FIRE and the Big Dilemma: Dividends vs. Safe Withdrawal Rate – Which One Helps You Sleep at Night?

So, you’ve made it. After years of grinding, saving, and investing like a maniac, you finally hit your FIRE number. Financial independence is yours. No more alarm clocks. No more bosses breathing down your neck. Just freedom.

But then, reality kicks in.

“How do I actually live off my investments?”

This question keeps a lot of FIRE folks up at night. After spending so long watching your net worth grow, the idea of selling investments to fund your life can feel… well, terrifying. Nobody wants to see their nest egg shrink, even if it’s part of the plan.

That’s why many people turn to dividends—the idea of living off passive income without ever touching the principal feels safe. But is it really the best strategy? Or should you focus on total return and use the Safe Withdrawal Rate (SWR) method instead?

Let’s break it down—without all the boring financial jargon.

Dividend Investing – The “Never Sell” Approach

Imagine this: Every quarter, you get a nice little deposit in your account. Free money, right? That’s the appeal of dividend investing—build a portfolio of solid companies, collect passive income, and never worry about selling shares.

Why People Love Dividends:

✅ It Feels Like a Paycheck – You’re just living off the income, not selling anything.
✅ No Market-Timing Stress – Whether the market crashes or booms, your dividends (mostly) keep coming.
✅ Psychological Comfort – Your net worth stays intact, making it feel like you’re not “spending down” your wealth.
✅ Legacy Factor – You can leave the whole portfolio to your kids without touching the principal.

Sounds great, right? Well… hold on.

The Downsides Nobody Talks About:

❌ You Need a HUGE Portfolio – A $1M portfolio with a 4% dividend yield only gives you $40K per year. Want $80K? You need $2M. That’s a high bar.
❌ Dividends Aren’t Guaranteed – Companies cut dividends all the time—especially during recessions.
❌ Lower Growth Potential – High-dividend stocks tend to grow slower than the broader market.
❌ Sector Overconcentration – Many dividend stocks are in boring, slow-growth sectors (utilities, REITs, consumer staples).

But here’s the biggest issue: Dividends aren’t actually free money.

The Big Myth: Are Dividends Really “Passive Income”?

There’s this idea that dividends are extra money, like an interest payment. But that’s not really how it works.

When a company pays a dividend, its stock price drops by the same amount.
That’s because cash is leaving the company—it’s not magic money appearing from thin air.
Companies that don’t pay dividends often reinvest profits into growth, leading to higher share prices over time.

That’s why companies like Amazon, Google, and Berkshire Hathaway don’t pay dividends at all—they’d rather reinvest for maximum shareholder value.

So while dividends feel great psychologically, they may not actually be the best way to maximize long-term returns.

Safe Withdrawal Rate (SWR) – The “Sell a Little, Let the Rest Grow” Strategy

Now, let’s talk about the SWR method, which is a fancy way of saying:

“I’ll withdraw a small percentage of my portfolio each year and let the rest keep growing.”

How It Works:

1️⃣ In the first year, you withdraw 4% of your portfolio (if you follow the famous 4% rule).
2️⃣ Each year, you adjust for inflation.
3️⃣ Your portfolio stays invested in stocks and bonds, growing over time.
4️⃣ Based on history, this strategy has a high probability of lasting 30+ years (hello, Trinity Study!).

Why People Love SWR:

✅ Lower Portfolio Requirement – Since you’re not limiting yourself to dividend stocks, your money can grow faster.
✅ More Diversification – You can invest in index funds, growth stocks, bonds—whatever you want.
✅ Historically Proven – Research shows a 3-4% withdrawal rate works long-term.
✅ More Flexibility – In good years, you can spend more. In bad years, you can cut back a little.

The Challenges of SWR:

❌ Psychological Barrier – Selling shares feels like spending your nest egg.
❌ Market Volatility – If you hit a bad market in the early years, your portfolio could shrink too fast.
❌ Uncertainty – Nobody knows the future—will 4% really last? What if you live to 100?

But here’s where SWR really shines:

SWR is More Likely to Grow Your Net Worth Over Time

For a lot of FIRE folks, it’s not just about covering expenses—it’s about watching their net worth grow even in retirement.

If you’re invested in broad market index funds (like the S&P 500), which average 8-10% returns per year, your portfolio can keep growing, even as you withdraw money.

Real Example of SWR Using World Index Funds (VWRA):

Let’s say you have $1M invested in a globally diversified portfolio of world index funds, such as the Vanguard FTSE All-World UCITS ETF (VWRA). This ETF provides broad exposure to stocks across both developed and emerging markets, and its historical returns have averaged around 7-8% per year.

