No official SWR is required. You could get all of your income in the form or rents on properties you own, which makes an "SWR" meaningless; or 1/2 from rental property, 1/4 from selling stocks, and 1/4 from Social Security, or any other infinite combinations of things.
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Hope this helps, please feel free to poke holes or offer suggestions.
The biggest hole is that how do you tell how much stocks to sell? I.e. what rate is safe to make sure you won't run out of stocks, then have to take a (potentially unsustainable) 25% paycut.
This is where www.cfirsim.com comes in handy, IMO.
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A 4% SWR is too simplified. So is an "income only" plan. Something like this shouldn't be over simplified.
Therefore, I highly recommend that anyone considering early retirement project out their future cashflows (until end of life), before electing to fully retire. I find that spreadsheets are most useful for this purpose.
or.....have a pre-determined asset allocation and stick with it. For example, if by the time you retire you have 1M liquid asset and your yearly budget is 35k. Then an asset allocation that would work could be :
3.5% cash
30% Bond
66.5% Stock
if your investments make some money during the year and assets increases to 1.05M, rebalance at the beginning of the year and take out the cash.
if your invesetment loses money during the year and assets drops to 0.95M, you do the reverse. It'd be wise to have a nice cushion (20%?) if you use this method, that's what we are planning to do.
There are many ways to do this, i feel they are all more or less the same.
DoubleDown is on the right track in my view. Most folks I know that have retired or will soon retire with a portfolio of paper assets and a decumulation plan are spending a lot of time looking over their shoulder at the stock and bond markets. It looks like the plan ought to work, but then there's that pesky sequence of returns risk to worry about and some valid reservations about the projected stock market growth rates in a mature economy being sustainable in the future. Call it the bucket approach or the multi-legged stool, but I think acquiring assets that throw off sufficient income to support you without significant decumulation is the only was to feel secure about 40 years of retirement. Pensions, real estate, dividend paying stocks, IRA RMD's and a general stock portfolio all work together to provide the income. And the income plan is key.
Fifty years of scholarly efforts are interesting, but not reassuring when it comes to converting assets into income that shows up at regular intervals. After all, haven't we all learned that past performance is not predictive of future results? Sequence of returns risk is forefront in many peoples' minds because of what we just went through in the last 6 years. Security is difficult to achieve with these thoughts running through your head.
Fifty years of scholarly efforts are interesting, but not reassuring when it comes to converting assets into income that shows up at regular intervals. After all, haven't we all learned that past performance is not predictive of future results? Sequence of returns risk is forefront in many peoples' minds because of what we just went through in the last 6 years. Security is difficult to achieve with these thoughts running through your head.
Plop your assets into a low cost 60/40 balanced fund, don't draw more than 4% inflation adjusted of your starting value, live a long and full life. I just said it in one sentence which I had to make longer with comments about life because this isn't that complicated.
Even your friend Nords is hedging his bets by keeping the rental and juicing his stock returns by writing options. The MM's live primarily on rental income, allowing the stock portfolio to grow for later and feeding it with work income. Their retirement is likely going to be "overfunded."
You are an exception because of your professional knowledge and skill. You can find a way to make your portfolio work under almost any scenario. The average retiree has no clue how or if the conversion of assets to income is going to work, and is scared to death. Most are in Happy's position - I achieved the asset target, now what do I do? What DoubleDown is saying is plan the income while you are accumulating assets. Focusing on acquiring assets and structuring them to provide long term income (with very low taxes and no decumulation) has worked well for me, and I retired a year before the SHTF in 2008.
Stop back when you and your friends are 65 so we 80 year-olds can ask "How's that working for ya?" You may be fine, but I'll bet a lot of of your friends will not be.
Even your friend Nords is hedging his bets by keeping the rental and juicing his stock returns by writing options. Their retirement is likely going to be "overfunded."Here, let me put my own words in my mouth.
Fifty years of scholarly efforts are interesting, but not reassuring when it comes to converting assets into income that shows up at regular intervals. After all, haven't we all learned that past performance is not predictive of future results? Sequence of returns risk is forefront in many peoples' minds because of what we just went through in the last 6 years. Security is difficult to achieve with these thoughts running through your head.
Plop your assets into a low cost 60/40 balanced fund, don't draw more than 4% inflation adjusted of your starting value, live a long and full life. I just said it in one sentence which I had to make longer with comments about life because this isn't that complicated.
*Sigh*
OP, what are you selling? I feel compelled to ask because this sort of thing is so often the prelude to such.
Now that that is out of the way, I will say that A) it is unwise to throw out 50 years of scholarly efforts on this subject and B) I do not like the income approach because it tends to drive people to do stupid yield chasing. I have watched a variety of retirement implosions due to various forms of idiot yield chasing (high dividend stocks, highly concentrated junk bond portfolios, various dopey options strategies, Venezuelan Beaver Cheese Futures...). If you are trying to simplify, beware that those that prefer simple often are simple.
This post made a lot of sense to me in that I have not stumbled across a canned calculator that begins to appreciate the financial position we are in.
The more I think about it, the more I'm convinced that there isn't likely a prototypical early retiree that will have a steady expenses/income need from now until they die. One obvious breakdown is the "old man vs. young man money" scenario if you're retiring early -- you break up your retirement into phases where you're living largely off taxable accounts, then you start tapping 401k's and IRAs once you're 59.5. I'll bet most people find themselves in situations more complicated than that. I'm not a complicated guy, but I've got at least 6-7 different periods I foresee where my spending or income sources could vary a lot, and I need a plan to accommodate: My wife decides to stop working; putting kids through college; ceasing child support payments to my ex-wife; kids grow up and are out on their own; potentially moving to a low cost area; doing a long travel period; able to start drawing a pension; able to draw social security.
There's no way I could just come up with a safe withdrawal rate from now until I die, and live off that (except of course by saving way more than needed so no matter what expenses come up, I'd have more than enough). I'd also be concerned about really young people naively guessing that their expenses are likely to remain completely steady over their lives, without considering the numerous curveballs life could throw.
Plus, I do not expect my assets to appreciate at the same rates over time. One example is that real estate will appreciate at a rate different than stocks, and it's leveraged. My good ol' spreadsheets have to keep track of how those assets will accumulate and be used separately. Maybe I'm just restating the obvious here and those in the know are saying "Duh." But I've gotten the impression from many of the questions typically posted in this forum that a lot of folks don't get it.
I can see what you're saying. But isn't that the eternal YMMV?
When starting people off and someone asks the question "how do I FIRE?" I still think the quick and dirty is appropriate with a caveat of continual education about the matters, so that the quick and dirty becomes something more nuanced and knowledgeable regarding the risks and variables that come with life and planning for FIRE.
Then I think that the "how do I FIRE" question has not been concisely and sufficiently answered here, at least not since I've been around this site. If it was so straightforward, we wouldn't see so many questions about it.
Buckets of money, for example, I'm sure you're familiar with? That's a semi-popular one that helps explain and simplify the part you think people are confused on. People like Brewer probably don't see the point.
I myself prefer firecalc to cfiresim
I myself prefer firecalc to cfiresim
Huh? Why?
Is there something I am missing that cfiresim does better?
Buckets of money, for example, I'm sure you're familiar with? That's a semi-popular one that helps explain and simplify the part you think people are confused on. People like Brewer probably don't see the point.
I don't see the point in it and view as a behaviral finance trap. The shyster who came up with it also got nailed for faking the data/research that supposedly showed buckets as a good/valid withdrawal scheme.
I can see what you're saying. But isn't that the eternal YMMV?
Maybe. But now that I'm thinking it's probably far more common to have these different phases with different drawdown strategies, the single SWR is appearing more and more irrelevant and ill-advised to me. I mean, no doubt some are comfortable with a simple 60/40 asset allocation and 4% withdrawal strategy forever, and that's great for them. But I'm now thinking that may be more of an exception rather than the rule.
When starting people off and someone asks the question "how do I FIRE?" I still think the quick and dirty is appropriate with a caveat of continual education about the matters, so that the quick and dirty becomes something more nuanced and knowledgeable regarding the risks and variables that come with life and planning for FIRE.
Then I think that the "how do I FIRE" question has not been concisely and sufficiently answered here, at least not since I've been around this site. If it was so straightforward, we wouldn't see so many questions about it. I feel like the quick and dirty answer is too little, and a long explanation tailored to each person's circumstances is too much, so maybe there's a Goldilocks answer somewhere in the middle. That's why I'm suggesting that in addition to paying attention to the Trinity study, that the primary answer is to figure out how you will meet your income needs. Once someone does that, it becomes a lot clearer if they're adequately prepared (or even able) to FIRE.
In his blog posts, MMM described the Trinity study and the 4% SWR which is all great -- but then we see he's not really following that model at all. Rather, his income primarily comes from rental property, plus some side work, and now lots of unexpected-at-the-time blog income while his paper assets grow even larger. I don't mean to suggest he pulled a fast one or anything -- he had an excellent strategy for ER, and described it in detail. It is anything but a 4% withdrawal strategy though. His spending has remained constant apparently. I guess he does not foresee any significant change in that, like having any more kids, moving to a lower cost of living area, and so on.
or.....have a pre-determined asset allocation and stick with it. For example, if by the time you retire you have 1M liquid asset and your yearly budget is 35k. Then an asset allocation that would work could be :
3.5% cash
30% Bond
66.5% Stock
if your investments make some money during the year and assets increases to 1.05M, rebalance at the beginning of the year and take out the cash.
if your invesetment loses money during the year and assets drops to 0.95M, you do the reverse. It'd be wise to have a nice cushion (20%?) if you use this method, that's what we are planning to do.
There are many ways to do this, i feel they are all more or less the same.
I think that's a sound approach too, but personally I'm too much of a wuss to have an all-paper portfolio. I think I would not enjoy my freedom if we were going through a 2- or 3-year+ market downturn, and I'm selling stocks at bargain basement prices in order to convert to cash to live off.
An alternative to the 4% SWR (annual expenses x 25) is the "living off the dividends" approach-- which is typically estimated at 3% or 33x. If you want to be ridiculously conservative then you'd use the S&P500 dividend rate, which puts you up into 40x-50x territory.
An alternative to the 4% SWR (annual expenses x 25) is the "living off the dividends" approach-- which is typically estimated at 3% or 33x. If you want to be ridiculously conservative then you'd use the S&P500 dividend rate, which puts you up into 40x-50x territory.
