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In running some projections, I estimated that In 30 years I will only have saved about $400,000 - this number is after-tax future valued accounting for inflation ( I used 3.5%). This will bring me to age 70. Longevity runs in the family so assume I live another 25 or 30 years after that. Can I still live indoors on this amount? I can provide other specifics if needed. Thanks in advance for your time and patience.
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Unless your preferred method of savings involves your mattress and coffee cans buried in the back yard you'll want to factor in anticipated return on investment as well. Remember, you're not just saving that money, you're (presumably) also investing it as well.
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In running some projections, I estimated that In 30 years I will only have saved about $400,000 - this number is after-tax future valued accounting for inflation ( I used 3.5%). This will bring me to age 70. Longevity runs in the family so assume I live another 25 or 30 years after that. Can I still live indoors on this amount? I can provide other specifics if needed. Thanks in advance for your time and patience.

Unlike the other responder I'll try to address your question. I hope he's right that you didn't include appreciation of your savings.

The usual starting draw assumed is 4% per year. This allows the principal to grow initially but it will decline later as your annual need increases.
Starting at $16K per year isn't very much to be retiring on now, using your 3.5% per year inflation makes $16K of 2037 dollars look like less than $6K now.

I think you need a better plan.
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You should do OK.

With your mortgage paid off, Medicare benefits and social security income, you will have a reasonable foundation.

Add $18K to $20K income each year and you should be comfortable.

A well designed dividend based strategy will allow you to withdraw 5% of your original balance (plus inflation) indefinitely. The downside risk, worst case, is that it falls to 4% for a few years. A guaranteed alternative is to use an all-TIPS portfolio. It will allow you to withdraw about $17K for 30 years before running out of money.

Have fun.

John Walter Russell
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A well designed dividend based strategy will allow you to withdraw 5% of your original balance (plus inflation) indefinitely.

Virtually all studies worth the paper (or bandwidth) they consume state that this number should be 4% (or less) to guarantee a 30-year withdrawal period. If you start at 5%, worst case is not dropping to 4% for a few years; rather, it is dropping to $0 in your account to live off of for the remainder of your life.

Acme
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...I can provide other specifics if needed....

Please do.

I don’t have a reference handy but some of the things that I have read concluded that history of family longevity is only a minor factor in predicting a of a persons life expectancy.

For what it is worth, when I try to do rough long term calculations, I factor out inflation by subtracting out inflation from expected return, for example if I think that I will get 10.7 percent returns while there is 3.5 percent inflation, I just assume a 7.2(10.7-3.5) return to keep everything in current dollars. This is rough but workable.

Greg
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If you start at 5%, worst case is not dropping to 4% for a few years; rather, it is dropping to $0 in your account to live off of for the remainder of your life.

Not with a properly designed dividend based strategy. They key is to avoid selling shares--which was the critical flaw in the traditional studies.

Combine a high yield portfolio (such as preferred shares) with a lower yielding portfolio that grows its dividend amount rapidly, manage cash flow carefully, and you can get to 5% safely. But again, never sell any shares.

Have fun and Merry Christmas.

John Walter Russell
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Not with a properly designed dividend based strategy.

This rings of the "build a better mouse trap" method of investing. The problem with this method is eventually it bites you in places where the sun doesn't shine.

One of the best posters in the history of the Fool (intercst) performed many studies that show the safe withdrawal rate is 4%. I have read through the studies and believe in the work. No offense, but your stating that a 5% withdrawal rate can be done safely -- with the caveat that you might actually have to cut your standard of living by 20% for a while -- does little to convince me that the past studies are incorrect.



But again, never sell any shares.

So when you have 2 years where the portfolio value drops by 15% per year and inflation averages 12% per year, how do you achieve this requirement? In just 2 years, your withdrawal requirement has risen from 5% of your portfolio to more than 8.6%. A third year like this means your next year will require withdrawing over 11% of your portfolio.

Also, most people are not really capable of reducing their lifestyle 20% after a couple of years in retirement.

Acme
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Here is a simple baseline portfolio. It gets you into the ballpark. There are many ways to do better.

I brought up my Automatic Allocator ( a spreadsheet) and put in up to date numbers. [Available for free from my Yahoo Briefcase, username jwr19452000.]

I used DVY as my dividend investment. I assigned it 3.36% yield and 6% per year dividend growth. I allocated 70% of my portfolio to it.

I used 1.8% TIPS. I assigned 30% of my portfolio to it.

I found that I could withdraw 4.8% of my original balance (plus 3.0% per year inflation) indefinitely.

I found that I could withdraw 4.5% of my original balance (plus 3.5% per year inflation) indefinitely.

Regarding: So when you have 2 years where the portfolio value drops by 15% per year and inflation averages 12% per year

Think through what I am talking about. The portfolio value is irrelevant. The inflation rate is relevant.

Have fun.

