What if you only live off dividends?

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getrichslowly
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What if you only live off dividends?

Post by getrichslowly » Tue Feb 13, 2018 10:12 am

Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?

cusetownusa
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Re: What if you only live off dividends?

Post by cusetownusa » Tue Feb 13, 2018 10:24 am

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
Sounds like you are advocating for an approximate 2% WR. Seems ultra conservative to me and I wouldn't want to work all of those extra years to save up 50x my expenses.

mega317
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Re: What if you only live off dividends?

Post by mega317 » Tue Feb 13, 2018 10:26 am

No, the assumption is the assets will not completely run out in less than 30 years.

If you want to live off dividends you will either unnecessarily delay retirement or take too much risk to generate high dividends. Which cannot be relied on to stay consistent.

0.04 X portfolio is not fancy math.

Chuck
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Re: What if you only live off dividends?

Post by Chuck » Tue Feb 13, 2018 10:28 am

It's even worse than that.

SEC yield on VTSAX (Total Stock Market Admiral) is 1.68%. Try saving up 59x expenses.

livesoft
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Re: What if you only live off dividends?

Post by livesoft » Tue Feb 13, 2018 10:30 am

It should be terribly obvious that one could live off of dividends, but that would mean:

a. Lower amount of money to spend for a given portfolio amount
-or-
b. Higher amount of portfolio needed for a given amount of money to spend.

So I don't quite understand the question.

I can say that (b) might lead to starting retirement later in life and (a) might lead to being unable to do some things that one wanted to do. There are other consequences which I left out, too.
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Chuck
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Re: What if you only live off dividends?

Post by Chuck » Tue Feb 13, 2018 10:31 am

Yes!! You can also say one can live off minimum wage. No one chooses to do so if they have another option.

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Pajamas
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Re: What if you only live off dividends?

Post by Pajamas » Tue Feb 13, 2018 10:32 am

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
MWhat if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream?
No. "Dividends" frequently include return of capital and capital gains and can include other components. Total return is the best way of looking at equity investments. The only real difference is in the accounting.

Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
You have to trust what the market provides no matter how you invest.

All equities use fancy mathematical analysis. You can't avoid it. It's often called GAAP or IFRS although there are almost infinite variations.

I do live off dividends but it's because the dividends in my taxable account happen to cover my current lifestyle and that may change in the future.

You can spend it or give it away while you are alive or designate how it will be spent or given away after your death or let others decide. I can't think of any other choices but maybe someone else knows of some.
Last edited by Pajamas on Tue Feb 13, 2018 10:36 am, edited 1 time in total.

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Re: What if you only live off dividends?

Post by Da5id » Tue Feb 13, 2018 10:33 am

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
If you can afford to retire on dividends only without reaching for higher dividends explicitly (say with normal 3 fund investment), go for it. But that will likely result in you vastly oversaving and retiring later than may be desired.

Thing is, you are discounting the price appreciation component of stock returns, which is a significant part of the value of investing in equities. You are saying that company that does a stock buyback rather than paying a dividend does nothing of use to you. And further, the "4% rule" assumes capital depletion, as success is retiring without going negative by a 30 year holding period. Are you instead planning for a perpetual portfolio?

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Re: What if you only live off dividends?

Post by cjking » Tue Feb 13, 2018 10:36 am

For major indices, the dividend yield is generally about half the smoothed earnings yield, so you could take a bit more and still not run down your capital. On a previous thread about perpetual income I reckoned you could aim for up to 80% of the smoothed earnings yield.

Having said that, if this is retirement income, and in a far-worse-than-expected scenario you would not actually eat cat-food in order to preserve your asset base, I would now advocate an approach like this for perpetual income: find a sensible strategy that would run down your portfolio over your retirement, then add a cap on your annual income. If the cap is low enough, say 80% of the initial smoothed earnings yield, there's a good chance your assets will grow in retirement. If disaster strikes, your original algorithm will ensure you have reasonable income. (Maybe slightly more than you would have had had you only had the algorithm, due to the excess income not spent in capped years.)

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Re: What if you only live off dividends?

Post by Toons » Tue Feb 13, 2018 10:41 am

"The assumption is that the assets will grow back"

That is the plan,although in down markets not the case.
I have several mutual funds in a taxable account where I take the dividends,cap gains in cash.
They are growth and income funds.
The last few years after paying out dividends,capgains,,,NAV being reduced accordingly,they have once again grown in value exceeding their value before payouts.
Down Markets different story.
:happy
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Re: What if you only live off dividends?

