Hypothetically living off investment dividends?

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Greatness
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Hypothetically living off investment dividends?

Post by Greatness » Mon Mar 24, 2014 11:40 am

Hypothetically, if one had about 2.5 million dollars in muni bonds and total market index, could they just live off the dividends? So, in theory, just take their monthly, quarterly, semi-annual or annual dividend payments, live off of that, and let the principle appreciate. This also assumes their housing is paid off and owned outright. They do not live outside their means. You may do side jobs or work to keep you busy, but nothing serious. Wife may keep her job and raise one kid. I would think things would be pretty smooth. No? Childcare is the only pain. However, with the childcare deduction and the dependent deduction, it really, all in all, is not that bad.

Spouse 1: 75k - 100k in investment income
Spouse 2: 65k in salary

Expense Estimates (monthly):
================
Prop taxes: 20k
Childcare: 24k
Health Ins: 15k
Prop ins.: 3.5k
Food: 8k
Utl: 7k
Cable: 1.8k
Fuel: 6k
Misc: 3k
=================
Total: 88.3k


Seems more than set. No?

John3754
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Re: Hypothetically living off investment dividends?

Post by John3754 » Mon Mar 24, 2014 12:51 pm

If your post tax income is more than your expenses then you're ok regardless of the source of the income.

FafnerMorell
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Re: Hypothetically living off investment dividends?

Post by FafnerMorell » Mon Mar 24, 2014 1:03 pm

Well, one potential concern is inflation/increases-to-expenses-that-exceed-inflation (college, medical care, etc). But I think the basic idea is great once one has enough money invested (and expenses reasonably controlled) - I think this is kind of what some of the folks mean when they refer to "winning the game" - there's not much of a need for relying on capital gains in the stock market if one can count on more stable sources of income.

Call_Me_Op
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Re: Hypothetically living off investment dividends?

Post by Call_Me_Op » Mon Mar 24, 2014 1:10 pm

No. What is the mechanism that will guarantee an increase in principal? Inflation will eat-away at the real value of both your principal and interest payments.
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Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Mon Mar 24, 2014 1:34 pm

Considering there is a 76700 approx. safety net of used income each year, I doubt that there will be many instances that the dividends will decrease by 40% + year after year. In addition, the time frame is many decades. So, you have that on your side as well.

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Mon Mar 24, 2014 1:36 pm

Call_Me_Op wrote:No. What is the mechanism that will guarantee an increase in principal? Inflation will eat-away at the real value of both your principal and interest payments.

Hence the reason why the principle will still grow in the market. Not using all dividends, only where and when necessary.

Longtimelurker
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Re: Hypothetically living off investment dividends?

Post by Longtimelurker » Mon Mar 24, 2014 1:45 pm

I have two quibbles with this.

1: I do not think ones entire bond portfolio should be dedicated to muni's. In fact, I would be hard pressed to go to muni's for more than 1/2 of my FI needs. If you have tax advantaged accounts, I would look at adding in total bond market, or TIPS (or both). Maybe have $35k in TIPS maturing each of the next 15 years to cover property taxes and health care, then the rest in Muni's and Equities?

2: I also hesitate to stop diversification within the boarders of the USA. I personally would choose to do this with the Total World Fund (~50% international), however there is strong evidence to support that adding in an allocation to Total International to Total Stock Market has benefit.
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John3754
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Re: Hypothetically living off investment dividends?

Post by John3754 » Mon Mar 24, 2014 1:55 pm

Call_Me_Op wrote:No. What is the mechanism that will guarantee an increase in principal? Inflation will eat-away at the real value of both your principal and interest payments.
If the portfolio plus the spouses salary generates $140-175k of income and they're spending $88k, that doesn't give you enough margin for error and inflation adjustment?

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Mon Mar 24, 2014 2:12 pm

I would think an nearly 80k a year leeway is more than ample. One would also assume since not all the dividends be used, they will continue to purchase additional shares in ETFs or mutual funds. These are not in tax advantaged accounts, as the funds are being used, or will be used in their late 30's early 40's. There is an additional 250k in tax advantaged funds that can be tapped at 59 1/2. If inflation is 3%, and their expenses are 90k, 2700 a year should be doable. Let's say inflation is 7%, then the additional 6300 a year in inflation would, again, still be within allowed means. As they have the principle still growing as well as 80k in yearly reserves not tapped and still growing. House they purchased 10 years ago is also paid off and worth around 800k.

richard
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Re: Hypothetically living off investment dividends?

Post by richard » Mon Mar 24, 2014 2:14 pm

Call_Me_Op wrote:No. What is the mechanism that will guarantee an increase in principal? Inflation will eat-away at the real value of both your principal and interest payments.
On the bond side, interest rates tend to increase with increases in inflation (tend does not mean guaranteed). As bonds mature, they get reinvested at then current rates.

Stocks and corporate earnings have a general tendency to at least keep up with inflation (their input prices may rise, but their sales prices likely also rise). Higher earnings means more available for dividends. Obviously no guarantees as to the behavior of stocks or dividends.

Whether this is enough to keep the after inflation income stream constant depends.

TN_INVEST
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Re: Hypothetically living off investment dividends?

Post by TN_INVEST » Tue Mar 25, 2014 11:22 am

Greatness wrote:Hypothetically, if one had about 2.5 million dollars in muni bonds and total market index, could they just live off the dividends?
Sure, it's possible. And considering most of these blue chip companies raise their dividends, they ought to see their income rise & ought to be fine.

Just remember, that even the blue chip dividend index dropped about 60% a few years ago while a lot of the big banks drastically cut their dividends (May 2007 to March 2009). The dividends are just now approaching where they were some 8 years ago (that's a pretty long time to tighten the belt), and bonds haven't exactly been making up the difference.

bhsince87
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Re: Hypothetically living off investment dividends?

Post by bhsince87 » Tue Mar 25, 2014 11:42 am

Seems doable to me. But a couple points/observations.

With only one spouse working, why would they need childcare? That would seem to be a huge savings. And in any case, I would expect childcare would not be needed forever.

The other thing is taxes. Is the salary before or after income taxes?

Also keep in mind that with income up to around $92-94k, with standard deductions, qualified dividends and capital gains will be essentially tax free. With a child that number is probably a bit higher.

And it might make sense to shift some of the excess savings into a Roth account each year, if it can be done tax free.
Retirement: When you reach a point where you have enough. Or when you've had enough.

dbr
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Re: Hypothetically living off investment dividends?

Post by dbr » Tue Mar 25, 2014 11:51 am

It is possible that one could support $88.5K in after tax spending (increased with inflation) from a $2.5M portfolio indefinitely but there is significant chance of failure. It would not be wise to plan on it without a fall-back of going back to work, etc.

I don't understand your proposition that you would live on the investment dividends but you specify a salary for the spouse. Which is it, living off the dividends or living off an earned income?

letsgobobby
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Re: Hypothetically living off investment dividends?

Post by letsgobobby » Tue Mar 25, 2014 1:04 pm

if current muni and stock yields are around 2% and you can live off them, then you are implying a 2% withdrawal rate. That has always been sustainable, including accounting for inflation, regardless of how you mentally account for that income. Even 3% has always been sustainable. 4% is sustainable the great majority of the time.

But I don't think $2.5m throws off $75k-$100k of income right now. Does it?

berntson
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Re: Hypothetically living off investment dividends?

Post by berntson » Tue Mar 25, 2014 2:07 pm

It doesn't matter whether your returns come from appreciation due to reinvestment revenue or from dividends. The main question is how much income a portfolio can be expected to generate. 3% a year is a very reasonable estimate. With $2.5 million, that gives you $75,000 a year in real terms. You may get some appreciation on top of that or you may not. It depends on how the markets perform going forward.

Rondo
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Re: Hypothetically living off investment dividends?

Post by Rondo » Tue Mar 25, 2014 2:48 pm

Property taxes of 20K? You must live in Jersey! :)

Also, if one spouse works, I assume they'd have some sort of healthcare. Why the 15K in the budget?

