Author Topic: Is 5% realistic?  (Read 2243 times)

GOFU

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Is 5% realistic?
« on: January 29, 2018, 08:51:27 PM »
On a 100k Vanguard account, 5% should be 5k. What is the asset mix required to achieve that? I thought it was alright at 70 stock/20 bonds/10 cash, but dividends and capital gains for 2017 were not even 2%.

On a million dollar portfolio, a person earning 5% should generate $50k, which is enough to live on.

How do you get that mix?

Vanguard specifically is most interesting to me.

Thanks!

Indexer

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Re: Is 5% realistic?
« Reply #1 on: January 29, 2018, 09:17:06 PM »
Historically, a 70/20/10 would grow more than 5% most of the time. Bad years would be obvious exceptions. 2017 was a great year for markets. If you are using Vanguard index funds in that allocation you should have seen more than 5% growth in 2017.

How are you measuring growth? You mentioned capital gains and dividends. Are you referring to your capital gain distributions on a tax page? If so, that information is for tax purposes. Your performance is likely different. Tax efficient stock index funds, like Vanguard's, don't distribute capital gains most of the time. They keep the gains inside the fund, and you will likely only realize your gains when you sell the investment in the future. This is great, it defers when you have to pay taxes. If you want to see how your investments performed go to the personal performance page on the Vanguard website. That will give you actual performance information.

If the lower returns are showing even on the personal performance page then please let us know what you are invested in because that is out of the ordinary.

The future is unknown. A 70/20/10 has historically grown more than 5% per year, but there were whole decades where it averaged less. This is why the 4% rule is so popular, because it takes into account the ups and downs of the market.

GOFU

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Re: Is 5% realistic?
« Reply #2 on: January 29, 2018, 09:40:56 PM »
Thanks, Indexer. That was helpful. I was looking at the year-end statement. The dividends reflected there is how I calculated the percentage.

On the personal performance page it says the rate of return is 17.4%.

That's more like it, but what is that? Does that include dividends plus the the increase in share price?

What would be the strategy to get one million to throw off $50k for living expenses? Or do you have to sell off shares to do that because the rate of return included the increase in share price?

sokoloff

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Re: Is 5% realistic?
« Reply #3 on: January 29, 2018, 10:21:57 PM »
What would be the strategy to get one million to throw off $50k for living expenses? Or do you have to sell off shares to do that because the rate of return included the increase in share price?
Yes, the latter. If you look at the account as a closed system (you had a set amount of money invested on Jan 1, 2017 and you didn't add any money to the account during 2017). The final value of the account at the end of 2017 is all that matters, not how much of that was cast off in dividends, not whether those dividends were reinvested or not, not how much was short-term or long-term capital gains distributions, nor how much was share/unit price increase, but rather the sum value at the end of the year vs the start of the year.

If you really want "mailbox money" every month or quarter, but don't want to actively sell shares, look into some high-dividend payers, often MLPs will be in this camp. I think most people are way better off with broad asset-class funds and selling shares if/as needed.

CCCA

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Re: Is 5% realistic?
« Reply #4 on: January 29, 2018, 10:28:15 PM »
yes, you'll probably have to sell some stock, since dividends typically aren't in the 5% range. 


Is this a retirement account or taxable account?  Taxes on capital gains are treated somewhat differently between the two accounts. 

GOFU

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Re: Is 5% realistic?
« Reply #5 on: January 30, 2018, 04:10:36 AM »
yes, you'll probably have to sell some stock, since dividends typically aren't in the 5% range. 


Is this a retirement account or taxable account?  Taxes on capital gains are treated somewhat differently between the two accounts.

This is a taxable account, but the analysis applies to my tax-deferred accounts too since they contain basically the same types of index funds.

Thanks you.

Steeze

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Re: Is 5% realistic?
« Reply #6 on: January 30, 2018, 04:40:51 AM »
Don't be distracted by dividends. Dividends and price appreciation accomplish the same thing, which is return on invested capital. When the time comes and you need 5% (4% is the recommended target) you will simply sell shares to accomplish this.

Any dividends you receive now in the accumluation phase of your investing career should be reinvested. Once you are retired you can use them as income to offset the amount of shares you need to sell to reach a 4-5% withdraw rate.

GOFU

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Re: Is 5% realistic?
« Reply #7 on: January 30, 2018, 05:02:52 AM »
Thank you, Steeze. Very clear and concise. Dividends are being reinvested until such time as I need to draw on these accounts to live.

Thank you, sokoloff. I will look at MLPs as a potential option.

Thank you, Indexer.

Rob_bob

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Re: Is 5% realistic?
« Reply #8 on: January 30, 2018, 04:06:16 PM »
You can boost the dividend/distribution with ETF's and CEF's that invest in Preferred stock, REITS, emerging markets sovereign debt, utilities and MLP's.

Generally this will lower returns from capital gains but you would need to sell fewer shares and often the div./dist. is more stable than the share price. You would maintain a core portfolio of growth funds. The income portion would be more holdings at smaller % of total portfolio to diversify sector and management risk.

GOFU

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Re: Is 5% realistic?
« Reply #9 on: January 30, 2018, 04:16:48 PM »
Rob_bob: Good information. I will analyze and decide. Thank you.

Mighty-Dollar

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Re: Is 5% realistic?
« Reply #10 on: January 30, 2018, 10:58:57 PM »
Historical returns of 50% S&P 500 and 50% ten year treasuries. http://investingadvicewatchdog.com/images-new/50-50-history.jpg