Post by Nate79 » Tue Feb 13, 2018 10:46 am

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
No, mainstream strategy is not "liquidate a share of principal each year to meet the SWR payment."

4% SWR = distributions + selling shares
Where distributions are all distributions like dividends, capital gain distributions, etc.

The point is that you are proposing to only live on distributions which is overly conservative (<2%). But the 4% SWR is not ignoring distributions but take a total return approach. 4% SWR just doesn't talk about the dividends/distributions side because of the total return.

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Re: What if you only live off dividends?

Post by rixer » Tue Feb 13, 2018 10:48 am

If I had to, I could get by on SS and dividends. If I had to.
So far I haven't had to, but it's comforting to know I could skate for a few years if need be.
And so far, my portfolio has risen even after taking withdrawals. If we experience some losses, we'll re-evaluate but until then 4% still works fine here.

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Re: What if you only live off dividends?

Post by Agggm » Tue Feb 13, 2018 10:49 am

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
Sounds good.

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Re: What if you only live off dividends?

Post by alex_686 » Tue Feb 13, 2018 10:53 am

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
What if you drop this assumption altogether and just withdraw the dividends and bond interest payments?
We are not dropping an assumption here. We are talking about logic, comprehensive theory, and vigorous historical back-testing. I think you want to swap out a sound framework and replace it with some heuristic.
getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
Why walk forward with your eyes open? Is it not better to close one's eyes and trust the market?
getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Is the actual reported "income" not a truer estimate of the sustainable income stream?
No. And here is the invidious thing about dividend investing. Many dividend companies are value companies. Value companies carry higher risk than low dividend growth companies. They will pay their dividends right up until they declare bankruptcy. They tend to be clustered in fewer industries, like banking and finance. So when problems strike, as they did in 2008, you are not in a well diversified portfolio.

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Re: What if you only live off dividends?

Post by 3CT_Paddler » Tue Feb 13, 2018 10:58 am

I don't think its the worst idea in the world, and its an approach that was more commonly used 30 years ago when yields were higher and dividends were more common.

You could try to set up your portfolio so that you mostly hold higher yielding dividend stocks. People used that argument at one time to justify concentrated positions in stocks like GE, Coca Cola or IBM. The problem with that approach is that you are concentrating your risk with certain kinds of companies... typically those have been large established companies that may or may not be on a downward trend.

If GE gives you a 4% dividend, but the stock price goes down 20% over a 5 year period, did you actually gain an extra return vs going with the company that increased its stock price with no dividend? Total return is what matters in the end.

As a non expert, I would argue that some dividends are better than others with a preference for utilities and REITs... they are set up to generate cash flow, and there is limited revenue growth upside. Look at an established utility like Duke Energy with a current dividend yield around 4%... absent a change in regulation, it's going to deliver a consistent dividend yield.

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Re: What if you only live off dividends?

Post by HomerJ » Tue Feb 13, 2018 10:58 am

cusetownusa wrote:
Tue Feb 13, 2018 10:24 am
Sounds like you are advocating for an approximate 2% WR. Seems ultra conservative to me and I wouldn't want to work all of those extra years to save up 50x my expenses.
This.

It's a great idea if you can do it. Many people here make a LOT of money, and keep their expenses reasonable and DO end up with 40x or 50x their expenses in their 50s. Good for them. It's not a huge sacrifice for them to retire at 55 or 58 instead of 50.

Another group of us will hit 25x expenses around 55-60. I have zero desire to work another 10 years to 65-70 to get myself to a point where I can live off the just the dividends.

Running out of money is indeed a risk. Running out of time is also a risk.

It seems foolish to completely focus on one risk, and ignore the other. A balance is needed.

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Re: What if you only live off dividends?

Post by Longdog » Tue Feb 13, 2018 11:02 am

Yes, you can do that. It basically means being very conservative with your expenses relative to your assets. Some would say being more conservative than necessary, but I think it all depends on your values: whether you have a goal to leave money to heirs and/or charities, and what you want your standard of living to be. Living solely off dividends will leave more behind than taking 4%, but will lower your standard of living. Taking a SWR of 4% will increase your standard of living, but lower the amount left behind.
Steve

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Re: What if you only live off dividends?

