Summary
➡ The 4% rule suggests that you can withdraw 4% from your investment accounts annually and still see growth over time, assuming your investments, like those in the S&P 500, grow 7-12% each year. However, this rule doesn’t account for market crashes or periods of decline, which can last for years and significantly impact your portfolio. Additionally, financial advisors may encourage this rule to keep your money in the market longer, benefiting from management fees and selling you their products. To apply the 4% rule, determine your annual financial needs and divide that by 0.04 to find out how much you need to retire or become financially independent.
➡ Instead of setting a large, daunting goal like saving $2.5 million, it’s more effective to aim for smaller, achievable targets like earning $8,000 a month. This approach is not only more realistic but also provides a steady income that can continue even after you’re gone, benefiting your children. To set these goals, first determine your minimum lifestyle number – the exact amount you need to avoid homelessness. Then, dream bigger and identify your ideal lifestyle, calculating the exact cost. This method changes the way you think about saving and makes financial goals more attainable.
Transcript
And I’m a partner at a leading tech VC hedge fund. Now, I’m not saying I know everything. But when it comes to advice, the first question I would ask is, if I take your advice, will I end up like you? You want to be very careful who you take your advice from. So today, I want to jump into some advice clips on money that you might see on your YouTube channel and probably are watching that could lead you astray. So let’s just jump right in. All right, so we’re going to just jump right in.
It’s a little bit different for you today. But again, like I said, the first question you should ever ask if you’re ever getting advice from anybody is if I take your advice will end up like you. So I wouldn’t hire a personal trainer at the gym that was really out of shape. I wouldn’t take diet advice from somebody that leads the health ministries of these different countries and nations like the United States. I wouldn’t take financial advice from someone who’s broke. I wouldn’t take business advice from someone who’s never started a business.
It makes sense, right? Of course. But yet, I see way too many people doing that today. Now, I said in the beginning that smooth sees never made a skilled sailor Mike Tyson said it in a way that said that everyone has a plan till they get punched in the face. And so success is a horrible teacher. So not only do you need somebody who’s achieved what you want, but you also want somebody who’s suffered from the adversity and has grown to become stronger for it. So it’s not just that they’ve had it, it’s that they’ve had it, they’ve earned it, they’ve dealt with the adversity and they’ve been able to keep it.
Okay, so that’s really what we’re looking at. Now, I don’t want to, I hate to do this, but we’re gonna call somebody out right here. So let’s look at this YouTube channel. We’re talking about this guy, Steve, call leap. And he’s got this YouTube channel here giving people financial advice. His mission is to help people better with their money. All right, and he makes a lot of videos here. We’re gonna look at this one right here on how to retire in 10 years. Now, you know, no offense to Steve, but he looks like he’s 20 years old.
So did he start when he was 10 years old and he’s retired? How many economic downturns has he been in? Now, I don’t want to tell you how old I am, but let’s just say that, like I said, I’ve been through multiple of these things, but I don’t want to like call him out specifically. It’s not an ad hominy an attack. Let’s listen to what he says and see if it even makes sense. Let’s go ahead and just play the first clip and see what it says here. If you want to retire or become financially independent, what really matters the most is how much money you’re able to save.
Contrary to what a lot of people believe, they think that their income is what’s important. And it is, of course, in the beginning, but in the end of it all, what’s really important is how much of that money you can keep in your pocket. The reason I say this is that there are so many people in America. All right. I mean, come on. So how much can you keep? So what these guys, and there’s a number of them, I could pull up any number of them on YouTube, and they’re telling you that you need to be saving 50% of your income.
And that’s great. You should save. As a matter of fact, one of the core principles of financial success is to live on less than you consume or consume less than you earn, I should say produce, save so you can invest. You have to do that. However, you’re not going to, you’re not going to invest your way to wealth. You’re not going to be rich because you’re saving five bucks on your Starbucks coffee every morning. And you’re certainly not going to become rich by saving 50% of your income if you’re only making $30,000 a year.
So you have to be able to make enough money to be able to save that in the first place. Grant Cardone, billionaire Grant Cardone, he says that you should save 40% of your wealth. And I agree with that. However, here’s what he says. You should save 40% of your wealth, but you need to make enough money so you’re able to save the 40%. See, it’s a different thing. It’s not about saving your way to wealth. It’s about earning your way to wealth. I hate to break it to you. But all of the greatest investors in the world, Warren Buffett, Ray Dalio, they didn’t invest their way to wealth.