This is a question I've thought about and need to think about more as I get closer to FI--and one that I find challenging to forecast.
What problem does living off of dividends solve?
If you're holding a non-dividend paying stock, and it's price gets cut in half, you're forced to sell at those low prices to pay your living expenses.If you're holding a dividend-paying stock, and the dividend gets cut in half, you're forced to sell some of the stock to make up the difference - and the price when you sell will be low because the dividend just got cut in half.
If you're paid dividends then you don't sell shares at the bottom and at the end of the day the volatility doesn't matter.Functionally, you do. Collecting a dividend is equivalent to selling that amount of the stock, because your holdings in that stock go down by (the market's expected value of) the dividend received. If the stock price is low that day, then your dividend is equivalent to "selling low".
If you're holding a non-dividend paying stock, and it's price gets cut in half, you're forced to sell at those low prices to pay your living expenses.If you're holding a dividend-paying stock, and the dividend gets cut in half, you're forced to sell some of the stock to make up the difference - and the price when you sell will be low because the dividend just got cut in half.QuoteIf you're paid dividends then you don't sell shares at the bottom and at the end of the day the volatility doesn't matter.Functionally, you do. Collecting a dividend is equivalent to selling that amount of the stock, because your holdings in that stock go down by (the market's expected value of) the dividend received. If the stock price is low that day, then your dividend is equivalent to "selling low".
If you sell 4% of a stock every year, it's totally equivalent to the stock paying you a 4% dividend every year (differing tax treatments of dividends and capital gains aside).
If you're holding a non-dividend paying stock, and it's price gets cut in half, you're forced to sell at those low prices to pay your living expenses.If you're holding a dividend-paying stock, and the dividend gets cut in half, you're forced to sell some of the stock to make up the difference - and the price when you sell will be low because the dividend just got cut in half.QuoteIf you're paid dividends then you don't sell shares at the bottom and at the end of the day the volatility doesn't matter.Functionally, you do. Collecting a dividend is equivalent to selling that amount of the stock, because your holdings in that stock go down by (the market's expected value of) the dividend received. If the stock price is low that day, then your dividend is equivalent to "selling low".
If you sell 4% of a stock every year, it's totally equivalent to the stock paying you a 4% dividend every year (differing tax treatments of dividends and capital gains aside).
If you're holding a non-dividend paying stock, and it's price gets cut in half, you're forced to sell at those low prices to pay your living expenses.If you're holding a dividend-paying stock, and the dividend gets cut in half, you're forced to sell some of the stock to make up the difference - and the price when you sell will be low because the dividend just got cut in half.
QuoteIf you're paid dividends then you don't sell shares at the bottom and at the end of the day the volatility doesn't matter.Functionally, you do. Collecting a dividend is equivalent to selling that amount of the stock, because your holdings in that stock go down by (the market's expected value of) the dividend received. If the stock price is low that day, then your dividend is equivalent to "selling low".
If you sell 4% of a stock every year, it's totally equivalent to the stock paying you a 4% dividend every year (differing tax treatments of dividends and capital gains aside).
Take a thought experiment with two different scenarios:You're assuming that after an 80% drop, stock (2) still pays a $0.04 dividend. Obviously, if the assumption is that dividends never go down even in drastic circumstances, then the conclusion will be that dividends are safe income in perpetuity.
(1) You own 1 million shares of $1 stock that doesn't pay dividends. In other words $1 million dollars. You need $40k to survive. The stock takes a drastic 80% drop. Now it's only $0.20 per share. You need $40k to survive, so you are forced to sell 200,000 shares to survive. You only have 800k shares left. Then the stock market recovers to its old mood and the stock is trading for $1 again. You only have $800k, even though the "average return" was 0% and you only took out $40k. This is how portfolios often fail in firecalc simulations, btw.
(2) You own 1 million shares of $1 stock that pays $0.04 in dividends (4%). Again, $1 million. And again, you need $40k to survive. The stock takes a drastic 80% drop. But luckily, since it's paying a dividend of $0.04 per share, you get paid $40k, and you didn't need to sell anything. The market recovers to its old mood, and the stock is trading for $1 again (I know you object to this. See below.) You now have $1 million and you got your $40k living expenses paid for.
Take a thought experiment with two different scenarios:You're assuming that after an 80% drop, stock (2) still pays a $0.04 dividend. Obviously, if the assumption is that dividends never go down even in drastic circumstances, then the conclusion will be that dividends are safe income in perpetuity.
(1) You own 1 million shares of $1 stock that doesn't pay dividends. In other words $1 million dollars. You need $40k to survive. The stock takes a drastic 80% drop. Now it's only $0.20 per share. You need $40k to survive, so you are forced to sell 200,000 shares to survive. You only have 800k shares left. Then the stock market recovers to its old mood and the stock is trading for $1 again. You only have $800k, even though the "average return" was 0% and you only took out $40k. This is how portfolios often fail in firecalc simulations, btw.
