Is the 4% Rule Right for You?

Cracking the Nest Egg - Fly to FI
Cody Berman
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Get ready to go head to head with one of the most sacred tenets in the financial independence community: The 4% Rule. *Gasps* Find out why I disagree with the traditional nest egg, what the alternatives are, and how to build your ideal lifestyle. For readers who are unfamiliar with the concepts of financial independence and the nest egg, I will provide a brief overview.

The 4% Rule of Financial Independence

Financial independence is the state of generating sufficient passive cash flow to sustain the cost of your current lifestyle in perpetuity. What in the world does that mean? Let’s assume that your current lifestyle costs $40,000 per year. One way to sustain this lifestyle in perpetuity is to accumulate a nest egg that, on average, produces investment gains greater than or equal to the cost of your lifestyle.

A nest egg is typically a large sum of invested money in a brokerage account. The archetypal nest egg size for an early retiree is $1,000,000 based on $40,000 in annual expenses and the 4% rule. The 4% rule is a guideline used by early retirees to determine how much they need in their investment accounts to sustain their lifestyle in perpetuity. The math works like this:

$1,000,000 x .04 = $40,000

or in reverse

$40,000 / .04 = $1,000,000

Since this early retiree has $1,000,000 in his/her investment accounts, the 4% rule allows for a withdrawal of $40,000 each year. Basically, the logic behind the 4% rule is that, on average, the stock market returns well over 4% each year. The average inflation-adjusted annual return in the stock market over the past 100 years is actually 8.86%. In theory, if the retiree withdraws only 4% from his/her nest egg each year, it should last in perpetuity due to the stock market gains. If you’d like to learn more about this concept, check out the Trinity study.

Quick Summary

In short, the nest egg is a large sum of money sitting in an investment account. For aspiring early retirees, the typical advice is “work hard for 10 to 15 years at your nine-to-five job and accumulate a large nest egg to support your lifestyle in perpetuity”. However, this is not the optimal route. Never sacrifice your life hours for money!

Money vs. Life Hours

Have you ever heard the saying “high school/college is the best four years of your life”? This is because, for most people, the years immediately following graduation are the turning point where life hours are sacrificed mercilessly for money. Ironically, these same years are where your physical health and creativity are at their peaks and also where your responsibility and lifestyle-creep are at rock bottom! Why then, do people choose to throw away their precious life hours in the pursuit of delayed freedom?

What are Life Hours?

Life hours are the finite number of hours during your lifetime to pursue things that truly add value to your life. Personally, my main goal is to maximize these life hours and build a life where nearly everything I do is geared toward self-fulfillment and happiness. It’s not always possible to cut out all of the things you don’t enjoy, but each step you take to increase your life hours will result in a happier, more fulfilled life!

I am certainly not here to dictate which activities add value and bring joy to your life. You might love watching movies, creating spreadsheets, building houses, cleaning the bathroom, or dressing up dolls and reenacting famous battles. The bottom line is: do what you love! Pursue your passions and defend your life hours bravely. Aim to never sacrifice your precious life hours for an unfilling nine-to-five career.

Although financial independence seekers fare much better than the average person, the 10-to-15 year grind to accumulate the nest egg eradicates thousands of life hours!

Maximize Your Life Hours

The assumptions in the following graph are:

  • Eight life hours are “wasted” each weekday at a nine-to-five job.
  • The traditional FI path includes 15 years of nine-to-five work.
  • The average American’s working years are from age 22 to 65.

Microsoft Excel Life Hours Graph

Analysis: Each year of unfulfilling nine-to-five work wastes 2,080 life hours (52 weeks x 40 hours). Even for the early retiree working a 15-year career, this means 33,280 wasted life hours. This is surely favorable to the 91,520 life hours wasted by the average American, but you can do better! My goal is to get your wasted life hours as close to zero as possible after you’re done reading this article.

If you have found a nine-to-five job that excites you and adds value, my deepest congratulations, but unfortunately, you are in the minority. According to a recent poll conducted by Gallup, a global analytics and advising company, 85% of nine-to-fivers feel disconnected or unsatisfied with their job.

