4% Safe Withdrawal Rate vs Living Off Dividends

There is a rule in the personal finance community called the 4% rule or safe withdrawl rate (SWR). It basically states that once you are retired you live off 4% of your net worth, which is the safe amount to spend to ensure you don’t run out of money.

The 4% rule is based on the Trinity Study which looked at a portfolio of 50% stocks and 50% bonds to see how likely it was to run out of money over 30 years.

The video above shows how complicated the four percent rule can be and why it is better in my opinion to simply live off your investment income (dividends, rent, interest, etc) as there is no calculation involved and no work. Everything is on autopilot. That being said when living off dividends there is a trade off between income and growth (see The Problem with HVST) and this is where I think the four percent rule can be used as a guide. If your dividend income is more than 4% of your net worth, invest more in growth assets whereas if your dividend income is less than 4% of your net worth, invest in income-producing assets.


You Save 100% of Your Salary? What if You Die Before You Retire?

I probably shouldn’t do this, but I told someone recently that I save 100% of my salary and live off dividends. One of the argument he used against this is that, if you save up a considerable amount of money, you deprive yourself while you save and there is a chance that before you retire, you may die, which means you never had the opportunity to enjoy spending the money that you saved.

This made me think about why I continue to live a minimalist lifestyle and live off dividends.

If you die with lots of money saved up, you could have enjoyed that money. However, for many people, freedom is so important that it’s not the spending of money that makes them happy but the holding of money. This applies to me as well. I love to hoard money not because of what I can buy with it but because of the freedom and autonomy it gives me.

If I had, say, $1 million then according to the 4% rule I can spend $40k per year forever. I never need to work ever again so long as I’m satisfied with a $40k per year lifestyle. There is no need to suck up to some boss, and I can do jobs on my own terms and live according to your own rules. I continue to work, but I do the work that I love. That is freedom, and I care about that more than some shiny Ferrari.

You enjoy your work when you’re not dependent on it

In my opinion, you enjoy working when you don’t care if you’re fired. If something at work bothers you, you simply ask your manager if you can be transferred elsewhere. If for some reason you are fired, just shrug and walk to a job agency or find a new job yourself. Because you live off your investments, it doesn’t matter if you’re unemployed. You don’t work to feed yourself because other people feed you.

However, if you’ve never saved up any money, if rather than living off dividends you have massive debt and spending obligations, you are then dependent on your job, and dependency is slavery.

Slavery has not been abolished. It has evolved.