FIRE in Italy: the 4% rule, taxes and the INPS pension

Where the 4% rule comes from

In 1994 the American adviser William Bengen analysed historical US market data and asked: what's the highest amount a retiree could withdraw in the first year, then increase every year with inflation, without ever running out of money over 30 years? The answer, even in the worst periods, was about 4% of the starting portfolio. A few years later the so-called Trinity Study reached similar conclusions.

Hence the rule: with a portfolio worth 25 times your annual spending, you can withdraw 4% in the first year and then adjust for inflation.

The limits, if you want to stop early

• A 30-year horizon. The original research covers 30 years of retirement. If you stop at 50, you may need to cover 40 or 45. Over longer horizons, the historically sustainable withdrawal falls.
• US data. The 20th-century US market was one of the best in the world. Later studies of other countries often show lower safe rates.
• Equity-heavy portfolios. The results assume a large share of shares (between 50% and 75%). A very cautious portfolio supports lower withdrawals.
• No costs or taxes. The original simulations ignore fees and taxes. A portfolio that costs 2% a year makes the 4% rule far more fragile.

The real risk: sequence of returns

Two people with the same average return over thirty years can end up in opposite places. If markets crash in the first years of withdrawals, you sell at low prices to live and the portfolio never recovers. If they crash fifteen years in, the damage is much smaller.

That's why the first 5–10 years are the most fragile. The usual defences are a cash or short-term bond reserve covering 2–3 years of spending, flexibility to cut withdrawals temporarily, and even a small income in the early years.

What changes under Italian tax rules

• 26% on investment gains (capital gains, dividends, coupons), reduced to 12.5% for Italian and "white list" government bonds.
• 0.20% annual stamp duty on the value of financial products in your securities account: a fixed cost on top of management fees.
• You're taxed on the gain, not the capital: when you sell to live, tax only applies to the part of the sale that is profit.
• ETFs and funds: watch your losses. Gains on ETFs and funds are classed as investment income and can't be offset against capital losses. It's a detail that matters when you plan your sales.

Example: if you need €30,000 a year net and 40% of your portfolio's value is untaxed gain, each sale pays 26% on that 40%, about 10.4% of the amount. The gross withdrawal you need rises to about €33,500. Your FIRE number should be based on that figure, not on your net spending.

The Italian advantage: the state pension

If you've worked in Italy for twenty years or more, you'll get an INPS pension even if you stop early. In most Italian FIRE plans, then, your portfolio doesn't need to cover all your spending for 45 years, only all of it until pension age and just part of it afterwards.

That's why a FIRE plan built on real numbers, pension included, almost always ends up with a lower target than the "25 times spending" shortcut. See the details in the guide on early retirement, and get a first estimate with the FIRE calculator.