How to fund a freedom dividend with a retirement portfolio

"Wait 'til I get my money right / Then you can't tell me nothing, right?" - Can't Tell Me Nothing, Kanye West

As I write this in 2020, the idea of a Universal Basic Income – “a guaranteed, no-strings-attached, recurring payment to every member of society, sized to meet basic needs” – is gaining momentum.

One particular implementation of a universal basic income is a “freedom dividend” as popularized by 2020 presidential candidate Andrew Yang – “a set of guaranteed payments of $1,000 per month, or $12,000 per year, to all U.S. citizens over the age of 18.” Yang proposes funding this program “by consolidating some welfare programs and implementing a Value Added Tax of 10 percent.”

But what if there were another way, one that did not involve increasing taxes? For a while now, I’ve been following the FIRE (Financial Independence, Retire Early) movement, which has empowered people to live off their retirement portfolios and stop working much before conventional retirement age. I started wondering if the same principles behind FIRE could help fund universal basic income.

An essential tool used by the FIRE community is the Safe Withdrawal Rate, defined as “the rate that you can withdraw from your portfolio every year that ensures you have a high probability of never running out of money.” Much like the universal basic income, the safe withdrawal rate is the subject of much debate. However, its most often quoted as 4% per year (inflation-adjusted), as recommended by the Trinity Study.

Now let’s try to fund a freedom dividend using the safe withdrawal rate. In the Real World™, this would never work due to limited market liquidity, among other things. Given that we’re speculating let’s also ignore inflation to keep the math simple.

With that disclaimer out of the way, let’s get down to business. To provide a safe withdrawal amount of $12k/year, each American would need a retirement fund of $300k. For the entire U.S. population of 330 million, that amounts to a cool 97.3 trillion dollars. That’s almost equal to the national net wealth of the U.S. at 106 trillion dollars! If this were ever to come to pass, the retirement portfolio would suck up asset allocation from its underlying assets, which is a thought experiment for another time.

“But surely, you ask, can’t wealthy oil states afford to do this?” Not quite. Using each country’s sovereign wealth fund as a stand-in for their retirement account, Norway comes closest to being able to provide each of its citizens with a freedom dividend of $658.75. Apart from Norway, only the UAE, Singapore, and Kuwait can give a freedom dividend of at least $400. Check out this spreadsheet to see the full data.

As appealing as funding a freedom dividend using a passive retirement account sounds, it just isn’t viable anytime soon.