Retirement and Financial Independence

The 4% Rule Vs Real Estate

Listen Money Matters is reader-supported. When you buy through links on our site, we may earn an affiliate commission. How we make money.

The 4% rule versus real estate investing. We give you a head to head comparison.

A recent discussion started on the Listen Money Matters Community site that got me thinking – how does the 4% rule work? This is a simple enough question and one many investors ask when checking on their progress toward retirement.

The “4% rule” is a theory that states you should be able to retire and safely withdraw 4% of your savings every year and your money should last 30 years. There are many assumptions with this – a 3% historical inflation rate, 7% stock return, 4% bond return, and a 50% stock/50% bond allocation.

There are also several factors that are hard to account for, like how long you will live, what taxes will be in the future, and if you will have social security to supplement your income. An awesome calculator for this is

This site has a retirement calculator that allows you to add in several different variables like additional incomes, inflation, your portfolio allocation, expected rates of return, etc. Playing around with this calculator is an educational and surprising adventure, and allows you to see some actual numbers that might apply to your situation.

But what if I don’t want to work until I am 60 and retire for 30 years? What if I want to work until I am 40 and retire for 50 years? This is where the “save everything” mindset in which you live below your means so that you can retire early and live on $3,000 a month leaves me seriously wanting more.

Ted And Ned – Two Retirement Scenarios

Let us go back to our calculators and see how much two different people would need to save in order to retire on $3,000 a month.

Ted is 25 years old and has a good paying job that he loves. He plans on working until he is 60 years old. We put in our assumptions – 3% inflation, 50/50 stock to bond allocation, 7% annual return for stocks and 4% annual return for bonds. In order to retire at age 60 and have his savings last 30 years, Ted will need to contribute $20,100 per year or $1,675 per month. Over his 35 year career Ted will save $703,500.

Ned is 25 years old but he does not like his job. He plans on only working until he is 40 years old and then retiring. We put in our same assumptions – 3% inflation, 50/50 stock to bond allocation, 7% annual return for stocks and a 4% annual return for bonds. In order to retire at age 40 and have his savings last 50 years Ned will need to contribute $65,550 per year or $5,462.50 per month! Over his 15 year career Ned will save $983,250.

And Then There Was Bob

Bob sees things differently. Instead of trying to save up the biggest pile of money he can so that he has income later in life, he decides to build up his monthly income streams now so he can save less than both Ned and Ted and still retire by 40. Bob needs to find a way to make his money and other people’s money work for him. He decides that real estate investing will be his retirement plan.

Bob decides to purchase a house every 1-2 years from age 25 to age 40 for a total of 10 properties. Every house he buys is worth $100,000, and he puts 25% down on each. At the end of 15 years he ends up with five single family homes each cash flowing $200 a month and five duplexes each cash flowing $200/unit or $400/duplex.

His 10 properties earn him $3,000 a month in cash flow. Remember our cash flow amount is after the mortgage, property taxes, insurance, 10% property management, 5% vacancy and 5% repairs.

In order to buy those homes with 25% down he had to save a total of $250,000 over 15 years – $16,667 per year or $1,389 per month. Every year or two, once he had saved up the down payment, he purchased the next property. By slowly saving and then purchasing the homes during his working years he needed to save less per month than Ted who planned to work until age 60!

Get our best strategies, tools, and support sent straight to your inbox.

How Much Did Each Person Need To Retire?

The total amount needed to generate the same $3,000 a month in cash flow tells the whole story. Would you rather save $250,000, $703,500 or $983,250 to generate your monthly income in retirement?

At age 40 Bob is enjoying retirement while his monthly rent checks roll in. Over the years his rents keep pace with inflation ensuring his standard of living stays at the level he wanted.

When Bob turns 56 something pretty amazing happens, his monthly cash flow starts to increase. His first 30 year mortgage is paid off and now his house that was giving him $200 a month is giving him $500 a month.

Every year or two as his homes get paid off his income increases while his friend Ted is still working and his friend Ned is just hoping his money lasts the full 50 years. By age 70 all 10 properties are owned free and clear and Bob’s cash flow is $7,500 a month.

While Ted and Ned’s net worth slowly falls each month in retirement, Bob’s only increases as his tenants slowly pay down his mortgages. If Bob wants to sail around the world at age 80, he just sells one of his houses and makes the trip.

The Time Is Now

I hope these simple examples demonstrate the importance of saving early and having a plan for your money and future retirement. Real estate is not for everyone, it is a very illiquid investment and should only be part of your overall retirement portfolio, but hopefully you can see how powerful it can be for your future.

Anytime you can leverage other people’s money to fund your retirement dreams you are going to get to your goal faster. To learn more about the 4% rule listen to our podcast on the topic. Good luck and see you in early retirement!

Featured Image Photo Credit: “Top Hat” by Rich Brooks on Flickr

The 4% Rule: Is It the Superior Retirement Planning Strategy?

The 4% Rule: Is It the Superior Retirement Planning Strategy?

Get our best strategies, tools, and support sent straight to your inbox.

Allison Karrels - Rental Expert I love learning everything I can about personal finance and real estate. I have purchased several rental properties in Florida and will continue to buy more properties until I can retire early and live off the rental income streams.

I am also a nurse, military spouse, mother to a little guy, and runner. I graduated from the University of Florida with a Bachelors's degree in nursing.

What's next?

learn courses podcast popular toolbox