But why do these workers continue to suffer and feel unsatisfied? Sometimes, lifestyle inflation and debt obligations trap people into an endless cycle of work — a.k.a. the Hamster Wheel. Other times, they are unaware that there actually is a way out. During my quest to maximize my life hours, I learned that any hobby or passion can be monetized. Don’t believe me? Check out some of the amazing success stories on PopUp Business School, a company created to help aspiring entrepreneurs monetize ANYTHING.

Create Your Own Luck

Four Leaf Clovers

As my friend and author of the book Set for Life, Scott Trench says: “Create your own luck”. What does this mean exactly? In order to become perpetually “lucky”,  you must avail yourself to take advantage of the opportunities that come your way! The first step in this process is to minimize your expenses.

Minimize Your Expenses

Who has more flexibility to test their passion as a viable income source and quit their current job: Someone spending $100,000 per year or someone spending $20,000 per year? The answer is simple but often overlooked. If your annual expenses are equal to your annual income, you have no flexibility to pursue a temporarily lower-paying opportunity!

If you’re a young 20-something, this part is easy. You’re probably used to living with roommates, buying cheap food and alcohol, and having minimal responsibilities. If not, don’t worry! There are hundreds of ways to lower your expenses by being intentional and cutting unnecessary items from your budget. Here is just a small sample of easy ways to reduce your annual expenses.

Easiest Ways

  • Cut cable and use streaming services such as Netflix, HBO, and Amazon.
  • Reduce your phone bill by switching to a cheaper service.
  • Minimize your utilities by shopping around for the best rates.
  • Manage your grocery budget. Consciously choose your purchases and decide whether the cost is reasonable.
  • Lower your discretionary spending. Cut back on restaurants, events, drinks, and other expensive discretionary activities. Don’t deprive yourself to the point of misery though.

These are all things that you could change today, this week, or this month. It may not seem like cutting out a $5 daily latte will make a difference, but the aggregation of all these little changes will make a huge impact! For hardcore optimizers, there are some more time-intensive and highly effective ways to cut into your annual expenses.

Most Effective Ways

  • Rent a room/home on Airbnb to help cover the mortgage and maintenance costs. Housing expenses make up 33% of the average American’s annual budget!
  • Buy a cheaper car. Transportation costs make up 17% of the average American’s spending. If you have an expensive car payment or luxury vehicle, downgrading could help reduce your annual spending tremendously.
  • Find a cheaper housing option. This is the most extreme of the strategies to reduce your expenses, hence why I listed it last. However, living in a high-cost-of-living area or having an expensive mortgage can make reducing your annual expenses extremely difficult.

Quick Summary

Some of these expense-reducing tactics might not work for you, but that’s okay! Do whatever you feel most comfortable with. The most important part is just to reduce your expenses to a level where you are able to take risks and exploit opportunities.

Fail Small. Gain Skills.

As previously mentioned, I am a heavy advocate for the pursuit of passion careers. However, I do NOT encourage anyone to put themselves in financial jeopardy to start their new business or venture.  First, you have to test your idea and see if it sells. Never bet the bank on an untested idea.

For example, let’s say my dream was to open a gym and become a personal trainer. Instead of assuming tens or hundreds of thousands of dollars in debt to acquire a property, I should test my idea first. Maybe I go down to the local gym and ask the owner if I can use a room in his facility for fitness classes. I’ll offer him 50% of the profits from my classes to incentivize him to say “yes”. After months of marketing my classes online and through social media, I have a loyal group of 40 who show up every day.

Now I know I’m onto something! Maybe then I can look for my own facility to rent so that I don’t have to share the profits from my classes anymore. After a few years, I might have enough money for a down payment to purchase a facility of my own and really start to grow my business!

In this scenario, I took minimal risks in starting my new business. If I relentlessly advertised my classes and nobody showed up for an entire month, I lost nothing except time. Back to the drawing board. Compare this to the aspiring entrepreneur who put a $100,000 down payment on a workout facility and then realizes his business is a failure. Uh oh!

