The 3% rule

Financial Freedom is as simple as this one line equation. If it were teaching a class in finance this would be the first thing I would tell my students on the first day.

Expenses =< Net Assets * 0.03

Now you read all these retirement experts touting that with a 4% withdrawal rate you will not likely outlive your money. However these models are built with assumptions. Many assumptions. Such only needing to sustain that withdrawal rate for 30 years, because you’re retiring at 65 and dyeing penniless at 95.
If you can live off 3% of your net worth annually, then you are set. 3% is a low number, and you need a lot of assets to be able to live off of 3% a year but that’s the cold hard truth. Anyone telling you otherwise is misguided.

Now if your thinking "I have portfolio of dividend stocks that are already paying me X% dividends, can't I simply live off the dividends?" the answer sadly is no.

First you have to pay tax on your dividend income. You are smart enough to buy Canadian corporations paying an eligible dividend, so you've reduced your tax burden good job. But unfortunately you still have to pay some tax.

Second inflation is eating away at your income stream. Your dividends need to increase as time goes by. Sure companies increase their dividends. That’s good. But if the yield on your portfolio is more than 3% it means you have stocks that are giving out a high payout ratio, and so have less retained earnings to reinvest in capital expenditures and so grow their earnings. Therefore you must reinvest some of the dividends earned to keep the dividend income increasing to fight off inflation. Same goes if you have any fixed income instruments, whatever yield you get above 3% must be reinvested in order to keep up with inflation.

Thirdly your assets need to last more than 30 years. You’re not 65 years old. If your income stream dies out after 30 years you are in trouble. I am 30 years old; I need my income stream to last for at least 65 years. Therefore one must model for a perpetual inflation adjusted income stream. Not a broke in 30 years model.

A 3% withdrawal rate would allow your assets to support an inflation adjusted income stream in perpetuity.