The Math Behind a 4% Withdrawal:

You start with $1M.

Withdraw 4% in year one: $40,000.
After the first year, you adjust the withdrawal for inflation.

Assuming the 7% average return holds and inflation is around 2%, here’s how your portfolio would grow over time, even with withdrawals:

Year 1: Start with $1M, withdraw $40K, leaving $960K.
Year 2: Your portfolio grows by 7% (now worth about $1.027M). Withdraw $40,800 (inflation-adjusted).
By Year 10, even with withdrawals, your portfolio could be worth roughly $1.3M if the market continues to grow at an average 7% per year.

This example shows that you’re withdrawing money, but your portfolio continues to grow. In fact, over the long run, it can even grow faster than you’re withdrawing, providing you psychological comfort that your wealth is still increasing.

What About a Hybrid Approach?

Many FIRE folks mix both strategies for the best of both worlds:

✔ Dividends cover core expenses – Helps avoid selling during market downturns.
✔ SWR supplements income – Provides flexibility and growth potential.
✔ A cash buffer (1-3 years of expenses) – Prevents the need to sell in a crash.

Example of a Hybrid Portfolio:

Total Portfolio: $1.5M

$500K in dividend stocks (generating ~$20K/year in dividends).
$900K in index funds (like VWRA) (used for SWR withdrawals).

$100K in cash (buffer for market downturns).

This setup:

Provides reliable passive income through dividends.

Lets the rest of the portfolio grow at market rates.
Reduces risk by avoiding forced selling in downturns.

So, Which Strategy is Right for You?

Go All-In on Dividends If You:

✅ Hate the idea of selling shares and want steady passive income.
✅ Have a big enough portfolio to support your expenses.
✅ Are okay with slower portfolio growth.

Go with SWR If You:

✅ Want a higher likelihood of net worth growth over time.
✅ Are comfortable selling shares as part of your strategy.
✅ Prefer more diversification and flexibility.

Do a Hybrid Approach If You:

✅ Want the security of dividends but also the upside of SWR.
✅ Like the idea of not touching assets during downturns.

At the end of the day, FIRE isn’t just about having enough money—it’s about feeling confident in your plan.

Some people sleep better knowing their dividends cover their bills. Others feel fine selling a little each year while watching their net worth grow. The best strategy? The one that lets you actually enjoy your freedom.

Which one do you prefer? 🚀

Good articles that you should read!

People are drawn to dividend investing.

Why? Firstly, dividends provide a regular stream of income, allowing investors to receive a portion of the company’s profits on a periodic basis. This can be particularly attractive for individuals seeking consistent cash flow or looking to supplement their existing income. Additionally, dividend investing is often viewed as a more stable and predictable investment strategy compared to relying solely on capital appreciation.

I always write and share articles, especially on dividends which many people love them. Do read them!

Simplified Guide to the Key Gist of Grant of Probate and Estate Planning

Alternatively, you can go the right side of my page, there is a search bar where you can simply search “dividend” to see all my articles related to dividends!

Of course, you can search for other things that would interest you such as “Careyourpresent”, “Reits”, “Side Hustles”, “Fixed Incomes”, “Savings” etc.

CAREYOURPRESENT

Money just buy you the chance of freedom.

When you are young and working, you exchange time for money. When you are old, you can have lots of money but you can’t buy time back, especially the things that you have missed while busying striking out in career. Of course, if you love your career, and consciously know that you are missing out the first time your child walk or talk, that’s ok, but if you are the other spectrum, please do something about it.

Your kids grew up and they no longer need you to accompany them. They no longer want to sit on your lap to share/do things with you…all these time you spent in your 9 to 6 or even longer cubicles…can the money that you have earned by you back these?

We always thought we have more time with our old parents, but we are wrong. Time with them is ticking away every day. One day it will suddenly be gone. There is no regret medicine, no reset in time. Gone is gone and cannot come back. No matter you are billionaires or millionaires, you cannot reset this.

We always thought that we have more time with our spouse every day, but we are wrong. One day they will be gone too. When you read this, please go tell your spouse that you love him/her and he or she is the best thing that you ever had in your life.

I have picked out some of the more life reflecting articles of the CAREYOURPRESENT series. Do read them:

The Best Advice to Parents and Child

You can read more about my articles on Careyourpresent via the Category “Careyourpresent” or simply click “Careyourpresent” via the main menu bar.

REMEMBER:

Love your life daily.

You have one less day with your spouse, parents, children and yourself.

Time is ticking away.

For each passing day,

Enjoy and Treasure your Life!

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Category: Investment and Finance

FIRE and the Big Dilemma: Dividends vs. Safe Withdrawal Rate – Which One Helps You Sleep at Night?