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When we think of jobs that lets us retire early, we think of lucrative tech jobs or entrepreneurs. Rarely if ever would trucking come to mind. However, trucking is an excellent career for anyone who wants an early retirement.

Trucking offers decently high pay without needing a college degree, which means you’ll be able to start working sooner and save more of your money instead of paying student debt. Trucking also has great job security, allowing you to shop around for competitive wages and benefits. Of course, there are downsides as well, trucking can be a dangerous profession, and it can be very lonely when time on the road keeps you from your friends and family. Even so, this does not take away from the advantages truckers have when it comes to achieving an early retirement.

How can a trucker retire early? Largely by doing the same as every other aspiring early retiree: make money, reduce spending, and invest as much as you are able. 

The Steps to Early Retirement

Step 1) Pay Off Non-Mortgage Debt

When it comes to financial health, becoming debt free is always the first step. Fortunately, truckers are ahead of the game. As trucking doesn’t require expensive degrees, truckers don’t have massive student debt. Being a trucker by trade, there is also less temptation to purchase an expensive personal car.

The final type of debt, consumer debt, is the most expensive. Credit cards charge anywhere between 15% to 25% in interest. If you have credit card debt, it will always be in your best interest to pay them off ASAP. However, on the bright side, credit card debt can generally be paid off within a few months of hard work, unlike car loans and student loans which often take years to pay off.

After you are debt free (or if you’re already debt free), the next step is:

Step 2) Optimize Your Savings Rate

Truckers are also well-positioned to have an excellent savings rate. As truckers spend much of their time on the road, they often:

• Travel as a part of work – As a part of the job, truck drivers frequently travel all across the US and sometimes also Canada. Truckers have the ability to plan their routes and many also plan their schedules to spend a weekend getaway out of state. Trucking offers the unique opportunity for inexpensive travel as a part of work. 
• Develop inexpensive hobbies – Much of your day as a trucker is spent on the road. This means occupying your time with activities that won’t distract you from driving, like audio books, music, and podcasts. Enjoying hobbies like these are easier on your wallet and a boost to how much of your income you can save.
• Food prep for long distances – It can be challenging to prepare adequate meals for the long haul when it’s so much easier to get takeout at truckstop. However, it’s much healthier to prepare your own meals and cheaper. Travel cookware and a fridge/freezer can be a great investment for both your physical and financial health.

Step 3) Emergency Fund

The next step to the journey of financial independence is to establish an emergency fund. Open a new high yield savings account (here are some great options) and use that for your emergency fund. This way you won’t be tempted to spend it and it’s encouraging to see the number go up. To know how much you need in your emergency fund, you’ll want to track your spending for 1 month and multiply that by 3 so you have 3 months worth of your living expenses.

It takes a bit of work, but you can track your expenses on a notebook, or through excel. If you’d prefer a faster, more efficient method, WeFIRE is currently running a limited time offer. Download the WeFIRE app and come try out our secure account tracking features and the AI Copilot for 1 month for free by clicking on this link. 

Having an emergency fund is important because it offers you a sense of security. This way in the case of accidents or unexpected costs, you have a couple thousand dollars sitting in the bank that can cover you. It also means you have a safety net while investing. Knowing that you’ll be fine even when the markets are down will give you the fortitude to stay invested, which is how you really reap the rewards of investing.

Step 4) Tax Shelters

Before fully getting into investing, especially stock investing, it’s important to know which taxes you can avoid paying. Your take-home income has already been taxed. In order to encourage the public to save for retirement, the government offers programs like the 401(k) and the IRA to reduce the taxes you have to pay.

Here’s a table comparing the 4 main types of tax shelters.

Because of tax incentives, it’s best to max out these accounts first before opening up an independent taxable brokerage account. Also, while stocks, bonds, and futures can be held in these tax advantaged accounts, real estate cannot and can still be taxed.

To learn more about this topic, check out our articles How to Withdraw Money from Roth IRA Without Penalty, How to Take Money Out of 401(k) Early Without Penalty, and Tax Strategies on FIRE.

Step 5) Investing

As a rule of thumb, to achieve financial independence, you’ll need to have 25x your yearly expenses saved and invested in a broad-based index fund. This is called the 4% rule and it guarantees you 30 years of retirement income, as long as you withdraw no more than 4% of your stock portfolio. We also have an article going into detail on the 4% rule if you’d like to learn more.

Even so, there are a variety of ways to invest so that your money grows with time. Let’s go through them now, starting with…

Stocks

Since the creation of a tracking system for the US stock market, it’s been recorded that the US stocks has grown by an average of 10% every year. If we assume an inflation rate of 3%, that makes for a real annual return of 7%. As long as you invest in a broad-based index fund, you’ll be able to capture the stock market return at very low management fees.

Of course, the market is volatile and unpredictable in the short term. It can be up 15% one month, only to drop by a third in the next. Trying to time the market doesn’t work, which is why it’s better to ignore short term price increases or dips and focus instead on the very long term. Only then will the 10% average returns prove out.

Because effective investing is so long-term, the headstart truckers get for their career means you’ll be able to invest more and sooner, which will have big payouts after compound interest works its magic. For example, at an average of 10% compound interest, an additional $1k in monthly contribution to stock investments from ages 21-25 works out to $3.3 million when you turn 65.

Bonds

A bond is a contract between you and a company or the government, where you agree to lend them a certain amount of money and they agree to pay you back by a certain date plus an additional amount in interest. 

Bonds are graded according to how trustworthy the burrower is. If you’re lending money to the US Government (Treasury Bonds), you’re guaranteed to get your money back but the interest will be lower, however if you’re lending money to a company that has a history of defaulting on bonds (junk bonds), the risk is much higher and so the interest will also be much higher. Exactly how someone with a higher credit score can borrow more money for lower interest.

In today’s economy, bonds don’t offer very high interest rates. The 10-year US Treasury bond offers a yield of 3.78%which only barely covers inflation. Meanwhile CCC junk bonds have a yield of 13.38%, but come at the fairly high risk of losing your principal (initial amount you lent out).

At these rates, bonds do not make for an effective method to store wealth. A high yield savings account offers rates from 4.5-5% and because they are FDIC-insured, they’re almost as safe as US Treasury bonds. 

You may want to keep a certain amount of money in bonds for the purpose of diversification as you near retirement but at their current rates, they are not good for building wealth. Interest rates often change, if bond yields increase in the future, then we’ll reconsider.

Real Estate

Unlike stocks or bonds, real estate serves a purpose beyond growing wealth; shelter. People need places to live and well-situated locations are especially in demand. If chosen correctly, a real estate property can be a very good investment, both as a property you rent out, and as an asset you sell after its value increases.

Before diving into the choppy waters of real estate investing, there are somethings to consider:

• Real estate is not a passive investment. Unlike monthly contributions to a broad-based index fund, real estate ownership requires finding a good property, bidding, maintaining the property and vetting renters if you intend to rent it out. Finding a good place to rent out requires a good eye for consumer demand. Although rent income is a great income stream, the process can be time consuming.
• The US housing market is currently in a bubble. Does this mean that buying a house now will definitely lead to a drop in value and cause you to lose money? Not necessarily, we wouldn’t dare try to predict when the bubble will burst (or if it even will, for that matter). The fact is, mortgage application is at its lowest since May 2023 and home prices are still far above what the average salary can afford.
• Houses take time to buy and sell, which means a big opportunity cost. As an illiquid asset, your money can be tied up in real estate for years and decades. During this period of time, you won’t be able to put it anywhere else, whether or spend it, in stocks, or in bonds. It’s quite a lot of money too, since a big down payment has to be made.

Other Investments

Aside from the options above, there are many other ways to invest. Each comes with its own risks, and some can be quite risky. So if you do invest in them, it’s best not to put too much money in them (5-10% of your total portfolio).

• International Investment – The US stock market is not always in sync with foreign markets. For example, while the whole world was impacted by the Great Depression, Japan and Latin America were less affected. There is also growth potential in emerging markets as they transition from developing to developed countries, i.e. Brazil, Russia, India, China, and South Africa. 

BEWARE: Today’s global economy is far more interconnected which has reduced the efficacy of diversification. The potential of emerging markets also comes with risk as these economies are less regulated and mature. Finally, there is additional cost that comes with international investment, as you need to pay currency exchange rates and higher management fees.

• Cryptocurrency – This is a new technology that offers decentralized currency with a cap on supply so value is maintained. Since Bitcoin’s introduction, it has seen incredibly dramatic peaks and troughs, going from record highs to a quarter of its value in a span of days. 

BEWARE: Bitcoin is perhaps the most reliable and least volatile of the cryptocurrencies and even then it has seen scary drops. Crypto is also very complex and its price is driven mostly by hype and has little in the way of real world value. Crypto advocates argue that the value comes from crypto’s potential to become a universal global currency separate from any single government, but if that were to come to fruition, the crypto would no longer have the same dramatic price hikes it does now, reducing its potential in wealth building.

• Gold/Precious Metals – Ever since the US stopped using the gold standard, there have been growing concerns with the value of money. Buying gold served as a way to mitigate this fear, the idea being that if your wealth was stored as an objectively valuable and scarce resource, it offers stability and safety that fiat currency cannot.

BEWARE: While gold has increased steadily in value, it’s not a wealth building tool with its low return on investment that only just keeps up with inflation. Gold has little practical use or ability to generate wealth for the economy, meaning its value is tied to the same thing as regular fiat money: social belief in that it’s valuable.

Other Things Truckers Should Consider 

Beyond the universal steps to early retirement, there are also some considerations specific to truckers. The most important of these are…

Health

It’s been said that truck drivers live to an average age of 61, 17 years less than the average American male life expectancy of 78. Although the legitimacy of this statistic has been brought into question, it does point to a worrying truth: trucking is a dangerous career. This is for a number of reasons.

• Truckers have higher odds for getting into car accidents and worse consequences. By being on the road so often and operating such a big vehicle, truckers have a much higher chance of getting caught up in an accident. Doing proper safety inspections will go a long way towards preventing the worst of these accidents, but the carelessness of other drivers can’t be managed the same way.
• Being on the road makes it difficult to maintain healthy lifestyle habits. It was briefly mentioned before, but a 14 hour work day with 11 hours on the road and truckstops filled with fast food can be a challenge to both maintain a healthy diet and decent exercise routine. It’s not impossible, however, in the mandated 10 hour break, truckers can prepare their own food and walk quick laps around the truckstop. Fast food restaurants also always offer healthier alternatives, in the form of salads and lettuce wraps.
• The mental health struggles of being a trucker can lead to unhealthy coping mechanisms. Truckers are prone to smoking and alcoholism. This is the result of many factors, from the stress of staying alert for long hours, to being apart from your friends and family, to dealing with the lack of respect society has towards truckers. 

