Author: Nathan Kangpan

Summary:

What is the 4% Rule?

The 4% rule says you can:

• Withdraw 4% of your portfolio’s value in your first year of retirement
• Adjust that initial dollar amount for inflation every year after…
• While having a reasonably high probability of not running out of money over a 30-year period

For example, if you retire with a $1,000,000 portfolio, that’s $40,000 in year one, then $40,000 plus inflation in year two, and so on for the next 30 years and you’ll have a reasonable chance of not running out of money during that time period even with the market’s ups and downs.

Where did the 4% Rule come from?

The rule is credited to Bill Bengen based on a piece he published in the Journal of Financial Planning in 1994 where he looked at different withdrawal rates across multiple US stock and bond market return periods. His main conclusion found a 4% withdrawal was the highest “safe” number that held up in the vast majority of the tested time periods.

Here’s a reprint of the original piece.

Why is the 4% Rule so popular?

It’s simple. It’s a single number that turns the complicated question of “how much do I need to retire” into a problem that can be solved on a post-it note.

All you need to do is take your expected annual spend in retirement, divide by 4% (or multiply by 25) and you have a target portfolio size needed to support your retirement. When your portfolio reaches that number, you are theoretically ready to retire.

For example, if you anticipate spending $150,000 in your first year of retirement, the 4% rule implies you can leave the working world once your portfolio hits:

$150,000 in spend / 4% = $3,750,000 target portfolio value

You don’t need a complicated spreadsheet and you don’t have to make all kinds of assumptions about future market performance.

Five places where the 4% rule falls short

Like any single number applied generically to all situations, the 4% rule is either too conservative or not “safe” enough. Researchers since the original study argue both sides with ranges between 3-5% being safe number. Here are some of the arguments across those ranges.

The 4% rule was calculated for a 30-year retirement. The original study modeled someone retiring at a traditional age and living another 30 years. If you’re aiming to retire before 50 like many of the people we work with, your retirement could easily run 40-50 years. The study doesn’t say whether the strategy fails past 30 years, it just doesn’t go that far out.

The rule assumes a steady withdrawal amount year after year. This isn’t how people budget in retirement. People adapt. They adjust their spending down in a bad market. A rigid rule that inflation-adjusts a fixed withdrawal every year doesn’t reflect how a thoughtful retiree actually behaves. 

It’s based entirely on historical U.S. market returns. Past performance modeling has an obvious limitation. The next 30-50 years may not look like the time period in the original study. Modeled future returns dramatically impact what the safe number actually is. But nobody knows, because nobody can predict what the markets will do in the future. Even if your name rhymes with Barren Wuffett.

It doesn’t account for other income sources. A single 4% number ignores things like social security, passive real estate investments, or even part-time work throughout retirement. This can mean the rule is overly conservative if additional income sources will cover a portion of your spending needs.

It doesn’t solve for sequence of returns risk. A market downturn in your first few retirement years can significantly impact the success of your overall strategy.

For example, let’s say you need $100k a year and you retire with a $2.5m portfolio ($100k / 4%). The first month after you retire, the markets drop 50%. Your portfolio is now worth $1.25m. Your $100k withdrawal is now 8% of the portfolio. 

The 4% Rule accounts for this somewhat by design (it was tested against periods that included bad early sequences), but it’s still the single biggest reason a “safe” withdrawal rate can turn out not to be safe for a specific person’s specific timing.

How I think about the 4% Rule

I applied the 4% rule to my own finances when I left a C-level corporate career at 38. I closely monitored and managed my expenses and resigned from my job when the value of my portfolio blew past 25x my expenses. 

I have yet to find a better starting point for retirement readiness calculations than the 4% rule. But it doesn’t account for how long you’ll be retired, your mix of fixed vs. variable expenses, other income sources you have available, and what happens if the markets tank those first few years of retirement.

It’s a very blunt tool but that doesn’t mean it’s a bad starting point. The more common issues I find with people trying to retire early is that they:

• Don’t have an accurate read on what their spending needs will be once they leave corporate and they often forget to include healthcare, changes in tax situation, etc.
• Aren’t prepared for a huge market drawdown within the first few years of retirement
• Count on assets locked in 401k or IRA accounts without a plan for accessing those funds

Reach out if you’d like a second opinion on your retirement calculations

I specialize in working with people who want to or have already retired early. I’ve developed a range of strategies over the years for analyzing and then mitigating the risks associated with blindly using the 4% Rule. 

I’d be happy to to help you look over your early retirement assumptions.

