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?
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The 4% rule simply states the amount to be withdrawn from the account.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.
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!
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.
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
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.
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.