msk wrote:Indeed dividends are a distraction. I checked the history of the SP500 for 50 years between 1966 and 2016. My conclusion: you can withdraw 5% of the portfolio value (including the previous year's dividends minus 15% tax) annually and your portfolio should survive 50 years more or less intact, inflation adjusted, i.e. in real terms. Throughout the 50 years your 5% withdrawals will trend upwards keeping up with inflation.
That strategy would indeed never have run out of money, but in the majority of the historical 30 year periods, your inflation-adjusted balance would have either remained remained flat or shrunk a bit. At the end of 30 years, you would have had a smaller inflation-adjusted balance about one-third of the time, though that's not a huge problem as retirees' spending tends to drop 1-2% annually in real terms from 65 until death.
I actually plan on using a similar strategy, but I'll be incorporating some bonds into the portfolio and will probably only withdraw 4.5%.
jbolden1517 wrote:That causes enormous shifts in spending, which is highly damaging to utility (the geometric mean of spending / the sum of the log of the annual spending). A person experiencing income flips and that level is undergoing rather regular financial dislocation. They are upgrading their apartment one year and being evicted 2 years later. They incur credit cards bills for travel they then can't pay.... The whole point of a retirement portfolio is to provide a stable income. I'm all in favor of growth, and think that many people undermine their retirement portfolios by placing psychological security higher than their need for inflation adjusted income, but those sorts of spending swings are damaging.
Utility is important, but if you are prepared for a variable income on the front end, it can still easily work. What you are describing is either just plain debt (bad idea with a variable income and not generally recommended for retirees anyway) or bad budgeting. A person using this strategy should likely be using something like the "You Need a Budget" approach (YNAB); simply put, you can only spend from last
month's (or year's) income. So if your income drops, it only impacts your future spending, not your current spending. But again, if such a retiree just never went into any kind of debt that could not be immediately paid off with cash on hand, they wouldn't get into trouble as long as their withdrawals never dropped lower than their necessary expenses. For those employing this approach, I would say that these necessary expenses shouldn't exceed 50% of their withdrawals since an all stock portfolio could drop 50% (even though that's only happened three times in market history).
Further, while it is indeed psychologically nice to have a stable income, many investors have had highly variable incomes their entire career anyway and managed just fine. The "whole point of a retirement portfolio" is not "to provide a stable income" but to provide an income sufficient for the retiree that they will not outlive. For those wanting stability, they must give up something. This may come from putting some of the initial portfolio into a SPIA, incorporating enough bonds to smooth out the portfolio's returns, or holding back some of their withdrawn cash for when they know the market will be down.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings