Investment Path Your money, in perspective

Worked example

The 4 % rule, with German tax applied

A €500,000 portfolio drawn at 4 % a year for 30 years, of which €200,000 was money paid in and the rest is gain. The figure below is the first year's average monthly payout after estimated tax on the gains each withdrawal realises.

The answer

First year's monthly income, net

€1,500 / month

After estimated tax and inflation. The supporting figures below state their own basis explicitly.

Modelled paths that paid the full income for 30 years
72.5 %
Portfolio when withdrawals begin · inflation-adjusted · before a final sale
€500,000
10th-percentile portfolio left after 30 years · inflation-adjusted · before a final sale
€0
Assumed yearly return
7 %
Assumed inflation
2.5 %
Assumed tax rate
18.4625 %

Tax basis: 18.4625 % on realised gains, which is the German 26.375 % less the 30 percent Teilfreistellung an equity fund receives. The standard rate applies to individual shares and bonds; a fund holding at least 51 percent equities receives the exemption. The yearly Sparer-Pauschbetrag of €1,000 is applied as well.

Stress basis: percentile 10 of 1,000 simulated paths, using the same assumed average return of 7 % and 15 % annual volatility.

Open this plan and change the assumptions

Opens with these numbers, ready to change. Nothing you enter there is saved.

The rule was not written for German investors

The 4 % figure comes from US research on a portfolio held in a tax-advantaged account. For a qualifying German equity fund, 30 % of fund income is exempt, the remaining taxable income uses the year's allowance, and only then is 26.375 % charged – so the gross rate and the money that reaches the bank account are not the same number. The gap widens over time, because a portfolio that has grown for decades carries a larger embedded gain in every euro sold.

Two different rules share one name

Taking 4 % of the current balance is not the same as taking 4 % of the starting balance and raising it with inflation. The first cannot exhaust the portfolio but lets the income fall in a bad decade; the second holds the gross withdrawal steady in real terms and can run out. This page models that second, original-research convention.

What the Vorabpauschale adds

German accumulating funds are taxed a little each year on a notional gain even when nothing is sold, which drags on the balance the withdrawals come from. It is the one part of this tax regime left out here: the Teilfreistellung and the €1,000 Sparer-Pauschbetrag that offset it are already inside the figure above. Switch it on in the full simulator to see the whole picture, and note that it raises your cost basis as it goes, so the same profit is never taxed twice.

What this page is not

It is an illustration under stated assumptions, not advice and not a forecast. The return is an assumption you can disagree with, the tax is an estimate of one common German case, and no page on this site knows anything about your circumstances. How it works sets out the arithmetic and the full list of what the model leaves out.

How it works

Other questions worked through