If you liked this piece, you might want to check out:

• What Worked: 9 Things That Made Me Financially Independent Before 40
• The Four Money Personalities I See in High Earners
• Can You Afford to Take a Pay Cut for a Job You Love?

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

Health Insurance Is One of the Largest Costs in Early Retirement

Most early retirement strategies focus on overall costs and safe withdrawal rates relative to the portfolio. Healthcare is typically one of the largest components of those expenses. However, our experience is that very few early retirees accurately model healthcare expenses or even develop an approach to tackling these costs until well after they’ve left their corporate jobs. Planning out an approach before you leave your job can protect your core cashflows until full retirement benefits kick in. 

The key is using your HSA as a bridge fund to pay for premiums. But it’s important to know which premiums can be paid with your HSA.

Can you use HSA funds to pay for COBRA premiums?

Yes. The IRS explicitly allows HSA funds to be withdrawn tax and penalty-free to pay COBRA premiums. This is one of the few premium types HSAs are allowed to cover before full retirement benefits. We’ll get to why this matters in a moment.

Can you Use HSA funds to pay for marketplace premiums?

No. Marketplace (ACA exchange) premiums are explicitly excluded from the list of HSA-qualified expenses. There is one exception: if you’re receiving federal or state unemployment compensation, marketplace premiums can qualify. 

Outside of that exception, if you try to go straight to a marketplace plan pay for it with HSA funds, you’ll owe income tax on the withdrawal, plus a 20% penalty if you’re under 65.

How HSA-funded premiums affect early retirement

If you’re retiring before 59.5, you’re likely relying on funds in your savings, taxable brokerage, and Roth accounts in the early years. The less you need to tap into these early on, the more assets you’ll have to carry you to full retirement age where you’ll unlock the rest of your accounts (401k, IRA, etc.). 

Let’s say you retire early at 45 in April.

You already made too much this year in earned income and your expected passive income to qualify for marketplace subsidies so you would have to pay full price for a plan. The plan you’re looking at is $1,850 a month without these subsidies.

Your COBRA plan also costs you $1,850 a month. You can use this plan for the next 8 months until the start of the following calendar year when you can take advantage of marketplace subsidies. 

$1,850 a month * 8 months = $14,800 in premiums for the rest of the year 

If you’re following the 4% safe withdrawal guidelines for typical early retirement budgeting, paying these premiums out of the accounts you’re using to support your early retirement would reduce your withdrawal rate by:

4% * $14,800 = ~$592 a year

While that’s not a huge number, every bit helps in the first stages of early retirement. The loss of that $14,800 in assets used to support your day to day living is an immediate and permanent loss of $592 in potential funds you can pull from your accounts. Ouch.

What else you need to look at

This was a simplified example to show the primary reason why an early retiree would consider COBRA over Marketplace if they have available HSA funds to utilize.

When we help clients with this decision, we look at other factors like:

• How pulling funds from the HSA will reduce the tax-deferred compounding of the account. You need to weigh the tradeoffs of doing this vs. the amount of liquidity you want available to you for early retirement.
• How much of a subsidy someone qualifies for and where their income will be for the calendar year
• The net cost of the marketplace plans they’re considering vs. the net cost of their COBRA options

If you liked this piece, you should check out:

• What Worked: 9 Things That Made Me Financially Independent Before 40
• Leaving a C-Level Corporate Career

We specialize in all things early retirement. If you want help modeling out how to approach healthcare in early retirement, reach out to me at the email below.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

Selling stock isn’t your only option to finance a business purchase.

There are many points in life when you need a big chunk of capital.

Buying a business is a common one. Your investment portfolio is a natural place to look for quick capital, but selling stocks can lead to significant capital gains. But a bigger problem is losing out on future gains for the portion you’ve sold. 

People assume selling is the only option they really have. Most people don’t realize they can borrow against their portfolio. 

Lots of people have heard about “rich people” who borrow against their assets and never incur capital gains. But they assume that’s for the multi, multi millionaires and billionaires. The option is actually more accessible than a lot of people think it is. Many large brokerages offer this to investors with portfolios as low as $500,000¹.

What selling stock costs you.

Let’s do the math.

Say you need to raise $500,000. 

You have stock that you can sell to finance the purchase. But $100,000 of that sale is going to be capital gains. If you’re at a 15% long-term capital gains rate, you’re paying $15,000 in taxes on the gain before any additional state taxes or NIIT.

You’ll start with $500,000 in your portfolio, but end up with only $485,000 in cash after selling so you still need another $15k to make up the difference.