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Tue Mar 25, 2014 3:33 pm

dbr wrote:It is possible that one could support $88.5K in after tax spending (increased with inflation) from a $2.5M portfolio indefinitely but there is significant chance of failure. It would not be wise to plan on it without a fall-back of going back to work, etc.

I don't understand your proposition that you would live on the investment dividends but you specify a salary for the spouse. Which is it, living off the dividends or living off an earned income?
Mixture of both. Ran all the numbers through firecalc, one 1 failure scenario. Both technically will have full time jobs, however, one works of commission. Therefore, the income is sporadic.

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Tue Mar 25, 2014 3:37 pm

letsgobobby wrote:if current muni and stock yields are around 2% and you can live off them, then you are implying a 2% withdrawal rate. That has always been sustainable, including accounting for inflation, regardless of how you mentally account for that income. Even 3% has always been sustainable. 4% is sustainable the great majority of the time.

But I don't think $2.5m throws off $75k-$100k of income right now. Does it?

Averaging a net divvy of between 4.5 - 5.5 combined. On average, 112500 should be issued in divvys. Aside from part in total market index, I suggested 10% in international funds and between 40% -50% in muni funds such as VGM, MHN, PZA, VWALX, etc.
Last edited by Greatness on Tue Mar 25, 2014 3:41 pm, edited 2 times in total.

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Tue Mar 25, 2014 3:40 pm

Rondo wrote:Property taxes of 20K? You must live in Jersey! :)

Also, if one spouse works, I assume they'd have some sort of healthcare. Why the 15K in the budget?

Not me. Brilliant sister and bro-in-law. The couple pays for their own healthcare. One self employed. One employed by a large company. Large company health ins. I am told is a very limited HMO and they are in the process of phasing the HMO out. Hence the reason why the couple is on the exchange. Ins. costs 1250.00 a month for the dynamic duo.

Sidney
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Re: Hypothetically living off investment dividends?

Post by Sidney » Tue Mar 25, 2014 3:50 pm

Greatness wrote:Averaging a net divvy of between 4.5 - 5.5 combined.
Hard to see how the principal will appreciate then.
I always wanted to be a procrastinator.

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Tue Mar 25, 2014 3:51 pm

Point would be take as needed. In addition, the funds will grow in principle over time. Thus, if you only take 60k a year in divvys, then the remaining divvys can grow along with principle.

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Blue
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Re: Hypothetically living off investment dividends?

Post by Blue » Tue Mar 25, 2014 3:55 pm

Greatness wrote:
letsgobobby wrote:if current muni and stock yields are around 2% and you can live off them, then you are implying a 2% withdrawal rate. That has always been sustainable, including accounting for inflation, regardless of how you mentally account for that income. Even 3% has always been sustainable. 4% is sustainable the great majority of the time.

But I don't think $2.5m throws off $75k-$100k of income right now. Does it?

Averaging a net divvy of between 4.5 - 5.5 combined. On average, 112500 should be issued in divvys. Aside from part in total market index, I suggested 10% in international funds and between 40% -50% in muni funds such as VGM, MHN, PZA, VWALX, etc.

Seems awfully high. How do these muni funds generate higher yields than comparable Vanguard funds? What additional risks are they taking?

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Tue Mar 25, 2014 4:05 pm

I know they go out long. As for the closed ended Blackrock ones, I am not entirely sure. They've been going strong, some for over 20 years. Blackrock isn't really a fly by night company.

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Blue
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Re: Hypothetically living off investment dividends?

Post by Blue » Tue Mar 25, 2014 4:10 pm

Greatness wrote:I know they go out long. As for the closed ended Blackrock ones, I am not entirely sure. They've been going strong, some for over 20 years. Blackrock isn't really a fly by night company.

The highest yielding munis I see by Vanguard are in the low 3's for comparison. It looks like your plan is counting on well over 5% from munis as total stock market dividends are about 2%? Before I'd commit to the plan I'd want to better understand the reasons for the higher yield.