In a practical sense, these factors likely lead to higher insurance premiums and general higher healthcare costs. Statistics may imply that truckers won’t have a retirement as long as the average American, but with care and planning, that doesn’t have to be the case.

Investing Timeline

Also a point mentioned earlier, truckers make more money sooner than most other professions. Following this early start, truckers are well positioned for career growth and wage increases as they gain experience. For example, you can go your own way and become an owner-operator, earning anywhere from $185k to $556k per year.

With such an early start and promising growth prospects, it only makes sense that truckers are at an advantage for early retirement. Contributing $1k every month to your stock investments from ages 21-25 means $3.3 million at age 65. Contributing $2k every month for 25 years means you’ll have $2.36 million at 46, if you start at 21. Enough for a fairly comfortable retirement at a 3% withdrawal rate for $70k annual expenses to last you the next 50 years at minimum.

Job Security

Because of how important trucking is to the function of the economy, there is always a demand for truckers. Thanks to this job security, truckers have the option to pick and choose between different positions for the best benefits and best compensation. On that same note, job hopping is also a good strategy to raise your income — even while employed, it’s worthwhile to keep your ear to the ground for better opportunities.

The final benefit of job security is for those who are uncertain of their retirement income stream. If there are concerns that the markets are down and not generating the promised return on investment, it’s fairly easy to find work as a trucker, especially when you’re experienced.

Conclusion

Trucking may not be a glamorous profession but it’s practical and it gets the job done. With their relatively high salary and a headstart on their career, truckers are at an advantage for early retirement. The only thing holding them back from this realization is an unfortunate lack of financial understanding. 

If you would like to learn more about achieving FIRE (financial independence, retire early), our article on FIRE essentials will serve as an excellent foundational guide. And of course, working hard to retire early is only half the problem. What do you plan to do in retirement and how will you lead a fulfilling post-retirement lifestyle? Check out this article and come explore this topic with us.

Retiring early is a marathon, not a sprint. Stay steady and keep saving! Good luck, we believe in you!

The post How to Retire Early as a Trucker appeared first on WeFIRE.

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Retirement is one of the most complicated and important matters of personal finance that the average person must contend with. Not only does it demand long-term discipline in savings, those who want to retire also have to account for inflation, tax-shelters, social security, annuities, and a host of other things besides. 

As such, it’s no wonder then that the 4% rule is so popular. No need to think about these difficult details, one only needs to calculate their annual expenses, multiply that by 25 (the reciprocal of 0.04 or 4%), and they’ll have the total amount they need to fund 30 years of retirement. 

Example: Jim has $40k in annual expenses. To retire in his 60’s, he’ll need $1,000,000 ($40k X 25).

Many finance experts are suspicious of the simplicity of the 4% rule. Certainly it makes retirement planning much easier (just save until you hit your number!) but is it perhaps too simple? And lest we forget, the 4% rule was first established 30 years ago, does this rule still apply today in a post-pandemic economy?

Origins of the 4% Rule

The 4% rule was first proposed by one William Bengen in his seminal 1994 study Determining Withdrawal Using Historical Data. Financial advisors of the time applied average returns and average inflation rates when making their recommendations. Since the stock market returned an average of 10% annually with an average inflation of 3%, surely this meant retirees can safely withdraw 6% from their portfolios every year, given a 50/50 stock-bond split?

Bengen wasn’t so sure. Rather than using averages, he backtested different withdrawal rates according to various periods of the US stock market history. Bengen wanted to know – if you retired at the worst possible time in history with both the worst returns and worst inflation rates, how much can you safely withdraw every year?

As it turns out: 4%. 

Assuming somewhere between a 75/25 and 50/50 stock-bond split and 30 years spent in retirement, you’re safe to withdraw 4% on the first year of retirement and up your withdrawals by inflation in every subsequent year.

Criticism of Bengen’s Study

Since the paper’s release, many criticisms have been levied against the 4% rule and Bengen’s methodology. These complaints can largely be summed up as.

Too conservative

• Far too Pessimistic – The 4% rule is intended to account for the worst case scenario of the stock market’s history in combination with terrible inflation rates. The odds of retiring precisely at the worst time is, historically speaking, really really low. Going into your retirement expecting the absolute worst will lead to you leaving potentially over a million dollars of your hard-earned savings on the table.
• Lots of Leftover Money – In Bengen’s study, 96% of people pass away with the same amount of money in their portfolio as when they first retired. This means the vast majority of retirees could have spent far more money in their retirement than they actually did. With a more flexible spending plan and effective guardrails in place, retirees would be much better positioned to make the most of their golden years without putting their retirement in jeopardy.
• No Other Income Stream – Although social security alone is not enough to fund your retirement, it’s still a significant boost to your monthly income that you need to account for. That’s not even to mention pensions, annuity contracts, and potential rental income from real estate.

