Retired Dilemma - dividends vs accumulating

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youngelder
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Joined: Mon Oct 01, 2018 10:18 am

Retired Dilemma - dividends vs accumulating

Post by youngelder » Tue Oct 02, 2018 4:11 am

Hi all,

I've read BH guides and literature and been learning a lot recently, and would like to get your opinions to hopefully help me with my dilemma.
I've been lucky enough to accumulate wealth to be able to retire already - but I'm really undecided between how to put this wealth to use.
I've read the various windfall-management literature and I'm not hasty with any decisions. I have time, patience, and am willing to learn.

Situation:
  • Age: 35
  • Live in: Europe
  • Investable money: 15M EUR (had some success with tech companies, startup investments etc.)
  • Yearly expenditure: 300,000 EUR (I know it's a lot... but, please don't judge :))


Goals:
  • Goal 1 - Make investable money generate passive income to sustain my life at the same expenditure rate as now to be able to retire and do other things in life - until the day I die
  • Goal 2 - Leave an inheritance to the next generation after I'm gone (and possibly help them out while I'm still alive)
Ideas:
  • Split the money into two - 5M for a long term portfolio for Goal 2, and 10M for Goal 1 - this means I need 3% to achieve goal 1 (putting aside taxes, etc. - which are low in my case)
  • Goal 1 option 1 - Invest 10M into dividend distributing ETFs (either following large index funds that distribute dividends, or "Aristocrat Dividend" high yield indices, or REITs, or a blend of them)
  • Goal 1 option 2 - Invest 10M into accumulating ETFs and just sell the shares yearly as I need
  • Goal 1 option 3 - Invest 5M into accumulating/distributing ETFs (whichever I choose above) and 5M into actual real estate, which I'd be collecting rent from
  • Goal 2 - Invest 5M EUR into accumulating ETFs (three fund portfolio) - this is a very long term (I hope) investment which should be for at least 20-30 years


Questions:
  • What are your thoughts/suggestions/comments/warnings/anything on the above ideas to achieve the goals? (more ideas are welcomed of course)
  • For "Goal 1 option 2" - one thing I'm concerned about is that during a market crash, from what I read - I can expect to still receive the same dividends I would in normal times (option 1), but if I must sell the ETF shares I'd be selling at a low price and thus losing a lot of money (since I'd need to be selling enough shares to meet my yearly expenditure, which in a time of market crash means - a lot more than I would otherwise) - any ideas/thoughts on this?


Thank you very much for the time to read and hopefully respond to this :)

BanquetBeer
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Re: Retired Dilemma - dividends vs accumulating

Post by BanquetBeer » Tue Oct 02, 2018 5:45 am

Nobody has an better solutions then you can read on the wiki. Doesn’t matter if you split accounts of keep combined. 300k from 15mill should easily provide growth every year with a conservative bogl head strategy.

Could just do 10mill total stock, 5 mill total bonds, forget it until it’s time to rebalance. You can probably pull your 300k mostly from dividends.

Grt2bOutdoors
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Location: New York

Re: Retired Dilemma - dividends vs accumulating

Post by Grt2bOutdoors » Tue Oct 02, 2018 6:24 am

Before or after tax? Euro bonds yield not so much. You could buy Dividend Aristocrats, but be mindful which ones you do buy - BP slashed its dividend after the Horizon incident. GE - well not only did they cut the dividend twice, they just axed its CEO after taking a $23 billion write off wasting shareholder money. That’s the risk with any one stock. Aristocrat or not.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Watty
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Re: Retired Dilemma - dividends vs accumulating

Post by Watty » Tue Oct 02, 2018 7:45 am

youngelder wrote:
Tue Oct 02, 2018 4:11 am
.... and 5M into actual real estate, which I'd be collecting rent from
Managing 5M in real estate is pretty much a full time job and not a passive investment.

You can hire people to do that but you still need to supervise them and occasionally hire new property managers. Think through how that will work when you are elderly and in a nursing home. Your heirs will also need to manage or sell that real estate when they inherit it someday so that may not be ideal for them if they all the sudden have to figure out how to deal with a large real amount of investment property. If you die when the real estate market is bad then your heirs may be forced to sell the property in a bad real estate market. If one of your heirs is someone like a five year old grandkid then how will that work if they inherit an interest in a piece of land?

If the real estate is all in one city or country then that could be a diversification problem.

Your other investments like stocks and bonds will also have a lot of real estate exposure since the companies you are investing in also own real estate. You may also own a house that you live in. Putting 33% of your portfolio into real estate investments is likely more real estate exposure than you need. 10% might be more reasonable.

Many places like London are pretty clearly in a real estate bubble right. Bubbles are hard to predict and the bubble can go on longer and higher but this is a real risky time to buy real estate in areas that have already had large price increases.

Professional real estate investors are usually experienced and sharp traders who will quickly buy all the best properties. You will have a hard time finding a good 5M investment that has not already been declined by a dozen professional real estate investors. There is a big risk that you investing a large amount in real estate would be sort of like if someone made a fortune in real estate and then wanted to invest 5m in tech startups when they don't have any experience with that.