John Walter Russell

NOTE: You can read the unedited version of my Dividend Baseline article at
http://www.early-retirement-planning-insights.com/dividend-baseline.html
I do not sell anything. I do not advertise anything.
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Think through what I am talking about. The portfolio value is irrelevant. The inflation rate is relevant.

Wrong. BOTH are relevant. If your portfolio drops to a point where you cannot withdraw your annual expenses, you lose. Game over. No re-dos.



I found that I could withdraw 4.8% of my original balance (plus 3.0% per year inflation) indefinitely.

I found that I could withdraw 4.5% of my original balance (plus 3.5% per year inflation) indefinitely.


This does nothing to address my comment about what happens if inflation spikes up to 12% per year for a few years. You say inflation rate is relevant, but you did not address my concerns about high inflation periods.

If your dividends are increasing by 6% per year and inflation is increasing by 12% per year, eventually you will have to start selling your shares to keep your lifestyle.

Also, you originally stated that you could safely live on 5%. Now you have dropped that to no more than 4.8%...and that uses an inflation rate assumption I would not be comfortable with personally.

Obviously, you can live forever on your money IF you never have to sell shares to fund your living expenses. But when we hit a nasty patch, you cannot guarantee that this will be possible without reducing your lifestyle. Since lifestyle reductions can be exceedingly difficult at times, I don't see this as a reasonable option for planning purposes.

I looked at your site, but I did not see anything that addresses this issue. While you have a lot of good looking work on your site, there are some omissions and logic-defying results that make me think you have a ways to go yet.

Happy Holidays.

Acme
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There is always the issue of getting decent inputs to a model.

Taken At Face Value (Edited)

I have taken the Morningstar Dividend Investor newsletter at face value. I have assumed that its portfolios meet their goals. I have put its numbers into the Income Stream Allocator.

[NOTE: The Motley Fool Income portfolios include only stocks. This limits Investment B choices.]

Income and Growth Estimates

I assign Stock A an initial dividend yield of 3.5% per year and a dividend growth rate of 8% per year. I assign Investment B an initial dividend yield of 6.1% and a growth rate of 2%.

I assumed 3% inflation and 2% (real) interest for the TIPS.

Results

I started without making any deposits or withdrawals from the TIPS. I varied Stock A and Investment B allocations. I found that the best allocation [using an increment of 10%] is 20% Stock A and 80% Investment B.

Even without making any cash flow adjustments, the minimum withdrawal rate was 5.53% of the original balance (plus adjustments to match inflation).

The withdrawal rate grew gradually after Year 8. It exceeded 6.0% (plus inflation) in Year 25. It was 7.7% of the original balance (plus inflation) at Year 40.

The income stream was steady enough to make the cash management (TIPS) account unnecessary.

Failure Mechanism

Because there are no sales, the failure mechanism would be a drop in the purchasing power of dividends. The worse case for the S&P500 index after 1950 (using January values) was a drop from $16.606 in 1967 to $12.567 in 1976. This was a drop to 75.7% of the original buying power. It took until 1990 to gain a full recovery.


Conclusions

A retiree should focus on the higher yielding Investment B (Harvest) portfolio.

Taken at face value, the Morningstar Dividend Investor portfolios allow you to withdraw at least 5.54% of the original balance (plus inflation) on a continuing basis.

Applying the worst case dividend cut of the S&P500 index since 1950, the buying power could fall to a 4.2%. Treat this as an absolute worst case outcome.

Recommendation

I recommend that the cautious plan on a withdrawal rate of 4.6% to 5.1% (plus inflation). They can reinvest any excess to guard against a widespread reduction of dividends.

Have fun.

John Walter Russell
March 25, 2007
Full article: Taken At Face Value includes a sensitivity study.
http://www.early-retirement-planning-insights.com/taken-at-face-value.html
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I looked at Mr Russell's "TIPS Income Stream Allocator B" spreadsheet.
There are several flaws which make it wrong but there's one doozy which makes the whole thing completely and utterly absurd.

The dividend rate of stock A (used used DIVY) is initially 3.36%, the current DIVY dividend. The 6% dividend growth he mentions is applied to that 3.36%. That is, his 'sheet says that in year 2 that the dividend rate is 3.36* 1.06, year 3 3.36 *1.06 * 1.06 etc!!!

This is utter nonsense as is every other result in this 'sheet.

The average growth of S&P dividends in dollars has grown slightly over 5% over an extended period. Of course this has happened while the aggregate stock value has increased much more than that, the dividend rate has been declining!!! NOT Increasing!!!
http://politicalcalculations.blogspot.com/2007/12/history-of-s-500-dividends-in-pictures.html

Column T of the 'sheet is the new dividend rate which shows 19.298% in the 30th year (row 59). This 'sheet purports that DIVY's dividend rate will magically stay at exactly the 2007 rate of 3.36% for thirty years and then start to increase at 6% per year.

