Why Life Planning After FIRE Is Difficult (Simulating the Risks of the 4% Rule)

F.I.R.E. is a concept that spread from the millennial generation in the United States and has become major in Japan as well. It is an acronym for "Financial Independence, Retire Early," which means "to be financially independent and retire early."

It refers to the idea of accumulating assets by at least your 40s, quitting your job, and gaining a free lifestyle through investment returns.

And it seems that life after FIRE is based on the premise of withdrawing 4% of assets, which is known as the "4% rule." This figure is used because research from a U.S. university suggests that if you withdraw 4% or less, the probability of your assets running out in over 30 years is low.

This is based on the fact that the long-term average return of the U.S. S&P 500 is 7%, so there is a high possibility that assets will increase rather than decrease even if you withdraw 4%.

In that case, for example, if your living expenses are 4 million yen, you would need 100 million yen in assets (4% of 100 million yen is 4 million yen).Unfortunately, I learned about this concept in my late 40s, so I was not in a position to FIRE in the first place. Therefore, I have no intention of denying or criticizing investing with the goal of FIRE.

However, having spent many years in the ruthless world of investing and knowing that the market sometimes betrays human predictions and presents cruel realities, I believe it is necessary to perform a more realistic simulation.

Since the 2008 global financial crisis, financial authorities have begun checking whether financial institutions, such as banks, can continue operations even if unforeseen events occur in the financial market, such as stock market crashes or sharp interest rate hikes. This is called a stress test.

So, I performed a stress test by applying past performance figures. The calculation premises are as follows.
1. Assets are entirely in dollar-denominated S&P 500, and the exchange rate is 158 yen.
2. In the first year of FIRE, a stock market crash similar to the Lehman Shock occurs, down 50%.
3. The following year, stock prices remain flat, but the dollar crashes, leading to a stronger yen with an exchange rate of 80 yen.
4. In the third year, both stock prices and exchange rates remain flat.
5. From the following year, stock prices rise by 10% every year, and the exchange rate returns to a weaker yen by 5% each year, moving at +115%.

The results are as follows.

A 50% stock market crash actually occurred during the 2008 financial crisis, and the yen reached a high of around 78 yen in 2011, so these are historical values. Also, the subsequent rise applies the S&P 500's past average yield of 10% before inflation adjustment, and since a 5% annual weakening of the yen from 78 yen in 2011 leads to 154 yen in 2024, these are also realistic figures.

The reality that assets run out and become negative in the 10th year.

By the way, even if the withdrawal amount is set to 3 million yen, assets will run out in 18 years. If you had FIRE'd at 40, in both cases, you would be unemployed with zero assets before the age of 60.

Is this an extremely pessimistic simulation that is impossible?

It is true that stock market crashes occur in the short term, but the decline in the exchange rate is a bit more gradual, so it might be a bit rough. However, in both cases, stock prices rise every year from the year after the crash. The win rate is 7 wins, 2 losses, and 1 draw for the first table, and 17 wins, 2 losses, and 1 draw for the next table. I think that point is actually optimistic.

What if you just earn income from a part-time job along the way to curb asset depletion if the market crashes and your assets start looking thin?

That is certainly true.

However, there are limited places that will hire a middle-aged person near 50 who has had a blank in their work history for many years after FIRE. Besides, I think being bossed around by young student part-timers or older part-time ladies at a part-time job is tougher than you imagine.

Since NISA started, I have seen simulations in magazines and on YouTube where assets increase every year, such as 5% with All Country or 7% with S&P 500. But in reality, the return is different every year.Especially in the case of asset withdrawal, I would like to recommend performing a more cautious simulation.

Furthermore, regarding the two cases above, if you do not make withdrawals, what happens isthe principal recovers in the 13th year, and the asset value doubles by the 18th year.

I have no way of knowing now what your purpose would be if you were to enter the workforce and start investing. However, if you are aiming for FIRE, I think it would be good to look at this simulation to consider your investment strategy and subsequent life planning.

*The information posted is not intended for investment solicitation. Transactions involving financial products such as stocks or real estate carry the risk of loss.

The articles posted are written as a personal hobby, and the information provided may not necessarily be appropriate for all readers. Furthermore, there is no guarantee regarding its truthfulness, completeness, accuracy, or timeliness for any specific purpose. Please make all investment decisions at your own discretion and risk. I cannot be held responsible for any losses incurred.