Preliminary note: This is not investment advice.
Just a reminder, the 4% rule is somewhat of a sacred law in the FIRE movement (Financial Independence, Retire Early). If you save one million euros and withdraw 4% each year, meaning 40,000 euros in the first year, it is assumed that you’ll never run out of money, even accounting for inflation. Conversely, the community also says that you should have saved 25 times what you need annually to live, if you want to live off it.
What bothers me about the rule: If the stock market goes down and I have to sell 4%, I’ll have less than what I need annually. Moreover, the 4% rule is based on a study by Bengen, which is based on a very specific portfolio and a period of 30 years. Few stock markets come close to 4%, and there is hardly any data for periods of over 50 years (see also Ben Felix’s video). If you want to retire at 40 and live until 95, only 2.2% would be a safe rule. According to Fisker’s book, early retirement only works if you live relatively frugally. But that’s another story. Some people rely on accumulating MSCI ETFs, which likely makes a lot of sense in your younger years. I tried my luck with robo-advisors for a while, but I’ve since moved on from that. Growney even issued me an incorrect tax certificate, and only after persistent follow-ups with the bank did I receive the correct one. I’ve also parted ways with my financial advisor. No matter where, a fee is always charged, even when a loss occurs. At this point, I’ve focused on the Scalable broker, where the monthly fee is easily offset by the interest from the savings account.
At first glance, the dividend strategy seemed more attractive to me instead of the 4% rule: ETFs with dividend aristocrats that have consistently paid or even increased their dividends over the last X years. But upon further consideration, this strategy also has drawbacks: Companies that pay a dividend essentially reduce their company value; companies like Google that don’t pay dividends can invest the untapped dividend into growth, which in turn boosts the stock price. Theoretically. In this case, the argument that dividends must be taxed is certainly valid, while investors in non-dividend stocks only need to pay taxes when they sell (note: with accumulating ETFs that contain dividend-paying companies, it’s a bit different, as there is a pre-emptive flat tax). Ben Felix explains this very well:
Additionally, dividends are not guaranteed, even with dividend aristocrats. The VanEck Morningstar Developed Markets Dividend Leaders currently offers a dividend yield of 4.87%. In other words, if you invest 100,000 euros, you’ll receive 4,870 euros per year, before taxes. And, of course, taxes must also be considered. After taxes, you would end up with 3,586 euros, depending on whether you belong to a church or not. So, if you wanted to receive an average of 2,000 euros in dividends per month (though they are not guaranteed), you would need to invest more than 660,000 euros to achieve this after taxes. To reach this amount, you’d have to reinvest the dividends you receive for many years, with strong discipline.
Now, let’s compare this with the 4% rule: With 1 million euros saved, you would receive 40,000 euros annually, which, after taxes, amounts to 29,450 euros a year, or 2,454 euros per month. With the fund mentioned above, you would need to save slightly less—821,355 euros would give you the same amount. Assuming you reach a 5% yield with various dividend stocks and funds, the sum would be even lower, though you would never need to touch your principal. This may initially sound better, but if you follow Ben Felix’s reasoning, you would not have benefited from the full growth of the stock market. In other words, the portfolio of an investor participating in the entire stock market would have grown faster because it would also include companies that do not pay dividends.