What borrowing against your portfolio costs.

A Securities-Backed Line of Credit (SBLOC) lets you borrow against your portfolio without selling anything. No shares change hands, no capital gains.

So what’s the catch? The loan will cost you in the form of interest. 

Let’s say the rate on the SBLOC is 7.5%² (rates on these are variable and move with the market, so treat this as an example, not a quote you should expect). 

On $500,000, that’s:

$500,000 × 7.5% = $37,500 a year in interest.

That sounds like a lot next to a $15,000 one-time tax bill. Until you account for what the gains in your portfolio because that $500,000 had stayed invested. A stock heavy portfolio generating an expected 9.0% gross return³ could result in:

$500,000 × 9.0% = $45,000 in portfolio returns.

Compare that to the $37,500 in interest, and you’re theoretically coming out about $7,500 ahead in a given year. 

Here’s a table to sum up the comparison:

That last row in that table is the punchline: borrowing lets the money in your portfolio continue to grow. Selling means it stops growing.

As long as the growth rate of your portfolio is higher than the amount you’re borrowing, you may be able to make a spread on your borrowing cost while avoiding capital gains.

One More Thing: The interest on an SBLOC loan may be deductible if you’re using the funds to buy a business.

One more point to add to the SBLOC tally. Interest on an SBLOC can be deductible, but it depends entirely on how the borrowed funds are actually used. The IRS traces loan proceeds to their use, not to the collateral behind them. 

If the funds go toward acquiring a business, there’s a case for treating it as investment or business interest, subject to some limitations. But this is the kind of detail that requires you to work closely with a CPA or other licensed financial professional to ensure you have the right structure to take the deduction.

What can go wrong.

This all sounds great, right? There are some downsides you need to be aware of. 

An SBLOC is typically structured as a demand loan, the lender can require you to pay it back whenever they want, not just when you miss a payment. 

If the market drops and your collateral value falls with it, you can get hit with a maintenance call. Meaning you need to top up your account balance. If you can’t post more collateral, the lender sells your securities for you, at whatever price the market happens to be offering that day. 

Rates are variable. Whatever interest rate you initiate your SBLOC at isn’t what it will be going forward. The SBLOC rates move with broader interest rate trends. If rates go down, then this works in your favor. But if rates go up, you’ll end up owing more on your loan. 

Let’s chat.

If you’re working through how to fund a major purchase without selling pieces of a portfolio you’ve spent years building, I’d be happy to help you think through the specifics. Reach out to me at the email below.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

1. Each financial institution has different minimums and requirements for their SBLOC programs. Work with a licensed professional if you’re researching options.
2. This rate varies widely between different institutions and the amount you are setting aside as collateral. This is purely for illustrative purposes and not a quote you should expect.
3. Markets do not return a steady 9.0% a year. This is for illustrative purposes only. Investing involves risk, including the loss of capital. Past performance is not indicative of future returns.

How PA’s $19,000 state tax deduction works

If you’re a PA resident, then you get a state tax deduction for every dollar you contribute. Since PA’s state tax rate is a flat 3.07%, that means if you’ll get roughly $3.07 back in tax benefits for every $100 you contribute to a 529 plan

Many states cap their 529 deduction to just $5,000 or less per year, regardless of how much you contribute. And this is typically per married couple, not per beneficiary.

Pennsylvania’s 529 plan deductions are much more generous. PA allows up to $19,000 per contributor, per beneficiary. That means a married couple can contribute up to $38,000 per beneficiary.  

How much is this worth? A married couple maxing $38,000 in contributions for a child could be getting $1,166.60 in state tax deductions ($38,000 * 3.07% state tax rate).

And because the limit applies per beneficiary, a family with three kids could really crank things up with up to $114,000 in deductible contributions in a single year.

No income restrictions on deduction eligibility

Many states have a limit on income to qualify for 529 tax deductions. If you make more than that limit, then none of your 529 contributions are eligible for this deduction. High earners in PA don’t have to worry about this. There’s no income cap to be able to take advantage of the $19,000 in deductions. 

Deductions apply to any state’s 529 plan

Here’s a detail people often miss. Pennsylvania has tax parity, meaning you get the state deduction even if you use a 529 plan sponsored by a different state. You are not limited to just Pennsylvania’s own PA 529 plan. 

Each state’s 529 plan investment options, online experience, and fees are different. If another state’s plan has lower fees or better investment options for your situation, you don’t lose the PA tax benefit by using it.

