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How do you live off dividends in retirement? I don't get the 4% rule

#1
My plan is to live off my social security and dividends when I retire in a year, and never touch my principal. Until then I am reinvesting my dividends to grow that number. Once I stop reinvesting and take the cash dividends, I will still get some growth in my portfolio with the stocks dividend increase.
 
I don't understand the 4% rule and why you would withdrawal 4% of your principal each year. Can someone help me understand this rule?
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#2
welcome to the forum!

The 4% rule is best used as a ballpark (in financial/retirement planning) to determine how much investment asset one should have before entering retirement. The number 4% is just a suggestion - and it can be different for different people depending on their situation (e.g., people who foresee a long retirement are advised to take a lower number, people who want to live better and do not mind taking a chance with outliving money are advised to take a higher number). The number 4% was arrived by Willian Bengen through a study of historical market returns and inflation data. If you search the web, you will see enough write-ups suggesting why the 4% is bogus, and also enough articles saying why the 4% is still relevant. In the end, it's just a ballpark. If one expects to regularly draw 40K (inflation adjusted), then 1-million investment (40K / 4%) is the ballpark starting account balance.

 
The 4% rule simply states the amount to be withdrawn from the account. The withdrawal can happen either from the dividends, or from the capital gains (selling assets), or (more typically) a combination of both. There are several "withdrawal strategy" based on the rule - some simple ones (e.g., unconditionally withdraw 4%, withdraw 4% in the first year and increase withdrawal by inflation), some more complex ones (setting minimum/maximum annual amount based on recent market return and actual inflation). In my opinion, instead of following a strategy by its words, one can analyze the idea behind each of these strategies and come up with their own, suited for their individual situation and needs. There is no one-size-fits-all strategy that works universally for everyone.
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#3
It’s not 4% of your principle, it’s 4% overall from your portfolio so that includes interest, dividends, RMD’s  etc. It’s also only one of a bazillion withdrawal methods. Everyone needs to follow their own trail to happiness.  By the way don't forget taxes!
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#4
(08-28-2018, 06:10 AM)onlykelsey Wrote: It’s not 4% of your principle, it’s 4% overall from your portfolio so that includes interest, dividends, RMD’s  etc. It’s also only one of a bazillion withdrawal methods. Everyone needs to follow their own trail to happiness.  By the way don't forget taxes!

I believe the “rule” as originally expressed was to withdraw 4% of the value of your retirement savings, measured at the beginning of your retirement, and then increment that amount by the rate of inflation each year. Thus, it’s technically not 4% of your account value as measured each year.
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#5
Both gave good answers of the 4% rule.
I my case I am doing the same thing you are going to do in a year.  My wife and I both draw our SSN and have been stashing dividends for several years now.  We have less than the quoted 1 million dollars portfolio but are getting higher dividends.  You didn't say if your portfolio is in taxable, IRA, or ROTH account ( s ).  We are getting about the same dollar amount in dividends in  our combined accounts (ROTH ) and currently do not need to draw any dividends out for current income, so we use the cash dividends to purchase additional shares of our current holdings or new ones as we see fit ,usually on a monthly basis.
 
We have been converting our IRAs to ROTH over the past 5 years or so and the returns we are getting are tax free, which works well for us, keeping us in the 12% tax brackett.  Hope this helps.
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#6
Converting to roth also means paying taxes on the conversion, so hence perhaps the need to withdraw from taxable account.....i am planning on staying in 12% bracket abd converting significant tax IRA to roth over next two years, but the tax will take a bite out of my account
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#7
(09-14-2018, 09:28 AM)Kanga16 Wrote: Converting to roth also means paying taxes on the conversion, so hence perhaps the need to withdraw from taxable account.....i am planning on staying in 12% bracket abd converting significant tax IRA to roth over next two years, but the tax will take a bite out of my account

We have been converting our IRA accounts to ROTH gradually for a period of 5-6 years.  The amounts we convert keep us under the threshold of the next higher tax bracket.  Except for last year (2017) we have been able to do the conversion without any additional tax.

Last year was an exception because we both converted a little more into ROTH because we both turned 70 and started the MRD required disbursements from the balance we hold in our IRAs.  Hope this clarifies my other comment.
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#8
I think the best way to understand the 4% rule is that if you retire at 65 and figure you will live another 25 years, till 90, you can withdraw 1/25 of your money = 4% every year. In the meantime, conservatively, the money you are not withdrawing just keeps up with inflation.
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#9
Also, 4% is about the Minimum Require Distribution (MRD) as required annually by the IRS. (The MRD is varied annually depending on your age). MRD is calculated on all your retirement accounts.
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#10
4% is not a cardinal rule...it's a rule of thumb.  Much like the idiot lights  vs gauges on the dashboard of your automobile.
There are also rules that state that your age should dictate the percentage of fix income holdings, e.g. 60 yo should have 60% bonds.
There are some good rebuttals out there; and even the author of the "rule" had discounted some of the merits.
Guidelines are better than nothing but there's a lot of contingencies and latitude that must be spoken for prior to implementation.
 
Google the "four percent rule" as there is much discussion over the years on the concept.  Here's one that is in my interest and relevant to your inquiry: https://www.kiplinger.com/article/retire...wrong.html
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