with a college intern who took an 80 pay cut to get the experience. So you go back home defeated only to find that your wife has gone to cancun with the chauffeur you know what i'm going way off topic.

Let's get back to the 4 rule anyway long story short throughout history. There is a very clear guide in terms of how well our investments typically perform versus how much of it we could spend without running out of money, and that amount is what's known as the safe withdrawal rate. As you can see from the chart right here, if you're a hundred percent invested in the stock market and spend only three percent of your portfolio a year, it's safe to say, your money is going to last a 30 to 60 year retirement with a 100 success Rate that you won't run out of money. On the other hand, if you're 100 invested in the stock market and spend 5 percent a year, you only have a 76 percent chance of not running out of money by the end of those 40 years.

That's why the more money you spend and the longer you need that money to last the higher the chances are that you wind up with nothing, and that, of course, is where the four percent rule was born. This is the holy grail of retirement. That says, you have a 99 chance of your money, lasting you at least 30 years, as long as you don't spend more than four percent of your portfolio annually. But now, according to new information, the four percent rule no longer applies the same way.

It did when it was first calculated and to go into those changes. We should first start with vanguard. The first piece of criticism is that the four percent rule relies on historical averages, which might not be true today see initially, it was assumed that if investors from 1926 to 1992 could spend four percent of their portfolio be totally fine. That should work today, but, as we all know, past performance is not an indicator of future results, as every stock market disclaimer ever says and as you're about to see, four percent could end up getting you in trouble as vanguard, calculated.

Historically, the markets have a real return of seven and a half percent for stocks and two point: four: three percent for bonds, adjusted for inflation between january 1926 and march of 2021, but over the next 10 years, they're forecasting significantly lower returns like 2.44 for u.s stocks And 0.27 percent for us bonds adjusted for inflation. Charles schwab, also seconds this by saying that the market returns on stocks and bonds over the next decade are expected to fall short of historical averages. According to our 2021 estimates, the second vanguard warns that a 30-year retirement might not be long enough see. Originally, the 4 rule was crafted to fit a 30-year retirement, not someone who wanted to retire early and then spend all of their free time going and watching youtube.

Videos like this because of that the standard 30-year retirement calculation might not work for someone who wants to stay retired longer. For example, a 50-50 stock and bond portfolio might have an 82 chance of lasting 30 years, but it only has a 36 chance of lasting 50 years. So the longer you want to retire the riskier it is to use the four percent rule. The third, the four percent rule, does not take into account fees which could lower your return even further.

For example, your retirement account could have annual fees that eat away at your profit. Almost every index, fund or mutual fund has an expense ratio associated with it and, as a result, your overall returns begin to decline. Then fourth, the four percent rule does not look at diversification, see when the four percent rule was first calculated. It only considered u.s stocks, but vanguard's analysts believed that over the next 10 years, international stocks could actually wind up outperforming, which means, if you diversify throughout the entire world, you could increase your chances of having enough money from 36 percent all the way up to 56 And then, finally, fifth, they say: there's risk in simply spending four percent, and that's it even though the four percent rule was meant to be sustained through a time where the stock market crashes out of nowhere, even though jim cramer tells us to buy in reality, vanguard, Says that if the market crashes, it's probably a good idea to cut back on your spending long enough until things recover just to make sure you have enough money to last as long as possible.

However, the inventor of the four percent rule himself somewhat disagrees and says his calculation was treated a little bit too simplistically. That was because, during simulations he took into account the worst possible case scenario in the event you retired, at the worst possible time, or in his case that could more recently be 1968. Where the stock market peaked, then runaway inflation was just about to begin. However, even someone who retired at that time would still be okay if they just spent four percent of their account for 30 years.

So this was basically taken with the worst case scenario in mind. First and then you work backwards to make sure you'll still be okay, but more recently he added that at other points in history, when inflation was low and stocks and bonds were cheap, a new retiree could have spent much more money and been just fine. Historically, he says a safe withdrawal rate could have turned out to be seven percent and at some points as high as 13. Of course, the only way to know about this was in hindsight after the fact at which point it's probably too late, but almost a year ago he said that he would feel comfortable changing the four percent rule into the five percent rule, meaning you would be able To spend an extra one percent a year and still have money left over by the time you uh, you know, go to the big like button in the sky, but of course that relies on low inflation, which is not exactly something we're seeing right now, even more.

Concerning was that, when recently asked about his own retirement, he said that i normally have a 50 allocation to stocks, i'm at about 25. I just have a very uncomfortable feeling about the speculation in the market, the extremely high valuations and the disparity between the stock market and the economy with the virus. Then, after being questioned that his allocation violates the own rule that he invented, he responded by saying my position is a temporary one. The 40 to 75 average is a long-term average you'd like to maintain i'm doing this because of short-term conditions that i consider dangerous.