Post by MotoTrojan » Tue Feb 13, 2018 11:12 am

If you were in a high-dividend equity fund, and higher risk bonds, that paid an average dividend of 4%, you'd be in the same position as someone with a three-fund portfolio that sells shares (and uses dividends) to withdraw 4%; plus you'd be taking on extra risk by using a less diverse fund make-up.

Living off dividends isn't what makes this safe, it is the fact that you are living off a very low (<2% in most cases) withdrawal rate. It is important to realize why this strategy is more iron-clad, especially so you feel comfortable selling some equity if a bad market event reduces/eliminates your dividend (and your "paycheck").

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Re: What if you only live off dividends?

Post by David Jay » Tue Feb 13, 2018 11:19 am

Here's a lot simpler method:

5% of portfolio balance. By definition, it never fails (you never empty the portfolio).

It is variable each year, depending on the end-of-the-year account balance. But so are dividends and interest. Dividend yield goes up and down. Interest rates go up and down.
Last edited by David Jay on Tue Feb 13, 2018 11:23 am, edited 1 time in total.
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Re: What if you only live off dividends?

Post by AlohaJoe » Tue Feb 13, 2018 11:22 am

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
What if you drop this assumption altogether and just withdraw the dividends and bond interest payments?
If you can live off of just dividends then you are rich.

Congratulations on your financial success.

Telling people "just be rich" doesn't seem like useful advice.

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Re: What if you only live off dividends?

Post by dodecahedron » Tue Feb 13, 2018 11:30 am

3CT_Paddler wrote:
Tue Feb 13, 2018 10:58 am
I don't think its the worst idea in the world, and its an approach that was more commonly used 30 years ago when yields were higher and dividends were more common.
Another reason the practice was more common back in the old days was that commissions on selling securities were very high due to regulatory minimums and general industry practices.

Also, remember that taxes on realized capital gains were a huge factor in the past. (Most retired folks did not have significant sums in tax advantaged retirement plans 30 years ago. And prior to Reagan tax cuts, tax rates on investment income topped out at 70%. Qualifying long term capital gains rates were lower than that figure, but higher than today's LTCG rates.)

There was a lot more friction (from commissions and transaction-triggered taxes) impeding the "total return" approach back in the past. It was a VERY different world back then.

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Re: What if you only live off dividends?

Post by Wakefield1 » Tue Feb 13, 2018 11:38 am

AlohaJoe wrote:
Tue Feb 13, 2018 11:22 am
getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
What if you drop this assumption altogether and just withdraw the dividends and bond interest payments?
If you can live off of just dividends then you are rich.

Congratulations on your financial success.

Telling people "just be rich" doesn't seem like useful advice.
:D :D :D :D :D :D :idea:

Chuck
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Re: What if you only live off dividends?

Post by Chuck » Tue Feb 13, 2018 11:46 am

The P/E ratio of the total stock market fund is 22.9. So it would make more sense to spend 4.37% of your portfolio this year (and readjust every year).

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Re: What if you only live off dividends?

Post by retire57 » Tue Feb 13, 2018 11:47 am

AlohaJoe wrote:
Tue Feb 13, 2018 11:22 am
getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
What if you drop this assumption altogether and just withdraw the dividends and bond interest payments?
If you can live off of just dividends then you are rich.

Congratulations on your financial success.

Telling people "just be rich" doesn't seem like useful advice.
We live off dividends and aren't what I consider rich. We are able to do so because the dividends from taxable funds supplement our pensions to provide living expenses. Once we reach FRA, we won't even 'need' the dividends. We didn't plan it this way - it just happened organically. We never once in our accumulation phase bought funds expressly for the dividends.

What I'm trying to convey is that the answers to this question are more complex than they would appear. And also that one's 4% withdrawal plan is just that - a plan. You won't know until you are there.

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Re: What if you only live off dividends?

Post by Da5id » Tue Feb 13, 2018 12:29 pm

retire57 wrote:
Tue Feb 13, 2018 11:47 am
We live off dividends and aren't what I consider rich. We are able to do so because the dividends from taxable funds supplement our pensions to provide living expenses. Once we reach FRA, we won't even 'need' the dividends. We didn't plan it this way - it just happened organically. We never once in our accumulation phase bought funds expressly for the dividends.
For the purposes of this discussion, you don't "live off dividends" as most would understand it. The fact that at FRA you'll have 100% of your retirement covered by pension + social security makes your asset allocation and strategy basically moot, no? By the same logic that lets you say you live off dividends now you could say you live off of change found in the couch at FRA.

