• 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5

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

If you retired in 2003 and withdrew 4% of your total liquid assets, after 15 years you would have twice as much money as you did when you started. my argument has always been the 4% rule is much too conservative unless you want to leave money to your kids or want to be the richest guy in the cemetery If you retired in the early 80s and withdrew 10% a year, every year you would have more money than when you started off with after 30 years. But up to you, fair and balanced
Your thread noted that you plan to discontinue reinvesting your dividends to live off of the dividends and social security in retirement.
And your thread also stated that your portfolio will continue to grow based upon increases in dividends.
However, it is likely that any increases in dividends will be used to keep up with increasing costs of living expenses and other necessities.  (Social security cost of living increases are few and far between and do not generally keep up with inflation).
And you will no longer be reinvesting the dividends.  And dividend increases may not happen at the same rate as they have been, if the economy faces a period of recession. And sometimes dividend payments are suspended or cut.
So, a withdrawal of the principal may become necessary at some point in time.  4% is a standard often quoted as the amount which can be withdrawn over an individual's or couple's life expectancy without a substantial risk of depleting the portfolio.  (Usually 1 million at age 65-70).
As has been eloquently pointed out, the amount projected to be safely withdrawn without depletion during someone's lifetime depends upon varying factors, including age, health and healthcare expenses, potential life expectancy, living expenses and lifestyle, assets and liabilities, tax bracket, rate of inflation, etc.
So, you may wish to use a retirement calculator or consult with a financial advisor to test drive your portfolio to find out what withdrawal percentage provides you with peace of mind.  Good luck.
I'm familiar with the mindset of trying to live off the dividends and not touch the principal, however I don't think that is necessarily the best strategy for retirement. It encourages investors to focus on dividend stocks, preferably with higher dividends, while leaving out for instance growth stocks that might produce a lot more money for your portfolio, but not in the form of dividends. Many dividend investors for instance have been heavily invested in GE stock. While from a dividend yield point of view, its 3.9% might sound attractive, it has lost over 50% of its share price in the past year. And they will likely have missed out on Amazon stock since it doesn't pay a dividend, but its share price is up 96% in the past year. In my opinion you're a lot better off if your portfolio were up a lot and then you take 4% out without worrying about whether it's dividends or principal, rather than having your portfolio be down a lot and then taking out 4% of just dividends. 
At a 4% rate you incur mild neg amortizations.  But as you suggest the stock dividends and stock returns in general over a 3 to 7 year period would HISTORICALLY be at least 7% annually.
At a 4% withdrawal rate it is expected that you most often will conserve the original principle.  Less often you will have years where the principal erodes by some less significant amount so as not to be a disaster that leads to going broke gradually then suddenly. Also less often you will have some reasonable increase in your principal of 3% to 5% in some years which will mostly offset any years of negative amortization.
Your model seems to presume remaining "ALL in All the time".  So you are eschewing a more common bucket strategy of having a year and a half to two years of your anticipated withdrawals in some cash or other ST instruments.  ST bond FUNDS are not bonds and will continue to lose money. The distributions will likely not exceed the NAV share value declines as the FED continues to HIT ulta ST rates with hikes in the ultra Short Fed funds rate. The ST bond itself and CDs and MM funds are the best places to keep your cash bucket. Along with your dividends such a ST "bucket" provides the cushion should some recessionary period erode the value of your dividend payers or if one or two falter due to a secular economic change.  i.e. Of late companies like Sears and Peabody coal.
If your retirement savings are not sheltered then there are other tax issues.  So staying with dividend income benefits you vs bond income and REIT income that do not qualify for Tax advantaged dividend status.  If you have a ROTH IRA AMOUNG these assets you describe then most of your non-qualified holdings should be in that ROTH.  If you have more in a REg IRA then you have to consider doing incremental conversions to Roth.  These are especially advantageous to accomplish during the next two tax seasons.
I started retirement distributions at age 55 1/2 using a 72 (t) plan.  The 4.26% expected return in the plan left me with an expected negative amortization of 1.5%, just over a 5.7% annual distribution rate.   Managed to get through the 08-09 meltdown without losing most of my retirement assets as I started out with about 65% in a 5 year bond ladder.  I continued my 5.7% distribution rate for the rest of 6 years but reduced it "EFFECTIVELY" by setting aside $500 of cash monthly.   In the rebound my assets recovered in a decent fashion.  At the end of six years I reduced to about a 2.5% withdrawal rate for a year and supplemented my income requirements with the $500 month cash hoard.  A year before my ASAP SS award I set a 3% withdrawal rate and kept to it until this year when I upped that to 4% against MRDs now getting closer on the Reg IRA assets.  Since 2007 my retirement assets have diminished by about 10% altogether.  So with a total 10% neg amortization over 11 years I have beat the anticipated IRS expectations for a 1.5% compounded negative amortization rate, but not by a whole lot.  As a retiree I have not fully participated in the last several years of the big rally in stocks because I have a lot of income oriented stuff in my retirement portfolios.  The distributions I am at last starting from my Roths and the conversions this year will go along way towards providing near 25% of my Roth conversion tax costs.  But that will increase over the next few years as the assets continue being transferred over there to get ahead of MRDs.  Beyond age 73 when MRDs become more aggressive I would anticipate needing to distribute in kind some of those other Reg IRA tax advantaged income producing assets.  That then will affect my state income tax liabilities as well.   For now the tax advantage on qualified dividends is intact.  But after 2021 that could go away if there is a regime change in Washington.   At least 2/3rds of the US states are over levered on debt and worse their UNFUNDED pension liabilities.  So muni bond investing outside IRAs is becoming more complicated all the time.
Someone in our outer social circle passed this W/E at age 72.  They did not get more by waiting to take their SS later.  Another close friend with a substantially younger wife thought he would wait to age 72 to collect SS.  But he started for himself and his wife last year when she hit 62 after he was diagnosed with early stage Parkinson's and had some skin cancer issues.  IF/WHEN you die your issues as to running out of money before you die go away.
For people with not enough money to live off the earnings of one's principal holdings, some retirement formulas project that if you withdraw 4% of the balance each year you have pretty decent odds of having your money last......so many year. It may or may not work out that way. If we have a vicious bear market that lasts 2 years and you withdraw 4% of a balance that's diminished by 30% you obviously will run out of money quicker than if the market stayed flat, or ran up some. You also made an incorrect statement about growth coming from the dividends. Growth comes solely from the stock prices of your holdings going up, and not the dividends. The dividends are the "earnings" from your portfolio.