Learn by Failing

Imagine in my last scenario that nobody showed up to my fitness classes despite my stellar website and intriguing social media campaigns. Monetarily, I lost nothing since the only asset I invested was my time. Despite the fact that this business was a failure, I gained some highly valuable skills. I learned how to build a website, create email lists, and capitalize on social media marketing. My time management and public speaking skills improved from the few classes I instructed. I even formed a great relationship with the local gym owner.

Did my business fail? Yes. But I gained all of these valuable skills along the way. Now, I can learn from my mistakes and deploy my new skills to increase my chances of success in my next venture. The more times you try and fail, the more skills you gain and the more relationships you form. Before you know it, you might just keep getting “lucky”!

Cash Flow Your Way to Financial Independence

Bunch of Cash

In my opinion, the optimal route to achieve financial independence is through the “cash flow” method. This method involves calculating your expenses on a granular level and then building income streams to equal and eventually exceed them. Let’s put this method into practice.

Track Your Expenses

The first step is to track your expenses and understand what you spend on a weekly, monthly, and annual basis. This calculation will decide how much cash flow you need to generate on the income side of the equation. The lower your expenses are, the easier it will be to match your income.

Create Income Streams

Once you have calculated your expenses, you know how much income you need in order to support your current lifestyle. Break this down to a granular level. Let’s say you spend $2,000 per month. In order to support this lifestyle, you need to earn $500 per week or $72 per day. This can be achieved through your main job, side hustles, real estate, odd jobs, or by any combination of these sources. Learn about some great ways to earn extra income on my Resources page!

Build a Lifestyle

My favorite part of the cash flow method to financial independence is having the autonomy to build your ideal lifestyle. You can live in your parents’ basement, eat rice and beans, and never spend a discretionary dollar. This lifestyle commands a minimal amount of cash flow to sustain.

Conversely, you could strive to own a private jet, elegant mansion and have several dozen butlers to do your bidding. This option might take a bit more cash flow to support. The point is, once you figure out your ideal lifestyle, you can then work to unlock income streams to equal and eventually exceed your expenses.

Love What You Do

This is the most important part of the equation, although no math is involved. If you love what you do, work never feels like “work”. The joy and excitement from pursuing your dream or passion vastly outweigh any monetary compensation from a dreaded nine-to-five job. Remember, there is always a way to monetize your passion. You just have to be creative and hardworking enough to figure it out.


Happiness and fulfillment are not linearly correlated with dollars earned. Research has shown that after all basic needs are covered, the level of happiness that each incremental dollar brings is negligible. I can almost guarantee you that someone earning $30,000 pursuing their passion is happier and more fulfilled than someone earning $500,000 working 80-hour weeks in a sub-optimal job.

Identify what you value most and build your ideal lifestyle around that. For new businesses, the first few years might be difficult to match income and expenses. Just keep grinding and working side jobs to fill the income gaps. As you persevere, fail, and get back up again, you will learn valuable skills that increase your chances of success the next time. Reach for the stars and don’t ever give up!

Final Thoughts

I am on this journey just as much as you are. After tracking my annual expenses, I learned that I need approximately $16,000 to live my current lifestyle. Although I am unable to quit my nine-to-five until July 2019, I have built some side-income streams to cash flow my way to FI. I currently earn approximately $900 per month through my side hustles and odd jobs. On an annual basis, this equates to $10,800 in earnings. That means I’m only $5,200 shy of supporting my current lifestyle!

My plan is to continue working on my passion projects and to acquire a modest real estate portfolio. This cash flow will steadily increase as I grow my businesses and my income will start to exceed my expenses. At that point, I will be able to fund my lifestyle by doing the things I love! Sounds like the perfect life to me.

If this content helped you, please share! Website traffic helps to keep the lights on and allows me to keep producing helpful content.

Note: I am not a financial advisor or fiduciary. All of the information presented in this article reflects my opinion. I am not liable for any financial losses incurred related to this content. My content is always written with the readers’ best interests in mind. I believe that my content is helpful and well-researched, but it is not professional financial advice. For more information, read our Privacy Policy.

2 thoughts on “Is the 4% Rule Right for You?

  1. I’ve been reading various FI websites/blogs for several years and found yours today. It is one of the most inspiring and well-written that I’ve come across. Kudos!

    – Dana
    Pittsburgh, PA

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