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Tue Mar 25, 2014 4:18 pm

What are the communities feelings on Blackrock Muni Funds?

https://www2.blackrock.com/us/individua ... -end-funds

MHN - BlackRock MuniYield New York Quality Fund, Inc.
BTT - Municipal Target Term Trust
BHYRX - BlackRock High Yield Bond Fund
BYM - BlackRock Municipal Income Quality Trust

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Blue
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Re: Hypothetically living off investment dividends?

Post by Blue » Tue Mar 25, 2014 6:31 pm

Greatness wrote:What are the communities feelings on Blackrock Muni Funds?

https://www2.blackrock.com/us/individua ... -end-funds

MHN - BlackRock MuniYield New York Quality Fund, Inc.
BTT - Municipal Target Term Trust
BHYRX - BlackRock High Yield Bond Fund
BYM - BlackRock Municipal Income Quality Trust
Good question. Curious as well, especially how the math works in a raising interest rate environment with leveraged muni funds like these? Probably will get better discussion within its own thread so I hope you don't mind that I started Leveraged Muni Funds - Potential Downsides

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Tue Mar 25, 2014 7:16 pm

Not sure on the downside. Some have been very steady in a higher rate environment from the 90s on. But, I would like to see what the community says regardless. I think they should be in any portfolio. Not 100%, but not 10%. Depending on how the market performs, around 40% isn't a far off figure. Another 40% in a total market or S & P fund. 10% international. 5% in cash. 5% in a growth fund or tech/bio tech/preferred stock fund. In a retirement fund, I would be a bit more conservative. Maybe 25% S & P. 25% Total Market. 25% International 25% Bonds.

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Re: Hypothetically living off investment dividends?

Post by Dandy » Wed Mar 26, 2014 6:33 am

At one time when dividends and interest were high you might have gone through most of retirement living off them. It would be nice if that were to happen. I wouldn't depend on it. I wouldn't retire very early banking on living off dividends. Some market hits, some inflation bouts, some health issues and the plan can start to fail - big time. If you live frugally that is great. The downside is because you live frugally you don't have much to cut back on when you need to. So if you are just getting by on interest and div income and it takes a hit -- so do you.

Hey it is a nice goal but not something likely to be achieved over a long retirement.

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Re: Hypothetically living off investment dividends?

Post by IPer » Wed Mar 26, 2014 6:56 am

Greatness wrote:What are the communities feelings on Blackrock Muni Funds?

https://www2.blackrock.com/us/individua ... -end-funds

MHN - BlackRock MuniYield New York Quality Fund, Inc.
BTT - Municipal Target Term Trust
BHYRX - BlackRock High Yield Bond Fund
BYM - BlackRock Municipal Income Quality Trust
Diversify for safety, when I adjust the above Blackrock funds' yield for the expense ratio I start remembering the yield on utilities is less risky. I understand as well they must be adjusted by the tax rate if they will be compared, but I think a portfolio with more dependencies will be better off over time than sticking too much in one basket, it is very hard to tell what the future might bring! ;)
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market timer
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Re: Hypothetically living off investment dividends?

Post by market timer » Wed Mar 26, 2014 7:33 am

Yeah, this is definitely doable, and the budget isn't even that tight. They could move to a cheaper part of the country, for example, likely pocketing a sizable home price differential in the process. Plus, Social Security will help out down the road. If it were me, I'd try to find a way to avoid pay $20K in property taxes ASAP. No reason to live in a high cost of living location just to earn $65K.
Last edited by market timer on Wed Mar 26, 2014 7:35 am, edited 1 time in total.

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Re: Hypothetically living off investment dividends?