Be sure to know the tax details of owning that much real estate both now, when you sell it, and when someone inherits it. The taxes will be a big factor in determining if it works out well and the tax laws 50 years from now may be much different than they are today.

In the US there are Real Estate Investment Trusts (REITS) that buy real estate but they trade on the stock exchanges so they are liquid and don't require management. If you have something like that available where you are at then that might be a better choice. They are also more diversified since they could own a lot more than one 5m building.

In the US there are also private REITs and Master Limited Partnerships that are not traded on stock exchanges. These are often bad investments that are designed to be sold to naive investors and they can be very hard to ever resell. Be very careful with anything like that.
youngelder wrote:
Tue Oct 02, 2018 4:11 am
What are your thoughts/suggestions/comments/warnings/anything on the above ideas to achieve the goals? (more ideas are welcomed of course)
Take a hard look at your expenses and how you might spend more efficiently. For example if you rent an expensive place to live in it might make more sense to buy instead of renting. The reverse can also be true and some things like a vacation home that you only use occasionally might be better to rent.

Be sure to also budget for all your expenses and track them carefully since it is easy to miss some expenses like taxes and sporadic expenses like buying cars or a new roof that does not happen each year. If you are spending 300,000 a year then with taxes and other things your actual expenses could be more like half a million a year which would be harder to sustain.

youngelder
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Re: Retired Dilemma - dividends vs accumulating

Post by youngelder » Tue Oct 02, 2018 8:12 am

Watty wrote:
Tue Oct 02, 2018 7:45 am
Managing 5M in real estate is pretty much a full time job and not a passive investment.
I have some RE experience and it's actually very possible (e.g. commercial property like an office building, with property management company taking care of everything)
Watty wrote:
Tue Oct 02, 2018 7:45 am
If you die when the real estate market is bad then your heirs may be forced to sell the property in a bad real estate market. If one of your heirs is someone like a five year old grandkid then how will that work if they inherit an interest in a piece of land?
I mentioned this is part of "Goal 1" which is generating revenues for myself, not part of Goal 2 - in other words, when I reach an older age I'm okay to sell the RE properties and funnel this money into something easier to "inherit" for the younger generation

Thank you for the real estate related comments.
Watty wrote:
Tue Oct 02, 2018 7:45 am
Take a hard look at your expenses and how you might spend more efficiently. For example if you rent an expensive place to live in it might make more sense to buy instead of renting. The reverse can also be true and some things like a vacation home that you only use occasionally might be better to rent.

Be sure to also budget for all your expenses and track them carefully since it is easy to miss some expenses like taxes and sporadic expenses like buying cars or a new roof that does not happen each year. If you are spending 300,000 a year then with taxes and other things your actual expenses could be more like half a million a year which would be harder to sustain.
As I mentioned in the first post - and I expected a good scolding for this :) I know it's high, but I want to keep living this way. I think, that the total investable sum of money should suffice to cover for it.

Also, the 300k includes tax and everything.

Elbowman
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Re: Retired Dilemma - dividends vs accumulating

Post by Elbowman » Tue Oct 02, 2018 9:44 am

The best plan is probably the simplest one. Cap weighted global stocks and a bond fund. If $300k includes taxes you should easily be able to maintain 2% withdrawal and still have a ton of money for heirs.

youngelder
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Re: Retired Dilemma - dividends vs accumulating

Post by youngelder » Wed Oct 03, 2018 4:41 am

BanquetBeer wrote:
Tue Oct 02, 2018 5:45 am
Nobody has an better solutions then you can read on the wiki. Doesn’t matter if you split accounts of keep combined. 300k from 15mill should easily provide growth every year with a conservative bogl head strategy.

Could just do 10mill total stock, 5 mill total bonds, forget it until it’s time to rebalance. You can probably pull your 300k mostly from dividends.
Thanks - what are your thoughts about the below?
youngelder wrote:
Tue Oct 02, 2018 4:11 am
For "Goal 1 option 2" - one thing I'm concerned about is that during a market crash, from what I read - I can expect to still receive the same dividends I would in normal times (option 1), but if I must sell the ETF shares I'd be selling at a low price and thus losing a lot of money (since I'd need to be selling enough shares to meet my yearly expenditure, which in a time of market crash means - a lot more than I would otherwise) - any ideas/thoughts on this?

youngelder
Posts: 4
Joined: Mon Oct 01, 2018 10:18 am

Re: Retired Dilemma - dividends vs accumulating

Post by youngelder » Wed Oct 03, 2018 4:42 am

Elbowman wrote:
Tue Oct 02, 2018 9:44 am
The best plan is probably the simplest one. Cap weighted global stocks and a bond fund. If $300k includes taxes you should easily be able to maintain 2% withdrawal and still have a ton of money for heirs.
Thanks - are there any opinions for/against the dividend vs. share-sale approach for withdrawing the 2%? (below)
youngelder wrote:
Tue Oct 02, 2018 4:11 am
For "Goal 1 option 2" - one thing I'm concerned about is that during a market crash, from what I read - I can expect to still receive the same dividends I would in normal times (option 1), but if I must sell the ETF shares I'd be selling at a low price and thus losing a lot of money (since I'd need to be selling enough shares to meet my yearly expenditure, which in a time of market crash means - a lot more than I would otherwise) - any ideas/thoughts on this?