Want to learn more about building multiple streams of income? Check out our articles, Side Hustles to Accelerate Your FIRE Journey and How to Retire Early on a Low Income.

Too generous

• The US Stock Market Performance is Unsustainable – There’s an argument to be made that the US stock market performance is the result of luck and survivorship bias. Several historical events, from the Cuban Missile Crisis to WWII, would have capsized the US market but did not by dint of good fortune. In a 2022 paper, university finance professors write that a broad sample of developed economies like the UK, EU, Japan alongside the US make for a much better metric than just the US market. With their reassessment, the paper argues that the safe withdrawal rate should be revised to 3.02%-2.5%.
• Historical Sample Size is too Small – Bengen back tested every era of US stock market history, but as it’s not a very long history, this really only means 4 separate time periods of retirement with a lot of overlap. Under this new light, we can see how the 4% rule may not be as universal as we thought.
• Lower Bond Yields – Today the 10 year US Treasury bond yield sits at a modest 3.96%, as opposed to the 5.2% of Bengan’s day. According to the Financial Samurai, that lowers the safe withdrawal rate to about 3%.
• Longer Life Expectancy – The global life expectancy has been on an upward trend since the industrial revolution. For the purposes of retirement planning, this can mean an entire unforeseen decade you may need to account for. This is especially prescient to those of us who seek to retire early, whether that be 50’s or even younger. The 30 guaranteed years of the 4% rule no longer look to be enough.

Before closing out this section, it should be noted that Bengen himself recently came out against the 4% rule. The now-retired financial planner reassessed his calculations and came to the conclusion that the 4% rule is too conservative and in fact should be revised upward to 4.7%. 

Alternatives to the 4% Rule

There are elements from both schools of thought that are useful to those of us pursuing FIRE. 

The 3% Rule

Among Bengen’s various detractors, the 3% rule is a much favored alternative. Rather than withdraw 4% of your nest egg every year, you withdraw 3%. Given this adjustment, you’ll need to save 33X your annual expense rather than 25X.

Nest egg you need for $40k retirement income at 4% rule –> $1,000,000

Nest egg you need for $40k retirement income at 3% rule –> $1,320,000

As Bengen’s own study found, the 3% rule lasts at least 20 years longer than what the 4% rule promised. It will likely last even longer, if his musings are anything to go by.

We can also compare Bengen’s conclusions with those of Early Retirement Now, in a blog article published in 2016. This study compares different stock/bond splits in portfolio allocation:

Source: Early Retirement Now

So that’s it? Instead of withdrawing 4% of your investment every year, you withdraw 3% and all your problems are solved? Well, not quite.

Adopting the 3% rule alone doesn’t address the matter of market fluctuation and the unexpected expenses of life. 50 years may be a lot longer than 30, but is it really enough for someone who aspires to retire in their 40’s or even 30’s? Not to mention, retiring when you’re still young and active means a lot more potential fluctuation in spending, for example downpayment on a new house, or a big ski trip to the Swiss Alps. If you want to make the most of your retirement savings, you’ll want to combine the 3% rule with… 

Flexible Spending – The Guardrail Method

Flexible spending is exactly what it sounds like. When the stock market is performing well, you can up your withdrawals to 5% or even 6% and take that big trip. When the stock market is struggling, you can cut back on your spending and withdraw only 2% for the year to make up the difference with your cash fund.

In addition to being flexible with your expenses, you can incorporate guardrails to guide your long-term spending. The idea is if your total nest egg has dramatically grown or decreased as a result of market movements, you would recalculate your annual withdrawal amount.

For example, if you had a total nest egg of $1 million invested in the S&P 500 and you retired at 50 in 1990, using real world numbers your retirement would look something like…

4% Rule (without guardrails)

Pros: The 4% rule is safe for most market conditions and allows for a mostly hands-off approach to retirement. It also offers consistent withdrawal amounts for more effective long-term planning.

Cons: The 4% rule is very rigid, it’s likely to leave traditional retirees with a lot of money they never get to spend, and early retirees more vulnerable to long term bear markets.

4% Rule (with guardrails)

Rather than beginning with 4% and adjusting for inflation every year, we will set different withdrawal rates according to our total nest egg.

<$950k: 3% withdrawals 

$950k-1.5M: 4% withdrawals

$1.5M-2M: 5% withdrawals

$2M-3M: 6% withdrawals

$3M-4M: 7% withdrawals

$5M-6M: 8% withdrawals

This is an approximation for what someone might do to make their spending more flexible. In a real retirement, this model would better serve as a guideline than it would as a strict rule.

Pros: Guardrail Method makes better use of your investments and hedges your portfolio in case of poor stock market performance. 

Cons: This method comes with a significant degree of volatility in your post-retirement income. You also need to be more hands-on in your money management to make it work.

Some Thoughts on the 4% Rule and the Guardrail Method

In a well-performing stock market (as was the case from 1990 to 2023), the 4% rule leaves the aged retiree a jaw-dropping amount of money they have no time left to spend. However, in a less than ideal market, the 4% rule may leave the same 50-year-old retiree without funds by their 80th birthday.

Will you be fulfilled after an early retirement? Read our article: How can I be happy in early retirement?

In this, we can clearly see how the Guardrail Method is superior. The example above demonstrates how a retiree can withdraw more money from their nest egg while still growing the principal, and manage a period of poor stock market return at the same time. 

The main downside of the Guardrail Method is the abrupt drop in retirement income when the stock market slows. Going by the chart above, you would have been withdrawing six figures from your portfolio for half a decade before suddenly having to cut your income in half when the 2008 recession hit. 

While a dramatic difference, this volatility can still be managed. Save enough to fund a full year’s expenses when times are good and be wary of lifestyle inflation. With proper planning and foresight, bear markets are nothing to fear. And remember, the stock market is not the only factor at play when you’re in retirement…

Other Factors In Retirement

One of the common criticisms levied against the 4% rule is the fact that it oversimplifies the various fees and additional incomes that arise. For the sake of simplicity, we’ve also left these considerations aside for the earlier calculations. Let’s address them now.

Tax

Just as regular income is taxed, investment income is also taxed. Getting your income taxed twice in this manner is not ideal as it eats into your compounding and makes saving for retirement and managing retirement withdrawals much more difficult than what’s shown above.

To mitigate this, many people turn to retirement tax shelters. There are many different types of tax shelters but for now we will look at the four most common ones.

Beware: as these tax shelters are geared towards traditional retirement, you will be penalized for making early withdrawals (before age 59 1/2). There are some exceptions to these rules, if you’re withdrawing money for medical expenses, first time home purchases, educational expenses, etc. Additionally, there are penalties for not withdrawing the Required Minimum Distribution by age 72. The RMD penalty applies to traditional 401(k) and IRA, but not Roth IRA. After 2024, it will also no longer apply to Roth 401(k).

To learn more about this topic, check out our articles on How to Withdraw Money from Roth IRA Without Penalty, How to Take Money Out of 401(k) Early Without Penalty, How to Retire Early with No Penalty, Best Withdrawal Strategies for Early Retirement, and Tax Strategies on FIRE.

Investment Fees

There’s a wealth of different stock investment options, from mutual funds where many investors pool together their resources for a single professional to manage, to ETFs that more specifically targets a sector for investing. You can even get adventurous and pick your own stocks.

In terms of keeping investment costs down, monthly contributions to a broad-based index fund is the way to go. Mutual funds charge significant management fees while stock picking means paying transaction fees for every purchase and sale. Something like the S&P 500 is comparatively cost-effective, with rock-bottom management fees and little to no transaction fees due to minimal turnover.

Bonds

Today’s bonds aren’t attractive investment options. US Treasury Bonds over 10 years is 3.91%, or barely covering inflation. It’s not competitive with high yield savings accounts, some of which offer as much as 5%. At more lucrative (and more risky) rates, the current economy offers a 13.69% yield for CCC bonds at 21% rate of default. Compared to that, the stock market would be preferable with its higher returns and lower risk of default.

The main use of bonds would not be to build wealth. In fact it’s barely able to retain wealth. What it can offer is stability, specifically for if you’ve hit your 80’s or even 90’s and now seek to keep your nest egg somewhere safe and stable. 

Social Security

Social security is calculated according to how much money you made in your working career, when you decide to begin taking out your social security, and what the general economy looks like at the time of your retirement.

Social security alone is not enough to fund a retirement, but it’s not an insignificant contribution to your own savings. Social security additions can help smooth out the Guardrail Method and factoring it in can let you retire with a smaller retirement fund than previously thought. As a rule of thumb, the sooner you start taking out social security, the higher your safe withdraw ceiling, the later you start taking out social security, the higher your safe withdraw floor.

It’s a good idea to get an estimate of the amount you’ll get in social security so you can better plan your retirement.

Annuities

This is a type of financial product where you pay a company a large sum of money in exchange for future fixed monthly payments. Exactly how much you get for the amount you pay is dependent on an entire web of factors. How old are you currently? Do you want fixed payments for life or just a certain number of years? Do you want to leave guaranteed inheritance? What’s your gender? What’s your medical history? 

Ideally you’ll want to shop around and see what your options are. Annuities can be monstrously complicated so we recommend not buying one unless you know the ins and outs of your contract.

For a ballpark of how much you’ll get as a man – for a $500k annuity, we’re looking at $3,049/month at 60, $3,303/month at 65, $3,652/month at 70, and capping out at $4,080/month at 75.

Depending on your unique situation, an annuity might be a more preferable retirement tool than bonds.

Real Estate

Practically speaking, the best thing about owning a home is the safety and security of having a comfortable low-cost place to live in your golden years. Real estate can also make for great income streams, if you happen to have multiple properties that you can rent out.

Life Expectancy

Along with rising life expectancy comes rising health care costs. Going by our earlier charts, it may be tempting to reduce your retirement savings goal to $700k or even $500k. It’s important to remember that not only are extended bear markets still very possible, your health care costs can go up dramatically at the tail end of your life.

It’s better to assume that you’ll live longer than you do rather than the other way around.

Conclusion

As we hope this article has made abundantly clear, the 4% rule is a hilariously simple guideline for an incredibly complex matter. However, this doesn’t mean the 4% rule isn’t helpful. Having an easy clear guideline for what is generally safe can be invaluable for retirement planning.

Is the 4% rule obsolete? 

For our money, no. But on its own the 4% rule is not enough to capture the full picture of retirement. We have gone over many details and facets of retirement in this fairly long article and still have not covered them all. What of pensions? What of sharing retirement with a spouse? 

Even so, we hope that just like the 4% rule, our simplified overview of what retirement might look like is helpful to you. What matters is not following the rules and guidelines to the letter, but leveraging them to best suit your own circumstance and your own life. When you start working toward a meaningful goal, the result is always far better than setting off with no goal at all.

Best of luck to you and your retirement!

Did you find this article helpful? Check out our other articles for more tips to accelerate your journey to Financial Independence! 

How to Retire Early with No Money

Master FIRE Money Management: Your Blueprint for Early Retirement

How to Plan for Early Retirement: A Step-by-Step Guide

The post Is the 4% Rule Obsolete? appeared first on WeFIRE.

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“Becoming a single mother means your life is over,” so the narrative goes. “You’re stuck alone and miserable, forced to shoulder the burden of making money and raising your child all alone.“

Here at WeFIRE, we strongly disagree with this narrative.

Yes, supporting your child on a single income is difficult. And yes, being a single mother (or single father) requires hard work and sacrifice, but with careful planning it can also be full of joy and opportunity. Single motherhood does not mean you need to surrender your dreams.

In this article, we will discuss the ins and outs of financial independence for single mothers. The core path to financial independence is the same for single mothers as it is for anyone else – spend less than you earn and invest the difference. Achieving this may seem daunting when you’re responsible for children but with sufficient determination and planning, you’ll find that financial independence is in fact very possible!

Adopting a New Mindset

The stigma of single motherhood holds countless single parents back from going after their dreams. The reality is, financial independence can still be achieved by single parents if they…

• Seek help – As the saying goes, it takes a village to raise a child. You don’t need to spend all your time with your child to be a good parent. There’s nothing wrong with asking friends and family to watch your child for a couple hours each week so you have time for yourself. If those options aren’t convenient, you can also hire a babysitter. There are always options.
• Take time for yourself – You may be a single parent, but your life doesn’t have to be constant work and child rearing. Make sure to take the time you need for yourself and make space in your life for your hobbies. Seeing you overworked and tired all the time is not good for your child either. It’s always better to be happy.
• Take financial control – As a single parent, there’s no need to compromise your plans for the future and your vision for financial independence. You have full control over your money and your spending and all your assets belong to you and your child upon inheritance. If you do pursue FIRE in earnest, you won’t need to save as much to achieve because you only have your own retirement to worry about.
• Teach your child good money habits – Children don’t need to be kept ignorant of money, in fact, as long as all their needs are provided for, it’s good to teach them how best to save, spend, and invest money. Once your child is made aware, they will understand, and keeping your expenses within budget becomes a much easier task.
• You’re a single parent for a reason – No matter the circumstance that led to your single parenthood, being a single parent is a decision you made and a challenge you chose to take on. To be a single parent is a blessing, not a curse. You owe it both to yourself and your child to live a fulfilling life so you can provide them with the best possible future.

What matters is changing your mindset, so you’re thinking of ways you can grow and develop instead of ways you’re restricted. After all, only you can say where your limits lie.

The Actual Steps

To achieve financial independence, there are steps virtually everyone would benefit from following. Although they are laid out in an order of priority, you should ideally be doing all of them at the same time, at least until the first few steps have been completed.

Step 1) Pay off Non-Mortgage Debt

Put simply, there are 5 main categories of debt that face the American public, they range from bad, to neutral, to good.

Bad:

• Consumer Debt – Technically “consumer debt” refers to any debt you take on in order to purchase a good, but for our purposes, when we say “consumer debt” we really mean “credit card debt” and “payday loans.” These are your high-interest debt that should be avoided as much as possible and paid off as soon as possible. 
• Car Debt – Car loans don’t have nearly as high of an interest rate as consumer debt, but overly expensive car loans are generally a waste. New cars drop dramatically in value the moment they’re driven off the lot so there’s no much benefit to going into debt for your car. With some diligent saving, you’ll be able to purchase a perfectly good second hand vehicle entirely with cash.

Neutral:

• Student Debt – Depending on the amount you owe, the interest rate and if you’re currently investing in stocks, you might want to hold off paying back your student loans. We go into more detail about student loans, and debt repayment more generally, in this article but suffice it to say, if your student loan interest rate is 5.5% and the stock market has an average return on investment of 10%, it makes sense to prioritize investing in the stock market.

Good:

• Housing Debt – Mortgages are the largest debt the average person will take on but in many ways it’s also the most necessary. A house is a place you can live, and very affordable too, after you’ve paid off your mortgage. You can also sell your house in the future for a big profit, or rent it out for a monthly income. Although there are many benefits to taking on a mortgage, mortgage is still debt which means there are risks to keep in mind. Housing debt will cost you in interest, drain your income as you pay if off, and it’s not a guarantee that you’ll sell it for a higher price than you purchased it.
• Business Debt – Not every person will go into debt for starting a business but while the risk is high, so is the reward. Many entrepreneurs also opt to save their money to start a business rather than go into debt. As this category is less common, we will for now leave it aside.

Step 2) Emergency fund

Having an emergency fund in place can go a long way to easing your financial burdens and mental burdens. An emergency fund will cover unexpected expenses like car breakdowns or your child’s sudden peanut allergy forcing you to take time off work.

