How much you need invested to live on dividends, and what inflation takes
Your data
The tax is a field rather than a fixed number because it is different in every country and changes with the law, while the arithmetic around it does not change at all. Leave it at zero if the dividends reach you untouched.
Results
| Yield left after tax, in per cent | — |
| What the usual sum asks for | — |
| What it takes for the income to hold its ground | — |
| How many times bigger that is | — |
| Share of the dividend you have to put back, in per cent | — |
| Years until the untouched income buys half | — |
The first of those two numbers is the one every calculator gives, and it is correctly computed. It answers a question nobody meant to ask: how much capital pays that amount once. A yield pays the same amount next year and the year after, and the amount is what stops being enough.
What the untouched income buys later
| Years from now | The amount that arrives | What it buys, in today's money | Lost, in per cent |
|---|
The middle column never moves, which is exactly why the trap works. Nothing goes wrong on any particular day, no payment is ever missed, and the number on the statement is the number that was promised. The third column is the one that is falling, and nobody sends a letter about it.
The fix is one line of algebra rather than a better investment. If the pile has to grow with inflation so the income can grow with it too, then what comes in has to cover both, and what is left to spend is the yield minus inflation instead of the yield. That subtraction is the whole difference between the two figures above.
It is a subtraction with cruel arithmetic, because the smaller the gap the larger the pile. Six against four leaves two, so the requirement triples. Six against five leaves one and it multiplies by six. When inflation reaches the yield the answer stops being a large number and becomes that no amount works, which is a far more useful thing to be told early.
None of this says anything about which assets to hold, and the page cannot tell you whether the yield you typed is one you will actually keep receiving. It takes your own three numbers at face value and does the arithmetic that the familiar version leaves out.
Why is the usual answer smaller than the one here?
Because the usual answer divides the yearly income by the yield and stops, which is correct arithmetic for a single year. It tells you the capital that pays that amount once.
A yield keeps paying the same amount, and the amount is the thing that stops being enough. For the income to keep its purchasing power, the pile has to grow with inflation as well, which means part of what comes in cannot be spent.
Where does the second figure come from?
From one line of algebra. If the pile grows with inflation and the withdrawal grows with it too, then what comes in has to cover both, and what is left over to spend is the yield minus inflation rather than the yield.
So the capital is the yearly income divided by that difference. It is not a rule of thumb or a safety margin, it is the only figure that keeps the arrangement standing still, and a year-by-year simulation lands on it exactly.
How much difference does it make?
More than most people expect, because the gap between the two rates is what divides, not the rates themselves. Six against four leaves two and the requirement triples. Six against five leaves one and it multiplies by six.
Adding tax makes the same squeeze worse from the other side, since it shrinks the yield before the subtraction happens rather than after.
| Yield, in per cent | Inflation, in per cent | The usual sum | Holding its ground | Times bigger |
|---|---|---|---|---|
| 6 | 0 | 600.000,00 | 600.000,00 | 1,00 |
| 6 | 2 | 600.000,00 | 900.000,00 | 1,50 |
| 6 | 3 | 600.000,00 | 1.200.000,00 | 2,00 |
| 6 | 4 | 600.000,00 | 1.800.000,00 | 3,00 |
| 6 | 5 | 600.000,00 | 3.600.000,00 | 6,00 |
What happens if inflation reaches the yield?
Nothing works, and the page says so instead of printing an enormous number. When there is nothing left after the subtraction, every arrangement loses ground, and a bigger pile only means losing ground more slowly in relative terms rather than avoiding it.
Being told that early is more useful than a figure with many digits, because the answer is not to save harder. It is that the income cannot come from that yield alone.
So is the smaller figure just wrong?
No, and that is the awkward part. It is right about what it measures, and if you only need the income for a few years the erosion may not matter to you. The two figures answer different questions and the page shows both.
What the page will not do is tell you what to hold, or promise that a yield you type in is one you will keep receiving. It takes your three numbers at face value and does the arithmetic the familiar version leaves out.
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