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Re: What if you only live off dividends?

Post by Pajamas » Tue Feb 13, 2018 1:39 pm

3CT_Paddler wrote:
Tue Feb 13, 2018 10:58 am
As a non expert, I would argue that some dividends are better than others with a preference for utilities and REITs... they are set up to generate cash flow, and there is limited revenue growth upside. Look at an established utility like Duke Energy with a current dividend yield around 4%... absent a change in regulation, it's going to deliver a consistent dividend yield.
Many REITs cut their dividends or eliminated them entirely during the 2008-09 financial crisis. Even many preferred equity dividends were suspended.

Utilities may not be as likely to cut or eliminate their dividend, but sometimes they do.

https://www.sfchronicle.com/business/ar ... 445592.php

When a company reduces or suspends the dividend, the share price often falls at the same time, leaving investors who relied on the dividend income even worse off.

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Re: What if you only live off dividends?

Post by getrichslowly » Tue Feb 13, 2018 2:27 pm

3CT_Paddler wrote:
Tue Feb 13, 2018 10:58 am
You could try to set up your portfolio so that you mostly hold higher yielding dividend stocks. People used that argument at one time to justify concentrated positions in stocks like GE, Coca Cola or IBM. The problem with that approach is that you are concentrating your risk with certain kinds of companies... typically those have been large established companies that may or may not be on a downward trend.
I don't want to deviate from the 3-fund portfolio. I would just live off whatever dividends the total market provides.
3CT_Paddler wrote:
Tue Feb 13, 2018 10:58 am
If GE gives you a 4% dividend, but the stock price goes down 20% over a 5 year period, did you actually gain an extra return vs going with the company that increased its stock price with no dividend? Total return is what matters in the end.
Actually, GE's stock price went down after they cut their dividend. So their dividend yield remain pegged at the same value. This is further evidence that the dividend is a signal of what distributions are sustainable.

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Re: What if you only live off dividends?

Post by Iridium » Tue Feb 13, 2018 2:29 pm

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
1. In low inflation environments, this plan is too conservative.
2. In high inflation environments, this plan is surprisingly aggressive (remember that spending your interest means that your are keeping your nominal funds the same, while inflation eats at the real value if your principle).
3. Your spending could easily change considerably over the course of your retirement, as we enter low and high inflation environments.
4. Dividends could very easily fall out of vogue, as buybacks are slightly more tax efficient and might even be cheaper to operate (one tender offer, vs. cutting a zillion checks).
5. What the market chooses to provide has a lot more to do with accounting/tax principles rather than anything related to sustainable income. Remember: bond funds have to distribute all their earnings, even as the nominal value of the NAV is constantly losing too inflation. Issuing dividends could be a statement by management of their confidence in the profitability of their business, or it could be a result of management deciding they have no idea how to effectively reinvest in their business.

With a SWR if 2.5%, you'll have more consistent income, better handling of high inflation scenarios, and no temptation to skew your asset allocation toward tax inefficient investments. What's not to like?

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Re: What if you only live off dividends?

Post by getrichslowly » Tue Feb 13, 2018 2:31 pm

David Jay wrote:
Tue Feb 13, 2018 11:19 am
Here's a lot simpler method:

5% of portfolio balance. By definition, it never fails (you never empty the portfolio).

It is variable each year, depending on the end-of-the-year account balance. But so are dividends and interest. Dividend yield goes up and down. Interest rates go up and down.
I don't think this is optimal because we all have a rational desire to smooth our consumption. Hence the basis for the constant-4% SWR rule.

Dividends are volatile but we could smooth them by depositing dividends into a separate account and then withdrawing a smoothed average of the dividends. But if there is a structural shift in the future dividend yield, we would want to shift our consumption pattern to match it. So maybe taking something like the past 10 years average dividend and consuming that as a smooth function would be more optimal. The problem always is that this is backwards looking and not forward looking. If dividends are drastically cut today, you never know if its a permanent or temporary shock. If its permanent then its prudent to reduce your consumption. If it is temporary then you want to smooth the shock over your lifetime. But dividends are already smoother than the total return, so maybe pegging consumption=dividends is already a fair balance. If firms cut dividends, that is usually a very real signal of reduced future expected returns, that should not be ignored. The problem with pegging a constant 4% SWR is that it ignores the dividend as a useful signal. I believe dividends are a useful signal.

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Re: What if you only live off dividends?

Post by getrichslowly » Tue Feb 13, 2018 2:37 pm

Iridium wrote:
Tue Feb 13, 2018 2:29 pm
getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
1. In low inflation environments, this plan is too conservative.
2. In high inflation environments, this plan is surprisingly aggressive (remember that spending your interest means that your are keeping your nominal funds the same, while inflation eats at the real value if your principle).
3. Your spending could easily change considerably over the course of your retirement, as we enter low and high inflation environments.
4. Dividends could very easily fall out of vogue, as buybacks are slightly more tax efficient and might even be cheaper to operate (one tender offer, vs. cutting a zillion checks).
5. What the market chooses to provide has a lot more to do with accounting/tax principles rather than anything related to sustainable income. Remember: bond funds have to distribute all their earnings, even as the nominal value of the NAV is constantly losing too inflation. Issuing dividends could be a statement by management of their confidence in the profitability of their business, or it could be a result of management deciding they have no idea how to effectively reinvest in their business.

With a SWR if 2.5%, you'll have more consistent income, better handling of high inflation scenarios, and no temptation to skew your asset allocation toward tax inefficient investments. What's not to like?
This is a good point, my strategy ignores interest rates. And buybacks complicate things. What if you took the total distribution (dividends + buybacks + interest payments) and then subtracted inflation? I assume stock price will already adjust to inflation so the inflation would only impact bonds. E.g. 60/40 portfolio, 2% dividend rate, 2% buyback rate, 6% interest rate, 4% inflation rate = consume 60%(2%+2%)+40%(6%-4%) of your portfolio.

The advantage of this approach is that it pegs your withdrawal to the underlying asset distribution. If real bond yield or real equity yield falls, you should prudently adjust your withdrawals downward.

What I am mostly trying to correct for is speculative price movements. If the market's PE ratio doubles, most people just consider this a doubling in their wealth, and that means if they hit their retirement goal, they can now consume their same SWR as before of the inflated balance. Then if the market either (a) corrects itself, or (b) stagnates, their previously calculated SWR could fail. This is easiest to imagine if taken to extremes. Imagine CAPE is 100, or 1000. Would you still feel comfortable with 4%, or even 2% SWR? Obviously not. You would probably want to base your withdrawal on some sort of yield figure.

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Re: What if you only live off dividends?

Post by onourway » Tue Feb 13, 2018 2:53 pm

getrichslowly wrote:
Tue Feb 13, 2018 2:37 pm
What I am mostly trying to correct for is speculative price movements. If the market's PE ratio doubles, most people just consider this a doubling in their wealth, and that means if they hit their retirement goal, they can now consume their same SWR as before of the inflated balance. Then if the market either (a) corrects itself, or (b) stagnates, their previously calculated SWR could fail. This is easiest to imagine if taken to extremes. Imagine CAPE is 100, or 1000. Would you still feel comfortable with 4%, or even 2% SWR? Obviously not. You would probably want to base your withdrawal on some sort of yield figure.
The 4% number already accounts for the possibility of high valuations. In other words, for all past rolling periods, including starting withdrawals at previously inflated peaks, 4% was sustainable. YMMV for the future.

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Re: What if you only live off dividends?

Post by nisiprius » Tue Feb 13, 2018 3:19 pm

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
People who were doing this during the Great Depression were inconvenienced when the companies whose dividends they were living off stopped paying them.

"Living off dividends" has the same problem as many variable withdrawal systems. It is quite true that you will never literally run out of money, but the amount of money you are allowed to spend may not be enough to live on without wrenching dislocations in your lifestyle.

During the year 2006, if you had invested $1 million investment in the Vanguard 500 index fund you would have received 7,692 shares. They would have paid you a total of (0.58 + 0.60 + 0.65 + 0.78) * 7,692 = $20,076. During the year 2009, (0.54 + 0.45 + 0.51 + 0.69) = $16,845. That's the equivalent of a 16% "pay cut."

Note, too, that the decision that "trusting what the market choose to provide" meant 1.7% to 2%, not the often-mentioned 4%.

In the dividend-oriented Vanguard Equity-Income fund, VEIPX, that $1 million invested at the start of 2005 = 39,077 shares, which would have provided (0.17 + 0.16 + 0.17 + 0.21) = $27,745 during 2006, and (0.17 + 0.13 + 0.11 + .14) * 39,077 = $21,492.35. Although the dividends are considerably higher than those of the 500 index, they still fall far short of 4%, and you would have been faced by a 22% "pay cut."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: What if you only live off dividends?

Post by Greenie » Tue Feb 13, 2018 3:57 pm

A while back I noticed Vanguard had changed on their simulation retirement calculator from 4% of a 50-50 equities/ bonds mix lasting 30 years with a 95% likely successful outcome to a 91% likely success rate. At 3.7% withdraw rate I get 95% likely success rate now with my portfolio. It's hard to imagine today spending 5K more a year is going to send us to the poor house.

https://retirementplans.vanguard.com/VG ... ggCalc.jsf

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Re: What if you only live off dividends?

Post by willthrill81 » Tue Feb 13, 2018 4:08 pm

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment.
You are assuming that your capital is represented by shares owned; this is a common misperception that is false. More shares can be issued, shares can be bought back, and it ignores what your shares are worth. Would you consider your capital to be the same if the company you hold shares with suddenly declares chapter 11? Of course not. Your capital is represented by the dollar value of your investment. As such, if your investment grows from $100 to $110, your capital is now $110, even if your shares owned are the same.
getrichslowly wrote:
Tue Feb 13, 2018 2:31 pm
I don't think this is optimal because we all have a rational desire to smooth our consumption. Hence the basis for the constant-4% SWR rule.
There are many things I have a desire for, but this must be tampered by reality. How many of us have a very consistent income throughout our working years? Why then should we suddenly expect to have zero volatility in retirement? We have many retirees on this forum, and I've not heard a single one say that they use a completely fixed withdrawal rate for their income. When the market goes down, they adjust their spending accordingly.
getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Dividends are volatile but we could smooth them by depositing dividends into a separate account and then withdrawing a smoothed average of the dividends. But if there is a structural shift in the future dividend yield, we would want to shift our consumption pattern to match it. So maybe taking something like the past 10 years average dividend and consuming that as a smooth function would be more optimal.
You said above that we want to smooth our income, but then you illustrate how difficult this could be to achieve even with a supposedly safe dividend-only approach.

If you want smooth returns and a guarantee, I strongly suggest that you could look into single premium immediate annuities, particularly those with a cost of living adjustment.
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Re: What if you only live off dividends?

Post by David Jay » Tue Feb 13, 2018 4:18 pm

getrichslowly wrote:
Tue Feb 13, 2018 2:31 pm
David Jay wrote:
Tue Feb 13, 2018 11:19 am
Here's a lot simpler method:

5% of portfolio balance. By definition, it never fails (you never empty the portfolio).

It is variable each year, depending on the end-of-the-year account balance. But so are dividends and interest. Dividend yield goes up and down. Interest rates go up and down.
I don't think this is optimal because we all have a rational desire to smooth our consumption. Hence the basis for the constant-4% SWR rule.

Dividends are volatile but we could smooth them by depositing dividends into a separate account and then withdrawing a smoothed average of the dividends. But if there is a structural shift in the future dividend yield, we would want to shift our consumption pattern to match it. So maybe taking something like the past 10 years average dividend and consuming that as a smooth function would be more optimal. The problem always is that this is backwards looking and not forward looking. If dividends are drastically cut today, you never know if its a permanent or temporary shock. If its permanent then its prudent to reduce your consumption. If it is temporary then you want to smooth the shock over your lifetime. But dividends are already smoother than the total return, so maybe pegging consumption=dividends is already a fair balance. If firms cut dividends, that is usually a very real signal of reduced future expected returns, that should not be ignored. The problem with pegging a constant 4% SWR is that it ignores the dividend as a useful signal. I believe dividends are a useful signal.
Dividends Account balances are volatile but we could smooth them by depositing dividends account balance percentage into a separate account and then withdrawing a smoothed average of the dividends account balances. But if there is a structural shift in the future dividend yield account balances, we would want to shift our consumption pattern to match it.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: What if you only live off dividends?

Post by MotoTrojan » Tue Feb 13, 2018 4:23 pm

getrichslowly wrote:
Tue Feb 13, 2018 2:27 pm

I don't want to deviate from the 3-fund portfolio. I would just live off whatever dividends the total market provides.
This is probably the most bullet-proof financial plan you can possibly imagine, once you get there. Getting the 50-60X expenses on the other hand will require working a lot longer than needed and/or living a much lower cost life than necessary.

Enjoy.

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Re: What if you only live off dividends?

Post by MathWizard » Tue Feb 13, 2018 4:27 pm

In the 1940 to 1990 the dividend yield of the S&P 500 was in the 3-6% range.

In the 90's, likely due to tax treatment of capital gains vs. dividends for
those who were wealthy and had the most stocks drove a move away from
dividends, and hence to capital gains.

So in the past, the retained earnings were less, and so fewer stock buybacks, etc.
Th excess earnings were returned to shareholders through dividends. Thus the business did not
grow the capital (what you call principal), instead of returning earnings to investors.
So now, you have to sell some stock to get back to what used to be the dividend.

If a stock does not have a very good chance of returning at least 4% real over the long term,
I would rather not have it in my portfolio.

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Re: What if you only live off dividends?

Post by willthrill81 » Tue Feb 13, 2018 4:29 pm

David Jay wrote:
Tue Feb 13, 2018 4:18 pm
Dividends Account balances are volatile but we could smooth them by depositing dividends account balance percentage into a separate account and then withdrawing a smoothed average of the dividends account balances. But if there is a structural shift in the future dividend yield account balances, we would want to shift our consumption pattern to match it.
That is essentially what Vanguard does with their Managed Payout fund.
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Re: What if you only live off dividends?

Post by Sandtrap » Tue Feb 13, 2018 4:30 pm

You can live off of dividends and interest if:

1. Your expenses are very very low.
2. You have substantial alternative income streams. IE: SS, Pension, Rentals, etc.
3. Your portfolio is humungous :shock: (technical term).

j :D

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Re: What if you only live off dividends?

Post by retire57 » Tue Feb 13, 2018 4:57 pm

Da5id wrote:
Tue Feb 13, 2018 12:29 pm
retire57 wrote:
Tue Feb 13, 2018 11:47 am
We live off dividends and aren't what I consider rich. We are able to do so because the dividends from taxable funds supplement our pensions to provide living expenses. Once we reach FRA, we won't even 'need' the dividends. We didn't plan it this way - it just happened organically. We never once in our accumulation phase bought funds expressly for the dividends.
For the purposes of this discussion, you don't "live off dividends" as most would understand it. The fact that at FRA you'll have 100% of your retirement covered by pension + social security makes your asset allocation and strategy basically moot, no? By the same logic that lets you say you live off dividends now you could say you live off of change found in the couch at FRA.
Yes, I neglected to place the phrase "live off dividends" in quotes. But you miss my main points about how planning is just planning and that the reality - one's actual withdrawal strategy - can't be precisely predicted in advance.

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Re: What if you only live off dividends?

Post by Da5id » Tue Feb 13, 2018 5:15 pm

retire57 wrote:
Tue Feb 13, 2018 4:57 pm
Yes, I neglected to place the phrase "live off dividends" in quotes. But you miss my main points about how planning is just planning and that the reality - one's actual withdrawal strategy - can't be precisely predicted in advance.
Well, one can plan based known revenue streams, like your pension. Or Social Security -- with a caveat that the rules for social security can change particularly if you are very far from collecting.

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Re: What if you only live off dividends?

Post by HomerJ » Tue Feb 13, 2018 5:32 pm

Sandtrap wrote:
Tue Feb 13, 2018 4:30 pm
You can live off of dividends and interest if:

1. Your expenses are very very low.
2. You have substantial alternative income streams. IE: SS, Pension, Rentals, etc.
3. Your portfolio is humungous :shock: (technical term).

j :D
Groucho Marx was once walking around the New York Stock Exchange when one of the traders on the floor asked him: “Groucho, how do you invest your money?” Groucho answered: “All in bonds.” The trader asked: “But Groucho, they don’t pay much return.” Groucho said: “They do when you have a lot of em!”

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Re: What if you only live off dividends?

Post by randomguy » Tue Feb 13, 2018 6:38 pm

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
Sure it is sustainable and you will never run out of money. What you will not get is a steady income stream. For example you would have gone from making 15k/year in 1930 to 8.2k year in 1932 in real dollars. Or if you want something more recent, 33k/year in 2008 to 25k/year in 2009.