(2) You own 1 million shares of $1 stock that pays $0.04 in dividends (4%). Again, $1 million. And again, you need $40k to survive. The stock takes a drastic 80% drop. But luckily, since it's paying a dividend of $0.04 per share, you get paid $40k, and you didn't need to sell anything. The market recovers to its old mood, and the stock is trading for $1 again (I know you object to this. See below.) You now have $1 million and you got your $40k living expenses paid for.
Take a thought experiment with two different scenarios:You're assuming that after an 80% drop, stock (2) still pays a $0.04 dividend. Obviously, if the assumption is that dividends never go down even in drastic circumstances, then the conclusion will be that dividends are safe income in perpetuity.
(1) You own 1 million shares of $1 stock that doesn't pay dividends. In other words $1 million dollars. You need $40k to survive. The stock takes a drastic 80% drop. Now it's only $0.20 per share. You need $40k to survive, so you are forced to sell 200,000 shares to survive. You only have 800k shares left. Then the stock market recovers to its old mood and the stock is trading for $1 again. You only have $800k, even though the "average return" was 0% and you only took out $40k. This is how portfolios often fail in firecalc simulations, btw.
(2) You own 1 million shares of $1 stock that pays $0.04 in dividends (4%). Again, $1 million. And again, you need $40k to survive. The stock takes a drastic 80% drop. But luckily, since it's paying a dividend of $0.04 per share, you get paid $40k, and you didn't need to sell anything. The market recovers to its old mood, and the stock is trading for $1 again (I know you object to this. See below.) You now have $1 million and you got your $40k living expenses paid for.
Fair enough. But even if the dividend gets cut in half (which is worse than what happened to the S&P during the Great Depression), you'd still only need to make up for $20k instead of $40k, which would mean selling 100k shares, which once the market recovered would be worth $900k instead of $800k, which is how much you'd be left with from a non-dividend-paying stock.
I'm not saying that living only off of dividends, or switching your whole portfolio to high-yield dividend paying stocks is the best move, I'm only trying to show that there is a real effect here. Dividends really can get rid of much of the bad effects of stock volatility. Reaching for yield and buying cruddy companies just to get a high dividend, though, will probably lead to sorrow...
I'm only trying to show that there is a real effect here.There only appears to be a real effect when you make the assumption that profits paid out as dividends are more reliable than profits used to buy back stock. A dividend payout reduces your holding in the stock by the amount of the dividend (well, the market's expectation of the dividend, but this is more uncertainty, not less) and credits that much to your cash account. This is the same effect as if you had chosen to sell that amount of stock; in effect, the company is buying some stock back from you at the spot price. If the company just used the same money to buy stock back from the market, then the only difference really is that it's up to you how much you will sell them for cash. Reinvesting the dividend is equivalent to choosing to sell none.
I wonder where Ray Lucia is these days. What an idiot.Then I think that the "how do I FIRE" question has not been concisely and sufficiently answered here, at least not since I've been around this site. If it was so straightforward, we wouldn't see so many questions about it.Buckets of money, for example, I'm sure you're familiar with? That's a semi-popular one that helps explain and simplify the part you think people are confused on. People like Brewer probably don't see the point.
Except that if you were paid a dividend, you own the same fraction of the company that you owned before, but if you sell the stock, you get cash, but own less of the company.I'm only trying to show that there is a real effect here.A dividend payout reduces your holding in the stock by the amount of the dividend (well, the market's expectation of the dividend, but this is more uncertainty, not less) and credits that much to your cash account. This is the same effect as if you had chosen to sell that amount of stock;
in effect, the company is buying some stock back from you at the spot price. If the company just used the same money to buy stock back from the market, then the only difference really is that it's up to you how much you will sell them for cash. Reinvesting the dividend is equivalent to choosing to sell none.
Any "imagine two stocks both crash 80%, let's see what happens" hypotheticals which show a difference, are either miscalculated, or hiding an additional assumption. In this case you assume stock (2) is just about to pay out its dividend and then crashes 80%; the dividend paid will be $0.02, but the market expected the dividend to be $0.04, so the price will drop by $0.04, not by $0.02, and your holdings in the company will be smaller because of that.
Also, you gave stock (2) an extra year to go from $0.96 to $1 again, but left stock (1) at it's immediate recovery price of $1.
QuoteIt's not quite equivalent. E.g., assume you own 100 shares and the rest of the world owns 100 shares, so you own 50%. You sell 4 shares that the company buys. Now you own 96/196 = 49%. Don't know how that affects the rest of the discussion.
in effect, the company is buying some stock back from you at the spot price. If the company just used the same money to buy stock back from the market, then the only difference really is that it's up to you how much you will sell them for cash. Reinvesting the dividend is equivalent to choosing to sell none.
Interesting way to look at it, and I think I agree here. If you sell 4% of your stock, and the company simultaneously buys back 4% of its stock, I think I agree that's equivalent to getting a 4% dividend. In that case, you maintain the same fractional ownership of the company, you have 4% of your holdings in cash now, and the company has 4% of its market cap less in cash. Same as a dividend.
QuoteQuoteIt's not quite equivalent. E.g., assume you own 100 shares and the rest of the world owns 100 shares, so you own 50%. You sell 4 shares that the company buys. Now you own 96/196 = 49%. Don't know how that affects the rest of the discussion.
in effect, the company is buying some stock back from you at the spot price. If the company just used the same money to buy stock back from the market, then the only difference really is that it's up to you how much you will sell them for cash. Reinvesting the dividend is equivalent to choosing to sell none.
