Fast Forward Twenty Years From Now: How Do I Extract The 4%?

I seriously wouldn’t know how to go about this. Okay, I get the 4% rule thingy and the 25 times your expenses ratio in order to retire early. I’m not daft…but how do I go about paying myself twenty years from now?

I mean, if you’ve built a property portfolio and landlording ‘n stuff…I get that your income comes from rent. Duh. But we don’t intend to do that (The Netherlands just isn’t the best place in the world to do that, we HATE DIY and we just couldn’t be bothered handling tenants).

So, we intend to have a mortgage-free home and a kick-ass portfolio that will consist of stocks, bonds and maybe some REITs.

The thing I haven’t read about in any of the cool blogs is how to go about this early retirement business then. Just the 4% rule. But do we extract 4% annually and put it on a savings account which we’ll then extract money from each month, or do we extract 0.33% monthly…or what?

I know we’re not there yet, not even close. But it’s good to know what to do when you’ve finally arrived.

Is this a really silly question or what do you reckon?

Maybe I should ask jlcollinsnh or MMM?

Love,

Mrs EconoWiser

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4 thoughts on “Fast Forward Twenty Years From Now: How Do I Extract The 4%?

  1. spaarolifantje

    Do.

    My suspicion is also that the answer to this differs from the US (where you pay taxes on how much money you made when selling a stock – price when selling minus price when buying times a certain percentage = what you pay in taxes) and the Netherlands with its flat tax on assets.

    Part of my current shares pay out dividend annually. Currently I put that dividend right back into the stock, I simply buy more shares with it; but I guess in the future that is one opportunity to get some real cash from your investments.

    Another option could be to buy an annuity from a bank or insurance company? Imagine selling part of your stock, and buying a, as they are called here, “uitkerende lijfrente”, with it. Maybe I’ll do that with part of my money, especially if, by that time, the offers are good enough. (They’re probably a bit low these days).

    I’m curious as to what people who already do this, will say.

    Reply
    1. econowiser Post author

      I hadn’t thought about these options yet, thanks!

      With index investing you don’t see the dividend, it is automatically reinvested.

      The annuity is an option…although in that case the kids wouldn’t inherit the ‘stash.

      Sounds like our tax system is easier then when it comes to taxes. Especially with this new idea of lowering it to 0.9% on assets, yay!

      Reply
  2. jlcollinsnh

    Hi Mrs EW…

    Interestingly I’ve gotten just this question in the comments on my blog a couple of times now in recent weeks. Maybe I should do a post on it.

    But in short, it really is pretty simple.

    If your investments are in tax advantaged accounts, since your dividends and capital gains are not taxed, the easiest way is to have them reinvested and then just pull out whatever percentage you choose. For example:

    Suppose you have 100k in VTSAX and you want to draw 4% ($4000) per year from it. You could have Vanguard sell $4000 worth of shares and send the money to your bank. Or you can divide by 12 and instruct them to send $333.33 to your bank each month. Easy-peasy!

    If your investments are in a taxable account, since you have to pay tax on your dividends and capital gains distributions, you could just have the fund pay these to you. In the case of VTSAX, dividends are around 2%. You’d get the other 2% as above. Make sense?

    But I gather that might be a little USA-centric for your needs. So forgetting any tax issues and still using VTSAX in our example, if you wanted 4% per year you could:

    1. Have VTSAX pay you the 2% dividend rather than re-invest it and have them sell enough shares each year for the other 2%. You can have them do this on any frequency you like: Annually, Quarterly, monthly.

    2. Continue to reinvest dividends and just have Vanguard redeem enough shares as above but now for 4%. If taxes play no role, as in a tax advantaged account or maybe your situation in the Netherlands, this is what I’d do.

    Hope that helps!

    JLC

    Reply
  3. Econowiser

    Hi JLC,

    Oh, I would love for you to do a whole article on it! Thanks ever so much for this advice. I am going to figure out what’s the best option for the Dutch. I’ll talk to my accountant about it as well.

    Thanks, this really helps a lot!

    Love,
    Mrs EW

    Reply

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