So is this a conservative approach? Depends strictly on the rates Taking out 10% (i.e. 1917 yield) is at a level that is unlikely to not deplete the account. Same thing with the 6-8% rates of the late 40s and early 50s. It is the fact that the rates are in the 2% range now that makes this conservative. Not the idea of just spending the dividend stream.

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Re: What if you only live off dividends?

Post by radiowave » Tue Feb 13, 2018 7:04 pm

One other thing to consider is RMDs at 70.5. If you are "living off of dividends" at say 2%, then RMDs kicks in at around 4% (I think the first year is 3.8%) so now you have approximately 6% or 3 times as much than your base dividends. Do you reinvest that in stock funds or munis in taxable, save as high yield savings/CDs? It's a balancing act between what you need to live (yearly expenses in retirement) vs. what you have to live off of.
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Re: What if you only live off dividends?

Post by willthrill81 » Tue Feb 13, 2018 7:09 pm

radiowave wrote:
Tue Feb 13, 2018 7:04 pm
One other thing to consider is RMDs at 70.5. If you are "living off of dividends" at say 2%, then RMDs kicks in at around 4% (I think the first year is 3.8%) so now you have approximately 6% or 3 times as much than your base dividends. Do you reinvest that in stock funds or munis in taxable, save as high yield savings/CDs? It's a balancing act between what you need to live (yearly expenses in retirement) vs. what you have to live off of.
As you point out, RMDs are a separate issue, and they obviously only impact tax-deferred accounts (with the exception of HSAs). The fact that the money is moved from a tax-deferred account into another account does not mean that the money must be spent; in fact, many turn around and buy the same asset in their taxable account that they sold in their tax-deferred account.
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Re: What if you only live off dividends?

Post by 22twain » Tue Feb 13, 2018 7:15 pm

3CT_Paddler wrote:
Tue Feb 13, 2018 10:58 am
I don't think its the worst idea in the world, and its an approach that was more commonly used 30 years ago when yields were higher and dividends were more common.
And when selling shares of stock was more inconvenient (you had to call up your "guy" and ask him to do it, maybe only in "round lots" of 100 shares) and commissions were a lot higher than they are today. Might have to go back to the '60s for that, though.
My investing princiPLEs do not include absolutely preserving princiPAL.

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Re: What if you only live off dividends?

Post by itstoomuch » Tue Feb 13, 2018 7:19 pm

Sandtrap wrote:
Tue Feb 13, 2018 4:30 pm
You can live off of dividends and interest if:

1. Your expenses are very very low.
2. You have substantial alternative income streams. IE: SS, Pension, Rentals, etc.
3. Your portfolio is humungous :shock: (technical term).

j :D
we could get by on #1.
we could do better on #2. SS+small pension+annuities (when the getting was good in annuities)
we can do even better with above with the rental addition
we can do best if we throw in the Discretionary Acct.

kinda depends when and how :annoyed :oops: :D
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: What if you only live off dividends?

Post by sergeant » Tue Feb 13, 2018 7:21 pm

No thanks! Too conservative. I guess heirs would be happy.
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Re: What if you only live off dividends?

Post by PFInterest » Tue Feb 13, 2018 7:33 pm

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
Your username is correct. Very slowly.

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Re: What if you only live off dividends?

Post by radiowave » Tue Feb 13, 2018 7:46 pm

willthrill81 wrote:
Tue Feb 13, 2018 7:09 pm
radiowave wrote:
Tue Feb 13, 2018 7:04 pm
One other thing to consider is RMDs at 70.5. If you are "living off of dividends" at say 2%, then RMDs kicks in at around 4% (I think the first year is 3.8%) so now you have approximately 6% or 3 times as much than your base dividends. Do you reinvest that in stock funds or munis in taxable, save as high yield savings/CDs? It's a balancing act between what you need to live (yearly expenses in retirement) vs. what you have to live off of.
As you point out, RMDs are a separate issue, and they obviously only impact tax-deferred accounts (with the exception of HSAs). The fact that the money is moved from a tax-deferred account into another account does not mean that the money must be spent; in fact, many turn around and buy the same asset in their taxable account that they sold in their tax-deferred account.
Yes, need to consider the overall portfolio and proportion that is tax deferred. But it gets back the to OP, with RMD you can invest in an equity mutual fund in taxable which will add to the overall dividends produced, or use the cash for living expenses, e.g. put the RMD in a high yield savings or CDs. Cash flow would be a factor here.
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