You can use a 529 for K-12 tuition expenses in Pennsylvania

529 plans aren’t just for college anymore. As of Jan 1, 2026, Pennsylvania allows up to $20,000 per year, per beneficiary to be withdrawn tax-free from 529 plans for qualified K-12 tuition expenses at public, private, and religious schools. 

This is a meaningful planning opportunity for families already paying private school tuition directly from a checking account.

Running tuition payments through a 529 first, even briefly, can capture the state tax deduction on money you were going to spend anyway, as long as you’re following the funding-then-withdrawal sequence correctly. This means you’re effectively getting a 3.07% discount on tuition expenses you were going to pay anyway.

529 accounts are exempt from PA state inheritance taxes

PA’s state inheritance tax can run as high as 15% for non-lineal heirs. 

The entire value of a 529 account is exempt from Pennsylvania inheritance tax for state residents for any beneficiary relationships. 

For families thinking about multi-generational education funding such as grandparents contributing to a grandchild’s account, this is a genuinely useful, PA-specific estate planning tool, not just a college savings vehicle. You get three distinct tax advantages: the state tax deduction for the contributions going in, tax-deferred growth of those assets, and then funds being passed on without state inheritance tax. 

Reach out if you’d like help with your K-12 or college education planning.

Educational funding is one of the main areas we work through with our Pennsylvania-based clients, particularly families navigating the cost of K-12 private school alongside college savings at the same time.

If you’re trying to figure out how to afford private school, sequence 529 contributions, tuition payments, and other savings goals, this is exactly the kind of decision we help clients work through and we’d love to help.

If you found this content useful, you might also like:

• Can I Afford Private School?
• Paying for K-12 Tuition with a 529

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

The Entire Process Takes About 30 Minutes of Your Time

In our experience, the anxiety around a rollover has almost nothing to do with the financial mechanics and almost everything to do with not knowing what’s about to happen to your money or how long or complicated everything will be.

Here are the key steps:

• Send us your latest 401(k) statement
• Set up an IRA if you don’t have one already
• Call your 401(k) provider together
  • If your provider sends the funds directly, we’re finished
  • If your provider sends a check, I’ll provide an envelope for you to forward
• We then let you know when the funds have been received and then invest them according to your investment strategy

The process on your end will take about 30 minutes active time in total.

Note, at this time we primarily use Schwab as our custodian so all steps will refer to how our process works with them. Let’s dive into each of the steps.

Step 1: Send us your latest 401(k) statement

We need your statement in order to:

• Confirm your name and address. To avoid complications, we need to check your name and address with your 401(k) provider matches your name and address at Schwab.
• Check that your funds have all vested. Some 401(k) plans have vesting periods. If you transfer funds before they are fully vested you may be leaving money on the table.
• Ensure we set up the right types of accounts with Schwab. Some clients contribute to traditional, pretax 401(k) plans, others use Roth 401(k), and some have a mix of both. 401(k) funds must be sent to the corresponding IRA types.
• Get the contact information of the plan provider. This will be used for when we reach out to them together in Step 3.

Step 2: Set up IRAs at Schwab if we don’t have them already

We need to make sure we have somewhere for your 401(k) funds to go. If we haven’t set up IRAs already, we will need to do this before reaching out to your 401(k) provider.

As with most our account setup processes, we streamline this for you. Our team will set up the account details with Schwab and then you will receive a DocuSign that takes no more than a minute to review and complete. Your account will be ready within 2-3 days.

Step 3: Call your 401(k) provider

While some providers allow direct 401(k) rollovers, our experience says most do not and it is often quicker and easier just to call them. Here’s what this looks like:

• Call Provider Together: We need to call them together so that you can authenticate yourself as the owner of the account and authorize me to speak on your behalf. I will handle most of the conversation from here.
• Confirm Direct Rollover: We will confirm with the plan provider that we are going to do a Direct Rollover into accounts held at Schwab. They will typically ask for the account numbers which I will provide.
• Review Plan Details: They will typically provide you with a summary of your current plan balances, an estimate on timing to receive the funds, and other information. I’ll write all this down and can provide you the summary if you’d like.
• Confirm Distribution Process: We found about half of providers will send the check directly to Schwab which requires no additional work from you. The other half will send you a check directly which then needs to be sent to Schwab. If this is the case, we will send you a stamped envelope along with a note to Schwab that provides some additional instructions to them. All you need to do when you receive the check is put it into this envelope and drop it in the mailbox.

