Why The 4% Rule Can Quietly Destroy Retirement Portfolios

The problem with retirement index investing via the 4% rule, in which you liquidate 4% of your net worth at retirement every year and adjust it annually for inflation, is that it means that you are forcing yourself to sell an inordinately high number of shares during down markets. Additionally, if your portfolio suffers a major market downturn early in retirement followed by a lost decade, even if the remaining years are very strong in terms of total returns leading to an average long-term total return of 10%, you may end up depleting your portfolio so much in the early going that it is unable to climb out of that hole, and your retirement dream becomes shattered.

If, instead, you are living off of dividend income, you do not have to sell your shares early on. As long as your dividends remain stable and growing in line with inflation over time, you will never have to sell a single share and can live off of your portfolio indefinitely, regardless of how market volatility behaves.