The 40 Percent Rule

Back in 2011, a friend spoke of these magical financial vehicles called “index funds”. What was news to me at the time sparked immediate deep research and eventual action.

Index funds have seen massive traction in the “FIRE” or Financial Independence, Retire Early community. And while there are many funds that track many indexes, the most common recommendations made tend to track the following indexes:

Whether right or wrong, the general consensus from this community is that for every $100 invested today, it will pay you back $4 every year, for at least 33 years.

This is known as the 4 percent rule, and is the “safe withdrawal rate” that finance bloggers like MMM, jlcollinsnh, Millenial Revolution and everyone else rehashing the same stuff over and over are talking about (no disrespect, there’s just very little “new” information).

The Problem with the Four Percent Rule

While the four percent rule sounds great in theory, there’s an issue for most people. You need a shitload of cash to make it work.

As a general rule, if you’re a high income earner by international standards, chances are your local cost of living is also high.

If you live where cost of living is very low, chances are your salary is two-fifths of f*ck all.

High salary + high cost of living = a long time until you can retire
Low cost of living + low local salary = a long time until you can retire

Of course, plenty of clever people have found ways around this:

  • Live on noodles, live in a share-house and work a high paying job in a major city, save almost everything you can, then move to a country town to retire.
  • Earn in a major economy, invest everything you can, then retire in a developing country with lower cost of living.
  • Live in a country with low cost of living and work a high-paying job remotely, investing the difference between cost of living and your pay cheque.

There’s a load of options, and to some extent I’ve subconsciously done a bit of a combination of all of these, and more.

What kind of annoys me though, is how easy, fast and enjoyable many of these money bloggers make it seem.

  • Not everyone enjoys cycling to work in Toronto in the middle of a miserable winter to save $12 per week.
  • Not everyone is earning $200,000 a year in a tech job that can be worked remotely.
  • Not everyone is willing to retire in South East Asia.
  • Not everyone is willing to work a high-stress career for 12 of the best years of their life.

The Problem with Early Retirement

Similarly, the early retirement community has its own problems. Some core issues (with similarities to entrepreneurship) were talked about on this podcast.

When people work their ass off, and scrimp on every cent to retire at 37, they often take 3 months to relax, begin exercising again, sleep a lot, and then realise they don’t have much to do with their time.

Many entrepreneurs also do this; working 14 hour days for years, earning next to nothing, only to get their large cash pay day after selling their business. After the initial ego boost and splashing of cash, they often realise they’re now bored out of their brains.

So, Do You Really Want to Retire?

While many of us say we want to “retire young”, what we really want are:

  • no money stress
  • freedom of time
  • freedom of location
  • no or few meetings
  • to work on things we care about
  • to work at a slower pace

…and so on. We’re mostly seeking freedom, security and the time to enjoy everything else in life that actually has nothing to do with money.

So for a moment, let’s pretend you live next door to me in Andorra where the cost of living is reasonable, but not “developing country” cheap. My wife, son and I can live comfortably on around €40,000.

Using the 4% rule, this means we only need to invest €1,000,000. For most readers, that’s probably a 15-20 year plan, assuming you are starting out with no debt, and you can manage to stay away from adventure and live a frugal life in that time.


Well, I think there may be a better way.

My hypothesis is that it’s possible to make around 40% annual return on investment by investing in “digital real estate” or “digital assets”.

Sceptical buyers may ask “if they were any good, why would they sell them?” The thing that I’ve realised from selling a website business myself is, plenty of people sell perfectly good businesses for not very good reasons.

These types of businesses are typically:

At this rate of return, keeping in mind I need €40,000 for myself and my family to live, I only need to invest €100,000. Yes, that is one zero less than the previous scenario. I call this the 40% rule.

The 40% Rule

There are some key differences however. While the 4% rule is used by people wanting “Financial Independence and to Retire Early”, the 40% rule is more along the lines of “Location Independence and Semi-Retirement”.


