Ep 65 | Wealth Building Basics - The 4% Rule and Index Funds with Brian Gubernick

Thank you for joining me today. It's Brian Gubernick, and welcome to the No Days Off podcast, where we believe that every single day brings a new opportunity to get better. Let's get into it. Today we're going to be talking wealth. We're going to get better at wealth, and we're going to do so by by covering the 4% rule and index fund investing, okay? These are some basic, basic tools or principles that I believe we need to know in order to embark on a successful journey to wealth, and specifically successful retirement, whatever that may look like for you. I think many of our listeners at No Days Off probably have no intention of ever retiring, but I want to make sure we're all getting to a place where our passive income, as we've discussed in the past, our passive income and our savings and our retirement exceed that of our monthly outflows, our expenses. You may not retire, you may not stop working, you may not stop earning income, job income, but I want everybody that's listening to at least have that option available to them. How do we get there? It's by covering topics or studying topics like the 4% rule and index fund investing and how those two are related. So let's start with the 4% rule. What is the 4% rule? Maybe you've heard of this before. I want to make sure we define it, we're clear around it today. The 4% rule is a basic or general guideline that's used in, in retirement planning. And what it is, is a, is a sustainable withdrawal rate from your portfolio. Basically what it means is according to this rule, if you retire, if you have, if you have a portfolio, portfolio, if you have a bunch of assets or money, uh, let's say sitting somewhere and that money's earning some degree of interest, ideally it's more than 4%. Then according to the rule, you can withdraw 4% of your initial portfolio balance in the first year of retirement, and then you adjust in subsequent years for inflation. So this is based— this strategy is based on historical data, and it's intended to, to provide a foundation, or a high probability, I should say, that your investments will last at least 30 to 50 years, which again is kind of what we're calling retirement. So let me demonstrate what I mean here. If you have $1 million sitting in an account, in an investment account, and ideally that investment account is balanced for this 4% rule to really play out as designed. It's balanced between, call it stocks, maybe bonds, maybe real estate, and it's rather stable, it's not overly aggressive, it's not overly risky. If you have $1 million, what that means is in year 1, you can withdraw from that million $40,000. And in doing so, that would be year 1. If you did that in subsequent years adjusted for inflation, right? So if, if we said inflation was 2%, hypothetically, and you were to adjust, that means the next year you'd be pulling out $40,800, right? So that 2%, $800 is 2% of $40,000. So you would adjust. So year 1's $40,000 in this example, year 2, $40,800, and you could adjust for inflation from there. Bottom line is, if you had that million dollars invert— invested in some sort of stable group of assets, you're able to withdraw $40,000 plus inflation year after year after year, and you will not run out of money in the, in the rough scenario here for at least a 30-year period, likely beyond. Again, this assumes a balanced portfolio and it, and it, and it's withdrawing 4%. Now, if you want to withdraw 5% or 6%, you can actually do so, but just recognize the risk of running out of money is actually higher. Now, why does all this matter, this 4% rule? Number 1, I want you to have a baseline. I want you to know what's comfortable in terms of withdrawal for retirement. If you have $1 million, it's $40,000. If you have $2 million, it's $80,000. So if you backed into the math and said, hey, here's what I need to live the— live the life I want to live in retirement, let's say, you can back into the amount you need to accumulate right now in your working life and stash away, and then use that 4% rule to determine, you know, the amount you need to, you need to save and how much you can withdraw. So run the math out. If you decide you need $400,000, what does that mean? Well, it means you need, what's that, $10 million in an account somewhere. Okay, so $10 million means you can withdraw $400,000. If you withdraw $400,000 annually, that gives you what, $30,000 to $35,000 a month for your expenses. Now, not everybody has, uh, has that much in expense or wants to spend that much. Great, adjust your numbers accordingly. Now, how does this relate to index fund investing? Index fund investing is something we should all know about. Because it's an approach that involves purchasing a portfolio of securities that aims to replicate some sort of market index. More oftentimes than not, when we talk about index funds, we're talking about the S&P 500 index. And if I want to drill down even further, in the circles in which I run, we're usually talking about stock ticker VOO, which is the Vanguard S&P 500 index fund. But essentially, index funds are passively managed, which means they aim to match the performance of an index like the S&P 500. They don't necessarily try to outperform it. And because they're passively managed, they're very low cost. They're very diverse. And frankly, if you go, go over the course of history, what you'll find is 8 out of 10, 9 out of 10 times each year, They outperform the actively managed funds and, and, and mutual funds. That's why it's become so popular. It's simple, it's low cost, and it has long-term growth. The S&P 500, at least for the past 25, 30 years, has matured, has appreciated about 9% a year. If you go back further, that'll go to 10% or 11% over the course of history. So if I tie this back to the 4% rule, if you take your million dollars and you put it in an index fund, and that index fund happens to grow at 8, 9, 10%, and you're withdrawing 4% to support yourself in retirement, it's a very favorable equation. Now let's be very clear. I cannot predict the future. Could we potentially have a significant market downturn? Well, of course we can. That's happened over the course of history, uh, multiple times. But the idea here is this is a 30 to 50 year approach. This isn't a 5-year approach, right? So one of the greatest keys to winning in the stock market is to do what Warren Buffett does And Warren does lots of brilliant things, but probably the smartest thing he does that the vast majority do not is that he's willing to play the long game. He's willing to sit on things. He's not trying to time his stock investments, his trading. So if you invested in an index fund— and I'm not your advisor here, disclaimer, I'm just someone who's active in this space, but I am not the expert nor am I managing your money— but if you were to invest in an index fund, and you were to sit there for decades, odds are, just based on the data that we've had, that we have over the past 100 years or so of, of the S&P 500, over the course of time it's going to play out favorably for you. And withdrawing 4%, again, playing it out over the course of time, because this rule, this 4% rule, was developed based by, based on looking at historical data. It's a pretty sound strategy. It's a pretty sound strategy. Now, again, there's a lot more here and not, you know, I can't cover it all, I should say, in an 8 to 10 minute podcast. But here's the focusing question today. How could the 4% rule impact your investment or retirement planning? What do you need to learn about the 4% rule that maybe I didn't cover today, but how can you go learn more go a little bit deeper on this. Another focusing question, I've tossed out the term index fund. How could you go study that, learn a little bit more? I'll give you some answers to this. Actually, I'll give you one key answer to these questions. I would go pick up the book, A Simple Path to Wealth, Simple Path to Wealth by Collins is his last name. It is a book dedicated to index funds, index fund investing, particularly Vanguard, and it talks around or compares it against the 4% rule. Probably a great place to start. That's all I have for you today, the No Days Off podcast. Thank you so much for listening, and remember, every single day brings a new opportunity to get better. So let's get at it.