Interesting way to look at it, and I think I agree here. If you sell 4% of your stock, and the company simultaneously buys back 4% of its stock, I think I agree that's equivalent to getting a 4% dividend. In that case, you maintain the same fractional ownership of the company, you have 4% of your holdings in cash now, and the company has 4% of its market cap less in cash. Same as a dividend.
The percentage of your holdings that you sell has to equal the percentage of the market cap that the company is repurchasing. And you have to do it at the same average price as them.
Most people saving for ER are not very interested in continuing to work, so they might find the 4% SWR much more compelling.
Most people saving for ER are not very interested in continuing to work, so they might find the 4% SWR much more compelling.
I prefer the 4% SWR based on this point. I'm interested in quitting work not working till I get to some state where I 100% confident the money will never run out.
Most people saving for ER are not very interested in continuing to work, so they might find the 4% SWR much more compelling.
I prefer the 4% SWR based on this point. I'm interested in quitting work not working till I get to some state where I 100% confident the money will never run out.
Doubly true, since there's no such thing as 100% sure. :)
Let me put it more starkly. If you did a simulation of early retirees where you had two different scenarios, one with an average 7% annual price appreciation and the other with 3% price appreciation and 4% dividend yield. And both had the same volatility (say 15% annualized volatility). And both had the same withdrawal rate, the first one would have a higher failure rate. There would be some scenarios where the market tanks and stays down for 10 years and the retiree just sells off all his stock.
QuoteLet me put it more starkly. If you did a simulation of early retirees where you had two different scenarios, one with an average 7% annual price appreciation and the other with 3% price appreciation and 4% dividend yield. And both had the same volatility (say 15% annualized volatility). And both had the same withdrawal rate, the first one would have a higher failure rate. There would be some scenarios where the market tanks and stays down for 10 years and the retiree just sells off all his stock.
If they have the same return, they will have the same failure rate if you take the same money out (there is a bit of hand waving as dividends tend to trail stock prices). That stock paying out 2% in divs is either going to have share price that is dropping 2% more than the 0 div stock OR it is is outperforming.
As I said, obviously if you assume that dividends never go down then the conclusion will be that dividends are a secure income stream. That's a tautology, but a silly assumption. You might as well assume that stock (1) always grows at least 4% per year, it's the same assumption.
I don't have the data, but I'm pretty sure I know what we'll see. If I have time I can do a similar test. I know XLU (utilities dividend paying ETF) data goes back to 1999. We could do the test on the S&P, which paid pathetic dividends back then vs XLU. I haven't done the test, but again I'm pretty sure I know the outcome.
So you don't have actual evidence to back you up, but you're nonetheless sure what the outcome will be?
Having said that, I will probably go for a bit of a hybrid approach, as I will likely need a somewhat stable income source to bridge for 10 years or so until taking pension. Over short periods starting with a partial stash, if you will, some portion in dividend-solid companies would help smooth the bumps. Over a small period, the risk of their demise is quite small. Or, is even that kind of thinking not correct?That hybrid approach is also known as "diversification".
I'm actually not at all sure I would win that bet! It's possible that dividend-paying stocks (A) are more secure than stocks from businesses which use their profits to buy back shares (B). My point is that there's no mathematical reason for them to be different, and that the arguments presented so far don't establish a difference. However, an invalid argument does not an incorrect conclusion make - for example, perhaps reliably profitable businesses have some other reason to prefer paying out dividends than buying back stock?
If I have time I can do a similar test. I know XLU (utilities dividend paying ETF) data goes back to 1999. We could do the test on the S&P, which paid pathetic dividends back then vs XLU. I haven't done the test, but again I'm pretty sure I know the outcome.