Where a Bogle-style “lazy portfolio” with only two funds will require you to rebalance as little as once per year, a portfolio of digital assets may require you to work anywhere from 1 hour a month to 40 hours a week.


While you can invest in Hong Kong property through a REIT and emerging market bonds through a fund with absolutely 0 knowledge in either areas, buying a website with no prior knowledge is an obviously steep learning curve.


Oddly enough, most people believe in others more than themselves. It’s why most are happy to work for an employer, where they have the illusion of security. It’s why they’re happy to invest in a company they know nothing about more than their own.

To use the 40% rule, you’ll need to believe in yourself.

This Isn’t a Bad Thing…

None of this is a negative.

Whether you’re retiring at 30 or 65, you don’t actually want 24 hours each day with nothing to do. With a small portfolio of websites that need maintenance or marketing to grow you may need to commit to, say 5 hours per week.

However you can do this work when it suits you, from whatever country you please, in your underwear if you so choose.

Unlike a job where the boss dictates the terms, you can build your digital asset portfolio around your goals. If time is most important to you, you’ll want the most passive businesses you can find (~1 hour per month).

If a greater return is important, maybe you’re looking to swap out the current 40 hours a week you’re working in an office for 40 hours on your own portfolio, as it brings freedom of location.

While operating these websites may not be in your wheelhouse yet, knowledge is easily gained. Rather than sleeping 12 hours a day in your early retirement, this time can be used to gain a new skill which can keep you engaged with the world.

It also allows you to lean into your strengths. For example, I’m a technical SEO consultant by day which means I’m generally looking for sites that I can improve using that skillset. If you’re a great writer you could consider buying sites that will benefit from new articles.

Similarly, the lesson in psychology is that security in the workplace is mostly an illusion. Your boss, no matter how noble, won’t fight as hard as you will to put food on your family’s table. You can be damn sure that the CEO’s of the S&P 500 companies you’re invested in won’t either (they don’t even know who you are).

Websites are Financial Instruments

Someone much wiser than me said:

Websites are financial instruments. Buy low, sell high, take the income.

It took this statement for it to all click for me. I was thinking too deeply about them – websites were keywords and sessions and conversion rates back then.

Now they look more and more different every day.

The truth is, 40% isn’t a rule as such, it’s a hunch. Website investors may be buying sites returning more like 20% (which is still a damn good return for most people), while others are pushing well past 100%.

This is what makes this model so interesting to me – it’s accessible to people of all demographics, locations and experience, so long as they are willing to learn.

Those with more money than time can invest more in safer digital assets that require little to no time, and take a smaller return in exchange. Those with less funds can buy a starter site and invest their sweat to grow it month-on-month.

But from what I’ve seen, for most investors, 40% annually is around the norm.

Next month I’m heading to Bangkok to speak with some clued up people in this space to learn from their experiences on this topic. I don’t know where it’s heading from my point of view but, as always, I’ll do my best to share any useful findings.

UPDATE: Bangkok was awesome, and it’s fuelled my fire. This is, as far as I can see, a huge opportunity, and I intend to take advantage of that.

4 Replies to “The 40 Percent Rule”

  1. Brilliant post. This has always been my biggest beef with the FI movement as well, even though I’m generally a fan of the FI concept overall.
    I have some digital assets, but most of my efforts at 40% instead of 4% are via physical real estate. With good property management, this provides a lot of the same benefits that digital assets do.

    1. Hi Taylor, thanks for your comment. I agree – FI is great and striving for it is not only ideal, it’s a very adult decision (being responsible for your own well being). 40% in physical real estate is impressive, do you have any tips for me here? Any sources for me to read and learn more? I’m Australian and my home market is very overblown – is this where timing the (property) market is important? Or are you able to make that sort of ROI even during a hot market?

Leave a Reply

Your email address will not be published. Required fields are marked *