Post by scrabbler1 » Wed Mar 26, 2014 7:34 am

Greatness wrote:
Call_Me_Op wrote:No. What is the mechanism that will guarantee an increase in principal? Inflation will eat-away at the real value of both your principal and interest payments.
Hence the reason why the principle will still grow in the market. Not using all dividends, only where and when necessary.
(emphasis mine in the quoted text) I am living off investment dividends and have been doing so for 5 1/2 years as an early retiree. I reinvest my excess dividends as well as any cap gains distributions. As a result, I have many more shares in my mutual funds, especially the bond funds, than I did 5 1/2 years ago. This has offset the decline in the monthly dividends per share which has eroded a bit over those years. I have also tweaked my AA to add more shares to the bond funds. Health insurance has driven most of the +/- changes in my expenses (I have had 3 different policies in the last 5 1/2 years, including an ACA one in 2014), while I have had little or no inflation in the rest of my budget.

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Re: Hypothetically living off investment dividends?

Post by Grt2bOutdoors » Wed Mar 26, 2014 8:07 am

Rondo wrote:Property taxes of 20K? You must live in Jersey! :)

Also, if one spouse works, I assume they'd have some sort of healthcare. Why the 15K in the budget?
They could be living in Long Island too, it's not uncommon to see taxes like that on the Island of Long.
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Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Wed Mar 26, 2014 12:18 pm

Dandy wrote:At one time when dividends and interest were high you might have gone through most of retirement living off them. It would be nice if that were to happen. I wouldn't depend on it. I wouldn't retire very early banking on living off dividends. Some market hits, some inflation bouts, some health issues and the plan can start to fail - big time. If you live frugally that is great. The downside is because you live frugally you don't have much to cut back on when you need to. So if you are just getting by on interest and div income and it takes a hit -- so do you.

Hey it is a nice goal but not something likely to be achieved over a long retirement.

Again, I do not see what you are saying. If annual expenses are between 65k - 89k, and the investments plus income is bringing in 175k each year, how these two run out of money? Keep in mind, there is another 250k - 500k in retirement funds. One also has a pension and both contribute and will continue to contribute to retirement plans.

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Wed Mar 26, 2014 12:19 pm

rkatz0 wrote:
Greatness wrote:What are the communities feelings on Blackrock Muni Funds?

https://www2.blackrock.com/us/individua ... -end-funds

MHN - BlackRock MuniYield New York Quality Fund, Inc.
BTT - Municipal Target Term Trust
BHYRX - BlackRock High Yield Bond Fund
BYM - BlackRock Municipal Income Quality Trust
Diversify for safety, when I adjust the above Blackrock funds' yield for the expense ratio I start remembering the yield on utilities is less risky. I understand as well they must be adjusted by the tax rate if they will be compared, but I think a portfolio with more dependencies will be better off over time than sticking too much in one basket, it is very hard to tell what the future might bring! ;)
Net yield is still pretty stable. Not suggesting all go into these funds, but a fair amount should. Some of these CEFs go back to the 80's and have had a stable dividend throughout many recessions. In addition, they are fed and state tax free.

Greatness
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Re: Hypothetically living off investment dividends?

Post by Greatness » Wed Mar 26, 2014 12:21 pm

scrabbler1 wrote:
Greatness wrote:
Call_Me_Op wrote:No. What is the mechanism that will guarantee an increase in principal? Inflation will eat-away at the real value of both your principal and interest payments.
Hence the reason why the principle will still grow in the market. Not using all dividends, only where and when necessary.
(emphasis mine in the quoted text) I am living off investment dividends and have been doing so for 5 1/2 years as an early retiree. I reinvest my excess dividends as well as any cap gains distributions. As a result, I have many more shares in my mutual funds, especially the bond funds, than I did 5 1/2 years ago. This has offset the decline in the monthly dividends per share which has eroded a bit over those years. I have also tweaked my AA to add more shares to the bond funds. Health insurance has driven most of the +/- changes in my expenses (I have had 3 different policies in the last 5 1/2 years, including an ACA one in 2014), while I have had little or no inflation in the rest of my budget.
Really depends on the amount you are living off of and they way that they are invested. If your investments are too conservative, then there will not be enough money. If they are too aggressive, then they will be too risky. Of course there will be ups and downs. However, since they are not using all the money, about half, I think that would be in there overall favor.

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