Date CPI XLU Price XLU Div XLU Div Rate Beginning Balance Capital Gain Dividend Withdrawal Ending Balance
1/4/1999 164.30 30.23 0.56 1.85% 1,000,000 -85,676 18,525 40,000 892,848
1/3/2000 168.80 27.64 0.964 3.49% 892,848 118,874 31,140 41,096 1,001,767
1/2/2001 175.10 31.32 0.667 2.13% 1,001,767 -137,535 21,334 42,629 842,936
1/2/2002 177.10 27.02 0.92 3.40% 842,936 -259,557 28,701 43,116 568,964
1/2/2003 181.70 18.7 0.797 4.26% 568,964 155,476 24,249 44,236 704,454
1/2/2004 185.20 23.81 0.874 3.67% 704,454 136,985 25,859 45,088 822,209
1/3/2005 190.70 28.44 1.01 3.55% 822,209 107,257 29,199 46,427 912,238
1/3/2006 198.30 32.15 0.783 2.44% 912,238 125,983 22,217 48,278 1,012,161
1/3/2007 202.416 36.59 1.095 2.99% 1,012,161 72,752 30,290 49,280 1,065,923
1/2/2008 211.08 39.22 1.235 3.15% 1,065,923 -278,303 33,565 51,389 769,796
1/2/2009 211.143 28.98 1.273 4.39% 769,796 14,610 33,815 51,404 766,816
1/4/2010 216.687 29.53 1.004 3.40% 766,816 56,868 26,071 52,754 797,001
1/4/2011 220.223 31.72 1.368 4.31% 797,001 74,373 34,373 53,615 852,133
1/3/2012 226.665 34.68 1.123 3.24% 852,133 46,685 27,594 55,183 871,228
1/2/2013 230.28 36.58 1.465 4.00% 871,228 52,398 34,892 56,063 902,455
Date CPI S&P Price S&P Div S&P Div Rate Beginning Balance Capital Gain Dividend Withdrawal Ending Balance
1/4/1999 164.30 1248.77 16.28 1.3% 1000000 141,595 13,039 40,000 1,114,635
1/3/2000 168.80 1425.59 16.57 1.2% 1,114,635 -70,338 12,958 41,096 1,016,160
1/2/2001 175.10 1335.63 16.17 1.2% 1,016,160 -148,677 12,302 42,629 837,156
1/2/2002 177.10 1140.21 15.74 1.4% 837,156 -179,419 11,554 43,116 626,174
1/2/2003 181.70 895.84 16.12 1.8% 626,174 165,435 11,268 44,236 758,640
1/2/2004 185.20 1132.52 17.60 1.6% 758,640 32,750 11,790 45,088 758,091
1/3/2005 190.70 1181.41 19.70 1.7% 758,091 62,449 12,643 46,427 786,756
1/3/2006 198.30 1278.73 22.41 1.8% 786,756 89,478 13,788 48,278 841,744
1/3/2007 202.416 1424.16 25.08 1.8% 841,744 -26,833 14,825 49,280 780,457
1/2/2008 211.08 1378.76 27.92 2.0% 780,457 -290,489 15,804 51,389 454,383
1/2/2009 211.143 865.58 28.01 3.2% 454,383 135,436 14,704 51,404 553,118
1/4/2010 216.687 1123.58 22.24 2.0% 553,118 78,293 10,950 52,754 589,607
1/4/2011 220.223 1282.62 22.96 1.8% 589,607 8,256 10,556 53,615 554,804
1/3/2012 226.665 1300.58 26.74 2.1% 554,804 76,708 11,405 55,183 587,734
1/2/2013 230.28 1480.4 31.54 2.1% 587,734 135,762 12,520 56,063 679,953
...
I looked at the price and dividends of XLU (a high dividend paying ETF) each year since 1999 (the first full year I have data for).
The starting 2013 value shows ~35, similar to your table, but the starting 1999 value appears closer to 30 instead of the 17.87 in your table. Is there more than one XLU or am I missing something...?
...
I looked at the price and dividends of XLU (a high dividend paying ETF) each year since 1999 (the first full year I have data for).
Eudo, nice work and fairly presented with appropriate disclaimers.
Went looking for more info on XLU (don't have that currently). Found a few links with charts that look similar to this one:
(http://s28.postimg.org/6rcn9mom5/screenshot_3.png) (http://postimage.org/)
The starting 2013 value shows ~35, similar to your table, but the starting 1999 value appears closer to 30 instead of the 17.87 in your table. Is there more than one XLU or am I missing something...?
XLU was at 30.02 . The 17.87 is an adjusted price that accounts for dividends and splits. I am guessing XLU never split and that dividends were basically double counted:). Since dec 1998 (inception), XLU has returned 5.83% with divs reinvested. Your money will not last 30 years with that type of return. Of course the s&p 500 returned 4.7% so your not living large off that either:)
The price of XLU was probably more stable than the price of the S&P, but that's not the main reason this worked. Look at the "XLU Div" column and compare with the "Withdrawal" column. His dividends were a large part of his withdrawals. When your dividends are higher than your withdrawals, the price of the stock you own doesn't matter.This is a fundamental misunderstanding. The price of a stock reflects how reliably profitable the underlying business is, and the dividends are your share of the profits. The price of the stock obviously does matter, because a low price tends to mean that the business isn't doing so well, and that means it can't pay out its usual dividends, so to make up the difference you are going to have to sell some of your stock, and when you do so is going to be when the stock price is low.
You're never selling stock, so what do you care what the price is?As I said twice already, if you (ridiculously) assume "you're never selling stock", you are assuming that dividends are a reliable source of income, which is exactly what you are trying to prove in the first place.
The price of XLU was probably more stable than the price of the S&P, but that's not the main reason this worked. Look at the "XLU Div" column and compare with the "Withdrawal" column. His dividends were a large part of his withdrawals. When your dividends are higher than your withdrawals, the price of the stock you own doesn't matter.This is a fundamental misunderstanding. The price of a stock reflects how reliably profitable the underlying business is, and the dividends are your share of the profits. The price of the stock obviously does matter, because a low price tends to mean that the business isn't doing so well, and that means it can't pay out its usual dividends, so to make up the difference you are going to have to sell some of your stock, and when you do so is going to be when the stock price is low.
XLU was at 30.02 . The 17.87 is an adjusted price that accounts for dividends and splits. I am guessing XLU never split and that dividends were basically double counted:). Since dec 1998 (inception), XLU has returned 5.83% with divs reinvested. Your money will not last 30 years with that type of return. Of course the s&p 500 returned 4.7% so your not living large off that either:)
Yes, that's exactly what happened. (It's been corrected in the original post.) And my conclusions exactly. (XLU out-performed, but neither retiree would be sleeping well at night these days.)