I'm hoping after this is over i'll return to my normal allocation for stocks. I may even go higher than normal, so if even the inventor of the four percent rule is not following his own guides that he discovered it does make you question whether or not this is actually a viable strategy, and there are quite a few people arguing against This line of thinking, for example, the popular finance blogger, the financial samurai, explains that the four percent rule was created during a time where the ten-year treasury bond was averaging five percent. But now, when 10-year bonds are paying just 1.3 percent, you should plan for a safe withdrawal rate of 0.5 yeah. You heard me correctly, not 5 0.5.

So if you want to retire off 40 000 a year, you're only going to need 8 million easy now to be fair, there's never been any point in history where the stock market has performed so low over 30 years to require 8 million dollars. For a forty thousand dollar a year income, so maybe he was just having an off day. We all have those, but that also doesn't stop people like susie orman, from telling people that if they want to retire in a nice comfortable middle class lifestyle, they will need five million dollars. She says: that's enough to support a family, live a nice middle class lifestyle in a high cost of living area, go on a few vacations and have a safety net.

In case things go wrong, the market goes down and tattooed chef doesn't do as well as you initially expected now. Obviously, both five and eight million dollars are ridiculous amounts of money to come up with, especially if you're not the type to spend frivolously. So i think in fairness here i will give you my own independent calculations and my own thoughts coming from somebody who makes videos here on youtube with the car in the background. So, first, in order to do this, we're going to take a look at what's called the rolling 30-year return of the s p 500..

This is basically the average return that you're going to get over any 30-year time frame, and by doing this, we'll be able to see the best and worst-case scenarios for your money. We'll start with this chart, which goes back the very furthest all the way back to the wonderful year of 1872.. This found that a 20-year stock market has never once produced a negative result, adjusted for inflation in history and the worst case scenario ever realized. So far in the market was a half a percent return adjusted for inflation.

However, that would be a 20-year time frame during the 1960s right before runaway inflation, and the likelihood of that happening again to such a high degree is rather slim, but during any other time in history, you'll see an average return of about six percent. In a best-case return of about 13 now, another chart shows that the worst possible case 30-year rolling period was 4.3 after inflation and again that would be during the 1960s. And if we look back throughout the last 30 years today, we could see that the average return was about 5.96 adjusted for inflation with dividends. Reinvested.

The only catch here is that these types of returns are not guaranteed, and we've got quite a few warnings that say that the future returns might not be as good as what we expect. For example, charlie munger says to prepare for lower returns, because the stock market has been fueled by a retail frenzy and easy monetary policy that boosts prices beyond their fundamentals. Charles schwab says that rising inflation, slow economic growth and high equity valuations will lead to less room for stocks to move upwards and pw capital mirrors the same conclusion with the mention that strong returns might be coloring investors perception of how much they should be earning from The stock market, so, given all of this information, i think if you're looking at a 30-year retirement - and you want to make sure with 100 certainty that you have money left over after those 30 years throughout all points in history spending four percent a year would be. Okay, if you're willing to diversify, cut back on your spending at the ritz carlton in the event, the market goes down and potentially get a job in the event you absolutely needed to.

Otherwise, if you want a much longer retirement like 40 or 50 years for all of you early retirees out there, then i think it's probably more appropriate for a three to three and a half percent safe withdrawal rate, just in case something happens and everything we think We know about the market is entirely wrong and really at the end of the day. All of this is just a rule of thumb and by understanding what this is and what it does you'll be able to better budget. How much you need to save and invest. Oh and then regarding the story about the mcdonald's ice cream machine, here's the scoop pun intended anyway, the ice cream machines are manufactured by the taylor company and i see 18 000 each and they have a reputation of not exactly working.

In fact, in the servicing agreement signed by mcdonald's, the taylor company is the only one licensed to actually go and work on those machines because of how complicated they are well. In 2019, a company called kitsch released their own diagnostic device that figured out what was wrong with the taylor machines and allowed the mcdonald's to make their own necessary repairs without having to call a taylor technician. As you would expect, taylor was not exactly happy about this. So allegedly, taylor tried to purchase their own kitsch product to reverse engineer it, and then they would just be able to make it themselves and cut out the middleman.

Well, a judge just sided with kitsch saying that their product was above board and issued a restraining order preventing taylor from buying their products. I guess you could say this is kind of a shaky situation. Okay hit the like button. That's all i want so with that said guys.

Thank you so much for watching. I really appreciate it as always make sure to subscribe and hit the notification bell also feel free to add me on instagram, i posted pretty much daily. So if you want to be a part of there feel free to add me there as my second channel, the gram stefan show i post there every single day - i'm not posting here. So if you want to see a brand new video for me every single day, make sure to add yourself to that.

And lastly, if you want a free stock worth all the way up to a thousand dollars, use the link down below in the description and sign up for public using the code, graham and plus, i'm posting all of my own stock trades on there. So if you want to be a part of it, the link is down below in the description. Thank you guys so much for watching and until next time.