They’re known for investing. But Warren Buffett built a company it’s called Berkshire Hathaway. He still goes to work there every day. Ray Dalio built a company it’s called Bridgewater Capital, and he went to work there every day. So you think of them as the best investors, but they built it through a business, they increased their income. So they had more money to go invest. So yes, you should definitely save money and invest it 100%. But in order to get to the 40%, you have to focus on your income first, you can’t save your way to wealth, you have to create the wealth by solving problems, and then multiplying what you already have.
Alright, let’s see what else he has to say about retiring in 10 years. I also know a lot of teachers who are making 70 to $80,000 a year, and they’re able to save 10, 20 and sometimes even $30,000 a year. Even though these people make less money than these people who make 100 or $200,000, they are going to be much more wealthy in the future because they have financial literacy and they know how much to keep in their pocket. So yeah, you know, if you want to live on the street and pocket all your money, you’re going to get ahead faster.
Again, it kind of goes back to the first statement I’ve made about you don’t invest your way to wealth, you have to earn it, you have to make more money. But I want to just hit on this point for a second because he’s talking about people that make 70 or 80,000 saving more than 100,000. And the key piece here is I’m in Southern California, our tax rate is extremely high, as is our cost of living. As you know, I also have a ranch property in Texas. I was just out there two weeks ago doing a mastermind at my ranch, and gas is like $2.50 a gallon.
I come back here to California and gas is $5 a gallon. The median price of a home in my town right here is $1.7 million. But in Austin, it’s about 400 grand. And so when he’s throwing out these numbers, this is not a one size fits all approach here. Like 70 or $80,000 in Kansas is a lot different than 70 or $80,000 in California. The other thing that I would say here is that, again, the core basic principle is that you must save more than you consume, you must you have to.
But again, it’s not about saving your way there. And the reason why I just go back to that is because it’s all about sacrifice and delayed gratification, which I’m all for, we should be saving, we should be investing, we do want to delay that gratification. But at some point, right, there’s nuance to this. So at the same time, I want to reap some of the rewards of my hard work. At some point, I do want to improve my life, my wife, my kids life as well. And so you’re trying to find that balance.
And so for me, I am not somebody who wants to share a room with six roommates and not get married till I’m 45 years old. So I can save my way to wealth by saving 50% of my $60,000 paycheck. That’s what we call a slowboat to China. Like we live in the greatest age of wealth creation ever seen before. I personally know because I’m in this content creation space, I know probably a dozen people that make seven, eight figures off of an Instagram account. The world is yours today. So let’s focus on making more money, but let’s just get back into how do we retire off 10 years? Let’s jump back in.
First things first, you have to know what the 4% rule is. So assuming that you’ve been following me for a while and you finally opened up your Roth IRA, your taxable brokerage accounts, and you’ve been investing in something like the S&P 500, the 4% rule basically states that this is the amount of money you can withdraw from your account and continue to let your accounts grow over time. So how does this make sense? Well, if you’re investing in the S&P 500, which typically grows around seven to 12% on average each year, you should theoretically be able to withdraw up to 4% of your portfolio and continue to let your accounts grow.
You actually don’t have to sell all of your assets within your accounts. What you can do instead is only sell around 4% of your assets in your account and withdraw that amount. Okay. So how do we actually apply this number? Steve, Steve, Steve, Steve, Steve. I get it. You’re 20 years old. I understand, but let me just show you from a battle hardened investor and business owner how this really works. So it’s great that, you know, your advice, you probably listened to a couple of Dave Ramsey episodes, I’m guessing, and he tells you that the market always goes up by seven or eight percent.
And that’s what I call factually correct, but intellectually dishonest. And here’s why. If you look at the market over a 60 or 80 year period, that’s what it’s average. So factually, that’s a correct piece of data. But the reason why it’s dishonest is because it doesn’t always do that. And I get it, Steve, you’re young, you haven’t lived through this, but let’s break this down real quick for you here. So here’s the S&P 500 index over the last 90 years. And what you can see is, as you would imagine, nothing moves up and down in a straight line.
So you see lots of peaks and valleys within this. So yes, if you take some predetermined cherry pick piece of data, you can have those returns show what you want. But let’s assume that we were living through this at any point in time. So here we are going through the nifty fifties and the sixties, the seventies, it was a great time of abundance. And I just so happened to be unlucky because I was born where like I’m turning 65 here in the sixties or seventies. So I want to follow your advice, Steve, and I want to sell 4% of my assets because they’re going to go up at 6%.