How much do you need in your emergency fund?

Ideally, you want to track your expenses for one month, and then multiply that number by 6. This will give you roughly the amount you need to sustain yourself and your child for half a year. This amount can be revised upward or downward, depending on how secure your job is and how risky your investments are. If your job is very secure with steady pay and you can afford to keep a smaller emergency fund (say 3 months), if your job is less secure with less expected pay then perhaps more (say 1 year).

It takes a bit of work, but you can track your expenses on a notebook, or through excel. If you’d prefer a faster, more efficient method, WeFIRE is currently running a limited time offer. Download the WeFIRE app and come try out our secure account tracking features and the AI Copilot for 1 month for free by clicking on this link. 

The best place to keep your cash.

While your emergency fund can be kept in a checking or savings account, we strongly recommend opening a new high yield savings account with a new bank and keeping your emergency funds there. The reason for this is because having money in a different bank makes it more difficult to spend and therefore easier to save.
Today HYSAs offer competitive rates as high as 4.5% in annual interest. As long as the institution you bank with is FDIC-insured, you can rest assured that your money will be safe.

Step 3) Increase Income

Making a living for yourself and your child while being a full-time caretaker is difficult even with a good job. Whether the compromise is to work more hours and spend less time with your child or to work part time and earn less, single parenthood is rife with difficult decisions.

The path we advocate for is finding more flexible free-lance work and speaking to management about getting a pay raise. As the head of household, it is within your rights to advocate for yourself so you have the money to take care of yourself and raise your child.

On the subject of suitable side-hustles, you can consider…

• Uber/Lyft – If you have a car, signing up as a driver for a ride-sharing app is always a viable side-hustle. On average, uber drivers earn $18.75/hr and lyft drivers earn $22.12/hr. Although these numbers don’t take the cost of gas or car maintenance into account, these are still respectable wages, and you stand to make even more during busier hours like the afternoon rush.
• Instacart – A grocery delivery service where you are paid per delivery. Generally, higher income and metropolitan areas pay better, so your mileage with this app may vary. Instacart is great for if you don’t like other people getting into your car and aren’t able to drive long distances.
• Doordash – An excellent option if you live in an area with a lot of restaurants. Unlike the two other options, delivery side-hustles, doordash doesn’t require you to drive a vehicle. If you live in an area that allows for it, you can get around on a cost-efficient moped and make a lot more per delivery. On average, Doordash pays anywhere from $15-25/hr depending on when you work.
• Babysit for other parents – Just as you need time to unwind, so too do other parents. As a parent yourself makes you a trustworthy candidate and you’ll likely know many fellow parents personally from picking up your child. Granted, this side-hustle is time sensitive, either when your child is very young and doesn’t mind unknown playmates in their home or when your child has grown older and left home. Otherwise it can be difficult to find the opportunity to babysit.
• Tutor – Online tutoring is easy to manage from home and allows for flexible scheduling, especially if you’re tutoring for children from other countries. For a list of viable online tutoring platforms, we suggest having a look at this article. Speaking with your fellow parents and offering your service is also an option.
• Dog-walker/pet-sitter – Being a dog walker or pet sitter can be a job you do alongside taking care of your child. As long as you teach your child to be careful around animals, walking dogs together is not just a way to make money, but also a bonding activity and opportunity to exercise with your child.

Although a long list, it is far from exhaustive. Read more about side-hustles.

Step 4) Tax Shelters

In order to help the average American reach retirement, there are many government-run tax shelters that offer a discount on the taxes you pay. The 4 most popular of such tax shelters are listed out below in a comparative table so you know how they match up.

Aside from 401(k), Roth 401(k), Traditional IRA, and Roth IRAs there are other ways to reduce taxes as well. The more common of these are…

• Health Savings Account (HSA) – HSAs exist to help you pay for healthcare but can also serve as an effective retirement savings tool. Contributions to the HSA are tax deductible and withdrawals from the HSA for healthcare are also tax free. The contributions rollover year on year, meaning you’re able to make up for past years. After 65, you can withdraw as much as you like and only be subject to income tax. Until then, all withdrawals from the HSA must go towards medical expenses (check out this article for more information), or else income tax and an additional 20% tax penalty will be incurred.
• 529 Plan – The purpose of 529s is to help parents pay for their child’s education. Contributions to the 529 Plan are tax deductible and withdrawals to pay for schooling are also tax-free ($10,000 can go towards elementary and high school expenses). Contribution limits are very high and differ by state, the lowest being $269,000 in North Dakota. 529 Plans have little impact on your child’s eligibility for FAFSA because they are considered the parents’ asset. Unspent money in the 529 can be rolled over to a different beneficiary or a Roth IRA.

Step 5) Invest

People who aim for financial independence use the 4% rule to determine whether they’ve reached their target. In theory if you stick to withdrawing only 4% of your stock portfolio every year, you’ll be guaranteed at least 30 years of withdrawals without running out of money. You can find the amount you need, aka your FIRE number, by multiplying your annual expenses by 25.

By maxing out your Roth IRA and 401(k) and taking advantage of other tools like the Health Savings Account and 529 Plan, you’ll be able to make the best use of your investment earnings without being subject to undue tax.