Except for the fact that during a market crash, a solid business that is doing fine canand will have its stock price decrease simply due to the panic in the markets. Big banks failing, for example, can cause unrelated stock price drops. This doesn't mean that the unrelated business is not doing so well (aside from a "well the economy as a whole is worse, so it will affect this company as well ... maybe, somewhat, yes).Yes, you're correct that I'm assuming efficient markets. I readily admit that there are various differences between dividend-paying stocks and non-dividend-paying stocks.
Yes, what I'm saying is during those (irrational) times, you may be smarter than the market. Not able to time it, per say, but the market could be undervaluing a business that has no need to cut its dividends, or not by as much as the share price would indicate it should.
In other words, the share price reflects how profitable the business is, but it doesn't always accurately reflect that.
FWIW I don't use the 4% rule as my retirement calculator, although I do think it is a revelation.
I don't because:
1. I don't feel secure relying on the market for all time periods and needs. I'm not a statistician/mathematician/engineer. I do have experience with investments that did not perform well and I did need to cash out some of them at a loss. I know that this was my lack of knowledge at the time, but I still am wary of relying on an index fund and I'm not naturally bent in a way that I can relax on the basis of probabilities and past performance.
2. I won't have the same financial needs each year due to paying for kids' education or receiving a pension.
3. I believe you need to save less if you use leverage plus tax planning to create an income stream through the use of rental properties and business dividends or eventual sale (yes, it is a bit more work). Both rentals and businesses are responsive to my strategic planning/efforts/creative thinking - unlike an index fund.
4. I want my assets to continue to grow so that I can leave a charitable legacy or provide for the unexpected like a grandchild with a disability.
There used to be some really cool real estate empire blogs in the mid 2000 as people assembled empires. They pretty much have all gone silent when those 3 million in gains disappeared over the next 24 months and those cash flow positive properties turned bad. Investing in the peaks of anything is always bad.
There used to be some really cool real estate empire blogs in the mid 2000 as people assembled empires. They pretty much have all gone silent when those 3 million in gains disappeared over the next 24 months and those cash flow positive properties turned bad. Investing in the peaks of anything is always bad.
I'd wager the vast majority of them were investing for appreciation, not cash flow, and were massively overleveraged.
If you've done it right, a recession and corresponding 20% drop in income and increase in vacancies will hurt, sure, but won't make you cash flow negative or cause you to lose any properties.
Do you have any links? I'd love to read some, whether to laugh or learn, even if they haven't had new content for years.
I will have to go through biggerpockets and see if I can dredge them up. The general pattern they were in hot places like Vegas. They would buy and hold a bunch of units and would constantly be refinancing out (units were still cash flow positive in general but often times the margin was reduced). The the crash hit and vacancies doubled (or worse the tenant stopped paying but had to be evicted) and rents dropped and then went from cash flow positive to negative. And of course that 2 million dollars in real estate was now worth 1 million but they owed the bank 1.5 million. Mortgage payments stop getting made and the blogs go dead.
It is definitely easy to see the mistakes now (investing in bubble locations) and some even at the time (they were far to aggressive with leverage). But how much of that is like saying don't invest in tech stocks in 1999 and you should be 100% in stocks?:)
I'd wager the vast majority of them were investing for appreciation, not cash flow, and were massively overleveraged.
If you've done it right, a recession and corresponding 20% drop in income and increase in vacancies will hurt, sure, but won't make you cash flow negative or cause you to lose any properties.
This is a fundamental misunderstanding. The price of a stock reflects how reliably profitable the underlying business is, and the dividends are your share of the profits. The price of the stock obviously does matter, because a low price tends to mean that the business isn't doing so well, and that means it can't pay out its usual dividends, so to make up the difference you are going to have to sell some of your stock, and when you do so is going to be when the stock price is low.
(a) If the dividend of a stock is not cut, and you are living on less than the size of the dividend, then it is mathematically impossible for your portfolio to fail, no matter what price the stock trades at?This is a bogus comparison, because you're assuming total stability for the first stock, but you have no similar assumption for the second stock. The analogous assumption for (b) would be: the company has totally stable profits, it regularly spends the same chunk of its profits buying back shares, and your withdrawal is always less than your proportion of those profits (an analogous assumption), then it would likewise be mathematically impossible for your portfolio to fail.
(b) If you are living on the same amount as (a) but own non-dividend paying stocks it is possible for your portfolio to fail if the stock price falls low enough for long enough?
(a) If the dividend of a stock is not cut, and you are living on less than the size of the dividend, then it is mathematically impossible for your portfolio to fail, no matter what price the stock trades at?This is a bogus comparison, because you're assuming total stability for the first stock, but you have no similar assumption for the second stock. The analogous assumption for (b) would be: the company has totally stable profits, it regularly spends the same chunk of its profits buying back shares, and your withdrawal is always less than your proportion of those profits (an analogous assumption), then it would likewise be mathematically impossible for your portfolio to fail.
(b) If you are living on the same amount as (a) but own non-dividend paying stocks it is possible for your portfolio to fail if the stock price falls low enough for long enough?