So I’m making more than I’m spending, right? But there’s a problem because right here in 1969, the markets crashed and they didn’t just crash. They continued crashing from 1969, 1970, 74, 70, all the way down here to 1982. So here we have over 22 years where the market has been losing value. How am I pulling out 4% during that time period? How does that work for me? That’s where the baby members have to go back to work at Walmart. We can see the same thing here in the year 2000. Well, as a matter of fact, before we go from 68, it took almost 25 years for my portfolio just to have gotten back to even just to get back to even that means if I didn’t want to lose money, I would have had to hold my assets for 25 years without pulling any money out without pulling out the 4% Steve.
And if I was 65, I don’t have that time. But Mark, that’s cherry picking data. What if I wasn’t born during that time? Okay, what other time? So here we have the year 2000. And as you can see, the markets continue going down until 2009, nine years of declines, and it took 15 years just to get back to even. So again, here I am, I’m unlucky. I happen to be trying to retire in this period of time and hint, hint, hint to happen about every 20 years. So it’s gonna catch you at some point.
Again, I can’t pull 4%. I have to wait 15 years just to get back to even. Now, this is what the data shows, Steve. But let me tell you from a math perspective from a real perspective. And let’s just think about this logically, if we will, why would I want to work? Well, in your in your case, I’m sacrificing my entire life to scrimp and save 30 to 50% of my income when I’m making 50 or 60 grand. So I’m living with 10 roommates, and I’m not getting married or having kids. So I’ve saved so that one day, to your point, I can sell 4% of my portfolio a year.
And hopefully, hopefully, I have enough to reach the end of my life. Hopefully, I die before my money runs out. So I end up with zero. But that doesn’t sound very good. Because in the game of wealth, the goal is to build wealth. My life should be proof of work, what I build and develop the assets I own are proof that I lived proof that I put value into the world. Why would I spend that down to zero? Why wouldn’t I want to pass that on to my kids? And so the entire saving to live off my savings is a broken premise.
Now part of the reason why they tell you this that the markets average six or 8% over the last 40, 60, 80 years is because your financial advisor wants to tell you that it’s not timing the market. You don’t know when to time the market. Neither do I. Instead, it’s time in the market. Why does your financial advisor tell you this? I hate to tell you this, but your advisor isn’t really your advisor. And what do I mean by that? Your financial advisor does not have aligned incentives with you. You see, when I hire somebody to run my sales team, or somebody to run my marketing department, I want to make sure that our interests are aligned.
So I would probably pay them on a commission basis. If they make me more money, I share money back with them. And I know that our incentives are aligned. You would think your financial advisor might have aligned interests, but they have the opposite. So here’s what I mean by that. How does your invest your investment advisor make money? How do they pay for their bills? They’re very nice house and car. Well, they make money typically in two ways. Number one, they make money by managing your money. Number one, so they say it’s time in the market, because the longer they can hold on to your money, the more fees they’ll make by managing your money.
So when the markets are turning down, don’t sell, don’t sell, leave your money in. Don’t don’t pull out. It’s time in the market. Just stay in there. Of course, they can keep taking their fees. The number two way that they get paid is by selling your products. So your financial advisor isn’t really so much as an advisor as they are a sales rep, meaning they want to sell you their products. So if they work for fidelity or Charles Schwab, they’re selling you the products made by their company. And they are the best products for you, but because they’re the ones that have the highest commission attached to them.
Now I can tell you from personal knowledge, I’m not going to say specifically who I don’t want to dox them here, but I know somebody who’s a vice president Charles Schwab. And they have told me that they’re not allowed to talk about Bitcoin with their client, even if a client asked them about it. The reason why well, Charles Schwab doesn’t have any Bitcoin products. They have no way to capitalize on it. And so they wanted to steer clear of that. So your financial advisor is not incentivized to work with you. And that’s why they propagate these myths, if you will, that the market always goes up and you should just stay in.
Now, the market does always go up, but not in a straight line. And so you need to be more nimble and learn to see through that advice. All right, let’s continue to see what Steve’s plan is so we can be retired in 10 years. Cause shoot, I mean, let’s all retire as young as Steve. Here we go. Okay. So how do we actually apply this number to ourselves? Well, basically you first want to see how much money you need annually. And then you’re going to divide that number by 0.04. And yes, I know there’s another way to do this where you can multiply it by 25, but essentially mathematically it’s still the same thing.