Step 4: Confirm funds received

We will monitor your account with Schwab and let you know once they have received the funds or if there are any additional steps that require your attention. Funds typically arrive within 7-10 business days of checks being sent out.

Once the funds have been received, we will then invest them according to the investment strategy we have aligned on with you.

The fine print

This process describes how Kangpan & Co. typically handles 401(k) rollovers for clients; individual provider requirements and timelines vary.

It’s important to note that rolling over a 401(k) is not always the right choice. Some employer plans have lower costs or unique investment options (e.g., stable value funds) not available outside the plan.

Our 401k Rollover Advisory Services

• We offer hands- on 401k rollover services to our wealth management clients as part of their relationship.
• We also offer our 401k rollover services on a standalone, one-time fee basis for people who like managing their own investments but just want objective advice on whether a rollover makes sense and assistance with the rollover process itself.

If you found this helpful, you might also want to check out:

• What is Tax-Efficient Asset Location? for an overview on how to optimize the taxes on your portfolio by splitting assets between your retirement and taxable accounts

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

Summary: I’m a financial advisor for mid-career professionals. This post covers the most common questions I get from clients about their emergency fund needs:

• What is an emergency fund?
• What do high earners actually need an emergency fund for?
• How to calculate your monthly burn rate
• How many months of expenses should you keep on hand?
• How much cash is too much? The one-year ceiling

What is an emergency fund?

Emergency funds are cash set aside for sudden, surprise costs or job losses. They act as a cushion between the financial shock event and having to take on debt or sell your long term investments to pay for these expenses. 

What do high earners actually need an emergency fund for?

One of the first questions that comes up during planning discussions with high-earners is whether they have enough in their emergency fund. 

In most cases, there is a sizable amount of cash and enough month to month cashflow that could cover most one-off, surprise expenses that come up over the course of a year like having to replace the water heater, an unexpected overseas trip to celebrate a friend’s 40th birthday, etc. 

What an emergency fund usually needs to protect against for this group is unemployment. Fixed costs like mortgages and day-to-day living expenses like feeding a family of four are typically high and difficult to pull back quickly. And these are all supported by a job that produces the income to pay for these things. 

How to calculate your monthly burn rate

Start by figuring out how much your total monthly expenses are. You should include things like:

• Mortgage
• Other loan and debt payments
• Insurance premiums
• Living expenses
• Childcare

Living expenses like dinners out, birthday parties, vacations, etc. can vary month to month. You can take your past year’s credit card and checking statements and divide by 12 to get a more smoothed result.

The sum of all these is your total cost of living and it’s what you need to continue to cover if you lose a job or experience some other kind of financial setback.

How many months of expenses should you keep on hand?

Once you have your monthly living costs, you can then determine how much of a cushion you want in your emergency fund. This depends on your household’s circumstances and your family’s risk tolerance. 

Here’s how I help clients think about how much they should have put aside.

Three months is the bare minimum.
If anyone comes to me with less than this, you can bet it’s going to be a priority to get this built up unless there’s a really good reason not to. I use three months as the minimum because the US Bureau of Labor Statistics (BLS)¹ consistently finds the median amount of time someone spends looking for work when they become unemployed is 7.9 to 11.6 weeks. In the event you lose your job and your income is impacted, you should plan on your funds being able to support your life for at least this long.

Six months if you’re more conservative or a family relying on a single income.
The June 2026 BLS found the average duration of unemployment was 25.5 weeks. If you are more conservative or your household only has one income earner, then six months may be a more comfortable cushion to build towards. It doesn’t have to be all at once, but should be something you steadily work towards over the course of a year or two.

How much cash is too much? The one-year ceiling

Usually no more than one year. Past this point, you’re not really buying more safety, you’re paying for it. Even the most conservative unemployment stretches rarely run past ten to twelve months. Too much cash has real opportunity costs. According to Portfolio Visualizer², a dollar invested in cash in Jan 1996 became a bit more than $2.03 by the end of June 2026. That same dollar invested in the US Stock Market became $20.23.

Learn More

Every number in this piece is a starting point, not a definitive answer for you. The right cushion for you depends on your job stability, your household’s needs, and what else you’ve got backing you up. If you want help figuring out your liquidity needs, feel free to reach out.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.

1. US Bureau of Labor Statistics. June 2026 Report, Table 12: Unemployment.
2. Portfolio Visualizer Asset-Level scenario modeling for “Cash” and “US Stocks.” Gross returns only, does not include the impact of taxes or fees. January 1996 through June 2026. Data availability upon request.