Can you have a 0% withdrawal rate?

[deborah]

Today, someone said in a thread that they believed in a 0% withdrawal rate, because rents, dividends... would exceed their withdrawals.

I thought that withdrawal rate was the amount you withdrew as a percentage of the total stash, rather than the amount that the stash changes each year (withdrawals - deposits).

So, if you are using your stash, is a 0% withdrawal possible?

[bacchi]

I consider withdrawal rate to be applicable to investable assets. That is, rent is not part of the withdrawal rate but dividends are since they're reinvested otherwise.

I'm sure, like savings rate, it can be interpreted numerous ways.

[dandarc]

Both of those things are withdrawals. You could retain the net rents in your rental business to buy more properties or de-leverage, so the fact that you use them to pay living expenses is no different than withdrawing from your brokerage account. Dividends are easily re-invested, so same deal there.

People who speak like this often seem to have a "principal and interest" view of investing vs. a "total return" perspective on investments. "I can't touch my principal ever!"

Semantics really - this more of a preference for your internal accounting system and how you think about investments / money.

I could see being at a 0% withdrawal rate if you can live your life with only Social Security and maybe a defined benefit pension - those are much more like income from work, just without the work part.

[deborah]

But they were saying that they didn’t believe in the 4% rule, as part of saying that they believed in 0%, so I’m talking in that context.

[dandarc]

Then they don't understand the 4% rule - dividends are included in the research that backs that up. The analysis uses total returns.

Rental income is a bit of a different animal, because you're basically running a small business and cheap leverage is so widely available. So lots of people account for that differently, but to say you're at a 0% withdrawal rate just because the net rental income cover your expenses is kind of a strange way to look at that as well. Real estate is not very liquid, so you can't withdraw in the same way you can easily withdraw from a brokerage account.

[Rob_bob]

Without reading the post I'm going to guess that they are saying the 4% rule is a draw down strategy typically with a 30 year time horizon, meaning at some point you may spend your last dollar.  As you sell shares your participation in the future growth of those assets is diminished.

With their 0% strategy they are only spending the passive income and not counting it towards growth of assets.  As long as they only spend the passive income the portfolio balance, the capital, will fluctuate with the market price of the assets and grow as long as the overall market continues it's long term growth trend.

[dandarc]

Rob_bob - sure, a draw down strategy except most of the time you wind up with far more money than you started with with the 4% rule. "Spending dividends only" is essentially advocating a 2-3% withdrawal rate if you're in more or less standard index funds. 4% rule is a nearly worst-case scenario in the US. 3% is a 100% success rate.

A lot of people who want this "pay with income only" are excessively conservative in investing - you worked too long if you get to a 2% withdrawal rate. I hope you enjoyed it because you didn't need to. Many are just saying "I can successfully pick stocks" and trying to sound smart about it.

The thing about this is if your dividends go down year or over year or your rental business has a bad year, are you REALLY able to cut lifestyle to match? Because if not, being willing to sell some principal will serve you well.

[Another Reader]

This is really just semantics.  The dividend people would contend that if they own 1,000 shares at the beginning of the year and only take the 2 percent dividends, the withdrawal rate is zero because they still had the same number of shares at the end of the year.  Others would look at it as a withdrawal rate of 2 percent of the total value of the portfolio at the beginning of the year. 

[SwordGuy]

I don't know whether something I said confused the OP or whether what they saw was from someone else.

I have 5 different income streams currently active:

1) rental house income.
2) rented farmland income.
3) social security income.
4) mortgage note income
5) stock/bond income.

Income sources 1-4 cover 96% of our budgeted annual spend.   
Another rental property (or just paying off the mortgage when the mortgage note we hold is refinanced) and we won't need to draw from our stock/bond income at all.   Current withdrawal rate would be near 0% at the moment if we stay on budget. 

It's a nice security blanket not to have to sell very much (if any) stocks/bonds when the market is down. 

It's not like I don't believe in the 4% SWR, I think it's a darn good plan if one uses a few extra safety cushions, particularly for a > 30 year retirement period. 

I don't count the other forms of income (i.e., non stock/bond income) as part of the stash the 4% SWR applies to because, well, they don't. 

A huge chunk of our super-duper safety margin was from an inheritance a year before our planned FIRE date.   The rest, a sizeable portion of it, was because we have a mentally handicapped daughter and we want to be extra sure there's enough left for her.