An unexpected boon

Although single parents earn less in income than dual income households, a single parent also spends less. As a single mother, your FIRE number is lower than that of a couple. With more control over your finances, you have more say in how much money you save and how much you spend.

Note: These aren’t all of the ways you can invest but the other options like cryptocurrency and foreign emerging markets have high risk and aren’t as suited to single parents so we decided not to cover them here.

Stocks

Since the creation of a tracking system for the US stock market, it’s been recorded that the US stocks has grown by an average of 10% every year. If we assume an inflation rate of 3%, that makes for a real annual return of 7%. As long as you invest in a broad-based index fund like S&P 500, you’ll be able to capture the stock market return at very low management fees.

Of course, the market is volatile and unpredictable in the short term. It can be up 15% one month, only to drop by a third in the next. Trying to time the market doesn’t work, which is why it’s better to ignore short term price increases or dips and focus instead on the very long term. Only then will the 10% average returns prove out.

Bonds

A bond is a contract between you and a company or the government, where you agree to lend them a certain amount of money and they agree to pay you back by a certain date plus an additional amount in interest. 

Bonds are graded according to how trustworthy the burrower is. If you’re lending money to the US Government (Treasury Bonds), you’re guaranteed to get your money back but the interest will be lower. If you’re lending money to a company that has a history of defaulting on bonds (junk bonds), the risk is much higher and so the interest will also be much higher. Exactly like how someone with a lower credit score have to pay high interest rates to borrow money

In today’s economy, bonds don’t offer very high interest rates. The 10-year US Treasury bond offers a yield of 3.78% which only barely covers inflation. Meanwhile CCC junk bonds have a yield of 13.38%, but come at the fairly high risk of losing your principal (initial amount you lent out).

At these rates, bonds do not make for an effective method to store wealth. A high yield savings account offers rates from 4.5-5% and because they are FDIC-insured, they’re almost as safe as US Treasury bonds. 

You may want to keep a certain amount of money in bonds for the purpose of diversification as you near retirement but at their current rates, they are not good for building wealth. Interest rates often change, if bond yields increase in the future, then we’ll reconsider.

Real Estate

Unlike stocks or bonds, real estate serves a purpose beyond growing wealth; shelter. People need places to live and well-situated locations are especially in demand. If chosen correctly, a real estate property can be a very good investment, both as a property you rent out, and as an asset you sell after its value increases.Before diving into the choppy waters of real estate investing, there are somethings to consider:

• Real estate is not a passive investment. Unlike monthly contributions to a broad-based index fund, real estate ownership requires finding a good property, bidding, maintaining the property and vetting renters if you intend to rent it out. Finding a good place to rent out requires a good eye for consumer demand. Although rent income is a great income stream, the process can be time consuming.
• The US housing market is currently in a bubble. Does this mean that buying a house now will definitely lead to a drop in value and cause you to lose money? Not necessarily, we wouldn’t dare try to predict when the bubble will burst (or if it even will, for that matter). The fact is, mortgage application is at its lowest since May 2023 and home prices are still far above what the average salary can afford.
• Houses take time to buy and sell, which means a big opportunity cost. As an illiquid asset, your money can be tied up in real estate for years and decades. During this period of time, you won’t be able to put it anywhere else, whether you spend it, in stocks, or in bonds.

Further Concerns

Aside from the topics covered above, there are some further concerns unique to single parents.

Child Support

In the case that your child’s other parent is still alive, they are obligated by law to make child support payments as the non-custodial parent. In most cases, this is 15%-25% of their gross income for one child, with the percentage increasing per additional child. With child support going towards raising your child, more of your own income can be put towards investing.

Insurance

As sole caretaker for your child(ren), having insurance in place can do a lot for their future and your peace of mind. Life insurance is a heavy consideration for anyone but it’s particularly weighty for single parents. To learn more about the ins and outs of life insurance, specifically for single parents, check out this article.

Claim Your Tax Benefits

As a single parent, you are eligible for an array of different tax benefits. Take advantage of these by making sure you…

• File as head of household – If you earn at least 50% of household income, you qualify as head of household. Compared to filing as “Single” or “Married Filing Separately”, you can claim a lower tax rate.
• Claim child tax credit – According to Turbo Tax, “A single mom making less than $200,000, can claim a $2,000 child tax credit for each child when using the Single or Head of Household filing status.”
• Deduct childcare expenses – Under certain circumstances, the cost of daycare is tax-deductible if you rely on it in order to work or look for work.

Conclusion

As much as the prospect of single parenthood is daunting, it’s also full of joy and opportunity. Just because you’ve become a single parent doesn’t mean your life is over. You can still take the time to do the things you want to do, plan for your own financially independent future and, who knows, maybe meet someone who will become the love of your life and help you raise your family together.

At the end of the day, the steps to financial independence are the same for single parents as they are for everyone else and the challenges are much the same. 

How can we make more money than we spend? 

How can we put that money to good use so it grows in the future? 

These are the questions that every person must face in their journey to financial independence, whether they’re married and child-free, or single with a high income. So what if your road is a little longer? It’s a good solid path all the same.

Did you find this article helpful? Check out our other articles for more tips to accelerate your journey to Financial Independence! 

How to Retire Early with No Money

Master FIRE Money Management: Your Blueprint for Early Retirement

How to Plan for Early Retirement: A Step-by-Step Guide

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