Consideration on Financial Freedom #5

 Regarding the FIRE 4% rule, I have the following reasoning and views.

Let’s say you have capital of 100. Then 4% spending is 4. The question is, for annual expenses, is it:

a) 4% of your capital every year, or
b) A fixed 4, increased each year according to inflation?

If it is (a), then when your investments do well, you can spend more. For example, in the second year you have 120, so you can spend 4.8. But on the other hand, if your investments do badly and fall to 80, then you can only spend 3.2. Your living expenses would drop a lot, and for most people this kind of adjustment is very hard to accept in real life.

So in general, using method (b) is more appropriate.

Another point: your investment return rate must be higher than $4\mathrm{\%}$ + inflation. For example, in recent years inflation has been below $3\mathrm{\%}$. Then your investment return must be at least $7\mathrm{\%}$, so you can ensure the money will not be used up for 50 years or more.

This $7\mathrm{\%}$ can come from different investment products and methods, such as bonds, stocks, crypto, gold, etc. The goal is that, on average, your returns can cover the 4 as spending plus the increase in expenses due to inflation, and the loss of purchasing power of your running capital.

From another angle, if you spend $4\mathrm{\%}$ a year, as long as your investments keep up with inflation, you have 25 years of money to spend.

Here are two simulations:

1. Capital 100, investment return $7\mathrm{\%}$, inflation $3\mathrm{\%}$, first-year spending is 4.
   In theory, it takes about 70 years to fully use up the money, and the annual spending is not $4\mathrm{\%}$ of capital but higher. In year 50, the spending is about $6.5\mathrm{\%}$ of the portfolio.

2. Capital 100, investment return $5\mathrm{\%}$, inflation $10\mathrm{\%}$, first-year spending is 4.
   From year 17 onward, you start to run a deficit, so you are no longer financially independent.

Therefore, you must ensure your investment returns are sufficient to meet future needs. In general, the long‑term average return of the S&P 500 is around $10\mathrm{\%}$, which seems sufficient. But you must take into account:

• Investment risk: returns may fall short, and a $-10\mathrm{\%}$ year is very possible

• Rising inflation: no one can predict what it will be like 10 years from now

So, using a conservative approach, my version of the 4% rule is:

• Annual spending should be less than $4\mathrm{\%}$, even as low as $2\mathrm{\%}$ only

This gives about a 50% margin. For example, if investment returns are cut in half, temporarily negative, or inflation suddenly jumps, you still have room.

If $2\mathrm{\%}$ is your regular baseline spending, then you still have 1–2% of room for discretionary spending. You can splurge on some expensive things: if you like cars, buy a new one; or take a trip to the Arctic, etc. Life becomes richer and more enjoyable, not just basic survival. This, of course, is based on successful investing.

One more point: as you get older, you can consider gradually increasing your bond allocation to become more conservative.

Finally, if you are good at picking investments and can achieve annual returns above $15\mathrm{\%}$, then basically you will have more money than you can spend. At that point, it all comes down to your vision, your courage, and how deep your understanding of the investment markets really is.

Kenzo
24 Dec 2025