Also, I'd encourage you to read, the link I posted above about how company management times stock buy back decisions very poorly. This negatively affects stock value compared to dividends. It wouldn't if companies had constant buy back policies like most dividend-paying companies do with dividends, but very few companies have such a steady buyback policy. And the ones that do tend to have the best results - that's also shown in that report.
Also, I'd encourage you to read, the link I posted above about how company management times stock buy back decisions very poorly. This negatively affects stock value compared to dividends. It wouldn't if companies had constant buy back policies like most dividend-paying companies do with dividends, but very few companies have such a steady buyback policy. And the ones that do tend to have the best results - that's also shown in that report.
By the way, I don't know about anyone else, but the link was broken for me (required a Credit Suisse login)
That would explain why no one addressed it. Weird, because I have no connection or login for Credit Suisse. Let's try: http://www.google.com/url?sa=t&rct=j&q=credit%20suisse%20adding%20value%20or%20destroying%20value%3F&source=web&cd=1&ved=0CCgQFjAA&url=https%3A%2F%2Fdoc.research-and-analytics.csfb.com%2FdocView%3Fsourceid%3Dem%26document_id%3Dx454556%26serialid%3De45HdNbTyfzxqJiuVkQbC5cPZZDE1SdAOSK1XWRCbxs%3D&ei=iuJFU4S3KISdyQHvvoHwAQ&usg=AFQjCNFCUHmca-Qnzwc9RH5K1jP42Cb_eQ&bvm=bv.64507335,d.aWc
So I guess my main question is, is anyone aware of resources for how dividends effect portfolio success rates? Or would I need to build a spreadsheet for that myself (which may or may not be beyond my ability)?I believe the Trinity et al. studies used generic "stock" and "bond" returns. The stock returns would have been part price appreciation and part dividend reinvestment.
A lot of the back-and-forth in this thread is based on what one believes about dividends: if you believe that a company never cuts its dividend then it will be "safer" than a company that never pays dividends (all other things being equal, which of course they never are).
So I guess my main question is, is anyone aware of resources for how dividends effect portfolio success rates? Or would I need to build a spreadsheet for that myself (which may or may not be beyond my ability)?
Tell me, why do you think company A would go up more than company B, just because it distributes dividends?
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Dividend payouts may be more volatile than you realize. In the US, say you owned enough shares of VTINX (S&P 500 index fund) in 2007 to produce your necessary income of $1000 per month. Here's how that income would have changed over the next 6 years:
2007: $1000
2008: $1008
2009: $847
2010: $791
2011: $903
2012: $1088
2013: $1189
"$791" sure doesn't equal "about $1000", at least not in my mind.
In order to have generated that $1000/month income from dividends in 2007, you would have needed a stash of ~$630,000.
In contrast, if you had started with only $300,000 and simply withdrawn/sold 4% each year, that would have been sufficient to generate a much-more-steady $1000/month income for the entire time. And while your net worth would have certainly been volatile over that period, your balance at the end of 2013 would have been $341,846, or 14% greater than when you started.
Tell me, why do you think company A would go up more than company B, just because it distributes dividends?
I don't, that's why I specified I'm not talking about growing the stash, but spending it. I couldn't care less about dividends while I'm still working. My concern is around a more stable stream of income once I FIRE. I know there's no free lunch, dividend investing is way more work ;-) I'm just trying to figure out if it's worth it.
So your concern about "spending" the stache works out the same as someone growing it: either way you're cutting into the company's growth, it's just are you cutting into it by selling shares, or are they cutting into it by giving you the dividend. It nets out the same.
I guess you could make the argument that paying out the dividend reduced the ability for the company to recover. But for that we'd have to assume that stocks always drop for a rational reason and then we end up in an efficient market debate :-)
Either way the best thing to do in down markets is be flexible.
Owning dividend stocks that may well underperform long term (due to a flight to dividend stocks causing company A to be OVER valued compared to company B) doesn't make sense, to me. It's a type of trying to outguess the market, which is a fool's game. Thinking your dividend stocks will perform better just because they output dividends is irrational. And if you accept that they won't perform better, why are you investing in them, given the potential downsides?
Either way the best thing to do in down markets is be flexible.
Owning dividend stocks that may well underperform long term (due to a flight to dividend stocks causing company A to be OVER valued compared to company B) doesn't make sense, to me. It's a type of trying to outguess the market, which is a fool's game. Thinking your dividend stocks will perform better just because they output dividends is irrational. And if you accept that they won't perform better, why are you investing in them, given the potential downsides?
I don't think they'll under or over perform with respect to stock price. What I keep circling back to is reverse dollar cost averaging of a standard 4% (or whatever) withdrawal portfolio when the market is declining. If dividend payouts are more stable than stock prices (has this been shown? I feel like it has but I don't have any references), then does that help your portfolio ride out storms? If so does it come at a detriment during good times?
Sorry for beating a dead horse, just trying to fully understand and hash it out.
Again, there's no such thing as a free lunch. :)
Again, there's no such thing as a free lunch. :)
Eh, I could respond to that by saying of course not, dividend growth investing is more work than just buying an index fund and withdrawing 4%, which is why you get better results (with regard to portfolio success rates over multiple 30-year terms). Not saying I believe that, I'm just trying to decide if it's the case or not.