My plan is very similar to yours, but I am planning on about 1/3 of my retirement income from dividends. I have commercial real estate that will furnish another 1/3, and then I have social security. So I have a classic 3 legged stool for retirement income. But if the dividends are pretty diverse and scattered out across different sectors, and are all from first class companies, we should not worry too much about losing out. Plus we have the luxury of not really caring that much about what the price of the stock does over time. For example, if I get $4,200. per year in dividends from CSCO, why would I care if the stock price fell from $42. to $32.??? I would not be concerned about it all because the dividends remain the same. If PFE pays me $3,000. per year and the stock fell 20%, why do I care? I still have not sold a single share in a down market so I am fine for the long haul.
Agree with Ordinary Man on all points but first step is to budget your retirement expenses, then subtract your SSI/PensionsRental Income . If you have a gap here, this is what can be filled in with dividends and you can review from there. Get your dividends from solid, dividend increasing stocks so that you will get "raises" just about each year. There will be a market correction along the way but Ordinary Man is correct, as long as the dividends are steady, the stock price is irrelevant in retirement and will bounce back at some point. There are many stocks that did not cut their dividend in 2008-09 so that is a good indicator when investing. We have a mix of dividend increasing stocks along with some conservative stuff to weather a downturn (bonds, preferreds, 3% cash in an old 403b, etc) but remain 75% in diversified stocks.
If you can live off dividends and Social Security, that's great. We have been retired a couple of years and are doing the same thing and we sleep well at night. But, and it's a big but, unless you spend down your principle, you will just be leaving a huge inheritance for your heirs. If that's what you want to do, fine; but you could be having a much better lifestyle than you have now.

After a lifetime of saving for retirement, we have found the transition from savers to spenders to be particularly difficult. But this is the time that you have been saving for. If you think 4% is too much, withdraw 2% instead and enjoy life

Forum Jump:

Users browsing this thread: 1 Guest(s)