The 8% Rule
Throwing out the unreachable conventional wisdom
Tradition - It is there as a plumb line, whether to overthrow or to defend.
The 4% rule is one of those traditions, or conventional wisdom, items in finance. You need enough saved in your 401k, Roth, or IRA, to sell and withdraw 4% each year to live on for the duration of your retired years.
Many people with a family would need in excess of 1 million saved to live at their current standards, not to mention the rampant inflation infecting the world economy thanks to central banks.
The 4% Problem
The problem with the 4% rule is saving that that amount of capital is out of reach for most people in the world. Most of us have not been that diligent. Most of us have neglected to save early, or had crises, or job loss or illness which prevent us from having saved a million or more.
The Good News of High Yield
I don’t mean to blaspheme when I say “the good news of high yield” this isn’t quite as good news as the gospel…. but it does vastly reduce the amount you need to have saved in order to retire comfortably. Enter, “the 8% rule”
The “8% rule” is from a YouTuber “Armchair Income”:
Now the insight of AM on YouTube was this, if he can find a fund with a minimum yield of 8% that also appreciates in value, he can retire on a lot less capital saved.
This YouTuber has an additional condition for his investments which is that the minimum 8% dividend has a track record of increasing each year to deal with inflation. This stipulation becomes moot when you discuss the world of high-yield, or perhaps we could say “ultra high yield” income ETFs.
These ETFs tend to pay 20% or more annually on the low end. The only trouble in that case is finding some which have resilient NAVs.
The 40% rule
I follow a dividend YouTuber who has a discord, this was his response to the ‘8% rule.’
The rest of the crowd had similar things to say:
The commenter here is referring to ETF manager YieldMax which has a multitude of Covered-Call ETFs where people can yield in excess of 80% on some of these ETFs.
So the good news is with ultra high yield ETFs you really can go with a lot lower capital. Instead of enough to live off an 8% annual yield, your necessary minimum capital saved to retire goes down with the increasing yield (so long as your underlying can appreciate).
Find out your retirement expenses
If you can calculate what you will need to live in retirement, it’s basic arithmetic to figure out what percentage yield you need to retire. Then you can go ‘shopping’ and find the best income funds.
I think the real trick is finding a fund with a stable NAV, or underlying stock price since these monthly dividends get siphoned out of that. If they can keep the NAV stable while paying 20% or more, as has FEPI, QDTE, XDTE and many others, then you have likely found a good place to park your money so long as you diversify.
In addition with the higher yields, you can more easily put a portion of the monthly dividend back into the price of the fund, or throw it into growth indexes like the S&P, NASDAQ-100. You could even throw some percentage into a leveraged ETF or ETN if you have the stomach for it.
If there is a market downturn, there are some income ETFs that follow treasuries, or even BTC or gold that might be worth looking into.
Peace of Mind on the 8% Rule
Really the 8% rule is something of a conservative start to retiring on dividends… Based on your risk tolerance, and age, you may find that the 40% rule is better. Regardless all these options are better than the 4% rule which has become unrealistic for most of us plebeians.