So if you’re someone who needs around $40,000 per year, you can divide that number by 0.04, meaning that you need around a million dollars to become financially independent or retire. If you’re someone who needs around $50,000 per year, you can divide that by 0.04, which means that you need around $1.25 million. Or if you need a little bit more, maybe around a hundred thousand dollars per year, you can divide that by 0.04, which gives you around $2.5 million. All right, Steve. So, um, let’s just go back to this slide here for a second.
So if you need a hundred thousand dollars per year, you need $2.5 million. That’s Steve’s math. Now let me tell you something about goal setting, how goal setting works here. It’s good to have a goal. Hey, I want to work for 40 years and I want to save $2.5 million in 40 years. So long goal, a little bit longer than I’d like to have. He says you can do in 10 years if you live with roommates till you’re 45. Uh, but the goal is 2.5 million. Let me tell you about goal setting again.
So goal setting is very, very important, very powerful. But the key with goal setting is to set realistic goals and to set small incremental goals that you can achieve along the way. So you can fill the wins and you can build the energy to get the big goal. The problem is that when I set myself a goal of saving $2.5 million, that’s a big goal. That’s, that’s going to take a long time. That’s, that’s unattainable. What difference does it make if I go out to dinner or take this vacation right now? Cause I mean, 2.5, I mean, that’s, that’s so far off, right? And so we get demoralized by these big goals.
So we want to make small goals that build momentum. And the key with this specifically is that he says it right here, but he doesn’t understand what he’s saying. So what do I mean? He’s saying that if you need a hundred thousand dollars per year, you need 2.5 million. That’s where he’s wrong. You don’t need 2.5 million. You need the hundred thousand dollars per year. And that’s a big difference. You see, you don’t need 2.5 million. What you need $8,000 a month, which sounds more obtainable to you, 2.5 million dollars or $8,000 a month.
Obviously the $8,000 a month is a way lower number, lower barrier of entry and is much more obtainable. I could go get $500 a month and then $700 a month and a thousand dollars a month. And then 8,000 doesn’t seem that far off to me. And so we want to set a more realistic goal. He says it, but he doesn’t understand it. You don’t need 2.5 million. You need $8,000 a month. You need $2,000 a week. That’s what you need. And the key to this is what he’s saying is that you would need 2.5 million in order to spend it down before you die by pulling out 0.4% a year.
However, if I were to build $8,000 a month of cashflow, that cashflow would come in for the rest of my life. And even when I die, that $8,000 is still coming in. Maybe it’s more by then 10,000. And the good thing is, instead of dying with zero, hopefully my money lasts as long as I do and then dying with zero, now my kids could get the eight or $10,000 a month, which sounds better to you. Now, how do you do this? Well, you have to understand the math. So the first is there’s two numbers that you have to understand what they are.
Number one, I like to start with the lowest number so I can have a goal that I can go chase after. And that is what I call my minimum lifestyle number. What is the exact number I need so I’m not homeless? So I’m not homeless. Okay, this is the bare bones. This is the Steve number. This is scrimping and saving every penny you can. What is my minimum rent, mortgage, electricity, gas, food, bill? How much is that? And it needs to be specific. Like it needs to be $5,429.17. The more specific the number, the better your brain can work to achieve that number for you.
It’s like using GPS. If you want to come over to my house or somewhere, you wouldn’t open up your GPS and say take me somewhere cool or take me to Mark’s house, you have to put in an exact GPS coordinate, an exact street number and street name. That’s how the brain works just like a GPS. I need to know the exact number. So I start with that my minimum number and then then I can dream because goals, goals are good that are attainable. But then we want stretch goals. The stretch goal is what’s my ideal lifestyle? And most of you have no idea.
You think like Steve, you need 2.5 million. Why? Why do you need 2.5 million? What does your ideal life look like? How many times per week do you go out to dinner? Do you take vacations? If so, how many? Where do you go? How much do they cost? Do you get new cars? If so, what kind of cars? How often are they? And so identify exactly what that ideal lifestyle looks like. And exactly now it’s $11,269.17. And this is exactly what I get for that. And once you have that your brain can go work that out.
Look, this video has already gone long. Hopefully this has changed the way you think about things. I did a video a couple of years ago. It’s kind of old. I could redo it. But for now, if you want to watch the math of how you achieve this and understand that there’s three levers to making this happen faster, to measure your timeframe and to get there faster. There’s three levers. You might want to go watch this video right here. Otherwise, give me a thumbs up if you like this video, thumbs down if you don’t let me know in the comments down below.
If you like this first time I’ve done a video like this, I can do more. And that’s what I got. All right. To your success. I’m out. [tr:trw].
See more of Mark Moss on their Public Channel and the MPN Mark Moss channel.
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