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Watty
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Re: Retired Dilemma - dividends vs accumulating

Post by Watty » Wed Oct 03, 2018 7:27 am

youngelder wrote:
Tue Oct 02, 2018 8:12 am
I have some RE experience and it's actually very possible (e.g. commercial property like an office building, with property management company taking care of everything)
The problem is that buying one office building for 5 million euros is putting a third of your net worth into one investment. That is a huge diversification problem. Buying 10 500K properties ends up being a lot of work and you might need to deal with multiple property management companies.
youngelder wrote:
Tue Oct 02, 2018 8:12 am
I mentioned this is part of "Goal 1" which is generating revenues for myself, not part of Goal 2 - in other words, when I reach an older age I'm okay to sell the RE properties and funnel this money into something easier to "inherit" for the younger generation
A lot of investing would be a lot easier if we knew when we would die or develope major health problems. Be sure to also consider how the real estate would work if something happens to you before you are old.
youngelder wrote:
Tue Oct 02, 2018 8:12 am
As I mentioned in the first post - and I expected a good scolding for this I know it's high, but I want to keep living this way. I think, that the total investable sum of money should suffice to cover for it.

Also, the 300k includes tax and everything.
I didn't mean for my comments to be scolding. I was trying to picture what your budget must look like to spend 300,000 euros a year and assumed that it might include something like renting places to live or a large mortgage payment.

As long as it includes all your expenses then you can easily afford that.

Clutch11
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Re: Retired Dilemma - dividends vs accumulating

Post by Clutch11 » Wed Oct 03, 2018 8:15 am

I’m new to BogleHeads so may not be as fluent in the “answers” to your questions. But I am approaching a similar scenario to yours and have made a tentative plan that may be a potential solution for your as well.

I plan to take about 7% - 10% of my portfolio (which will equate to 3 - 5 years of my planned annual spending) and put it in a money market fund, currently paying about 2%. I will fund my spending from that account, and feed it with dividends. If all goes well, it should sustain itself. If the market crashes as in the scenario you are rightly concerned about, then having 3 - 5 years of spending in a safe place will give me the flexibility to ride out the downturn and make adjustments to my spending if I choose.

So in your case, I may take $1M - $1.5M, put it in a MMF and fund your expenses from that account. Refill it with dividends and income from the rest of your assets. Give yourself a cushion so as to not be forced to sell low due to short term market moves.

ryman554
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Re: Retired Dilemma - dividends vs accumulating

Post by ryman554 » Wed Oct 03, 2018 8:53 am

The OP has 15M and wants to withdraw 2%. The OP should not apologize for wanting to spend 2% of their NW every year. That budget is not the problem.

OP: pretty much anything you do, as long as you don't screw it up, will serve to grow you money in perpetuity.

By screwing it up, meaning making bad investments. Up until now, you have made good investments. Academically, we will tell you that it is more luck than skill, but skill plays a big part. How lucky do you feel going forward?

My take on it is this: if you want to "take money off the table", then set aside 10M to live off of and be your legacy. Take your 300k standard of living out of it and pretend you are running an annuity. For simpliicity, invest the 10M in 60-80% stocks, globally weighted. Find something risk-free-bond-like that pays ~0%real and stick the rest in there. Hard to do in Europe, so I would tilt toward 80% equities until the interest rates come up a bit. Use that to get your yearly 300k. Don't reinvest dividends until the end of the year and rebalance. It is not necessary to be any more complicated than this. In fact, doing so is much more likely to lose money than gain it. Be a boring 80/20 boglehead, and more than likely this 10M will grow substantially to meet your goal 1 (self) and goal 2 (legacy) needs. Whatever you do, don't touch or otherwise mess with the 10M. It is your goose which will lay more golden eggs than you can carry. This 10M will likely grow to 20-30M+ (in real dollars -- oops, euros!) by the time you die while living like you want.

As for the other 5M -- I get the sense that you are still the entrepreneur. Do some angel investing or charity work or whatever that will keep your brain occupied and give you a reason to get out of bed in the morning. Treat this as your business side, I have every belief that this will grow as well, but treat it as a business, with profits and expenses (and taxes!) coming out of this pot. If the $5M goes *poof* due to a bad investment or ten, then you are out of business. So don't leverage it to the point where your other 10M is at any risk from creditors. Make sure you have adequate insurance. Blah, blah, blah. Worst case: you end up living quite nicely on your 10M nest egg. Best case: your 5M grows into 50 and you get to make this decision again.

tl;dr: take 10M off the table. More than enough to meet your goals. Use the other 5M to keep you busy and do some good in the world.

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