Maybe Mr Russell meant to show that 3.36% dividend rate growing right now, in which case the average dividend rate will be 19.298% in 2037.
The 30th year of the 'sheet would need to show another factor of almost 6:1 increase in the dividend rate so in 2067 the dividend rate would then be about 115%. Sweeee-eeet!!!! (if it wasn't utter garbage)

Of course, the absolute 5.38% growth of the dollar value of S&P dividends is across all the S&P rather than the dividend payers in DIVY.
This makes it all the more absurd to use the 5.38% with DIVY.

Thank-you for sharing your 'sheet, Mr Russell.
I appreciate that you did put up your 'sheet but that's what I think of it right now.
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The average growth of S&P dividends in dollars has grown slightly over 5% over an extended period. Of course this has happened while the aggregate stock value has increased much more than that, the dividend rate has been declining!!! NOT Increasing!!!

The dividend AMOUNT has been increasing.

The dividend RATE has fallen.

If you neither purchase nor sell any shares, only the dividend AMOUNT is relevant.

[The Exchange Traded Fund DVY has been growing at 6% per year.]

Have fun and Have a Merry Christmas.

John Walter Russell
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>> The dividend AMOUNT has been increasing.

The dividend RATE has fallen.

If you neither purchase nor sell any shares, only the dividend AMOUNT is relevant.
<<

Assuming you intend to hold every share for life and just rely on the dividends for current income, partially true.

But I would suggest that falling *rates* in the face of increasing *amounts* points to potential overvaluation. This is a trend that can't last forever...can it?

Plus, maybe people will pay more for dividends when taxes on them are capped at 15%. Repeal the special tax rate and tax it as ordinary income, and maybe the amount the people will pay for the same amount of dividends will fall quite a bit...

#29
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I'm 40. On SSDI which I use to pay all my yearly expenses without touching my investment savings of $116,000. I own no property, live with family. (I suppose someday I will need to own something.) My apologies. I was trying to keep this simple so as not to take up too much of people's time, since I had already created another thread topic which many came to answer about my specific investments and expected rates of return. As advised in the other thread, I've lowered my expectations and here they are.

SYSTEMATIC INVESTMENT CALCULATOR, WITH TAX AND INFLATION CONSIDERATION
1. Enter the initial investment: $116000
2. Enter the annual deposit amount: $1000
3. Enter the assumed average annual rate of return: 8%
4. Enter the number of years: 30 yrs.
5. Enter your combined state and federal tax rate: 10% (?)
6. Enter the expected average annual inflation rate: 3.5% (hard-nosed economists use this %, so I will too.)

Gross future value: $1,389,000 approx.
After-tax future value: $1,110,000 approx.
After-tax future value accounting for inflation: $395,000 approx.

I have no idea what my tax rate will be so I took a wild guess with 10%. Right now I have no tax liability. About $42K of this investment savings is in a ROTH.

So if I'm lucky enough to end up with $400K in 30 years, will this cover basic needs? Literally worrying sick about this issue is certainly not helping me heal.

If you need me to add other specifics, please let me know which ones. Thanks so much.
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I have no idea what my tax rate will be so I took a wild guess with 10%. Right now I have no tax liability. About $42K of this investment savings is in a ROTH.

You will pay no taxes on your Roth money per current tax law. If you want to stick with that calculator, run it separately for your Roth money with 0% tax rate. This will increase your total since you will keep all of the appreciated Roth.


Gross future value: $1,389,000 approx.
After-tax future value: $1,110,000 approx.


From these numbers it looks like the calculator is modeling the money as being in a taxable account where all gains are taxed each year. This isn't a bad assumption for it to make but it would give too low a result if any part of the rest of your money were tax sheltered (401k / pre tax IRA etc) or if tax efficient investments (index funds for example) were selected. Either of these cases would reduce the tax loss to your tax rate instead of over double that shown by these numbers.

If any of your current funds are in pre-tax (IRA etc) accounts you may be able to benefit by converting them to Roth. Whatever amount you convert in a given year adds to your taxable income so you'd limit this amount to stay in your current zero percent tax bracket.


So if I'm lucky enough to end up with $400K in 30 years, will this cover basic needs?

Remember that the $400K is 2007 dollars. Drawing about 4% as a conservative number gives $16K as a equivalent 2007 income. Compare this plus whatever SS gives you to the 2007 poverty level for a single person living alone $10210 per http://aspe.hhs.gov/poverty/07poverty.shtml
You will surely qualify for subsidized housing etc so I would expect you will have a substantial margin more than basic needs.


Literally worrying sick about this issue is certainly not helping me heal.

Please don't worry like that. I know it's easier said than done but
1. you can only do so much about it
2. your obvious clarity would make it a particularly grievous waste for you to suffer considering #1

Just try to focus on doing the best you can with what you've got now.
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I assumed 3% inflation and 2% (real) interest for the TIPS.

This is your problem right here. You cannot assume a fixed inflation rate this low. Inflation occasionally spikes dramatically higher; failing to account for this will give you a false sense of security.

Since 1970, the arithmetic mean inflation rate has been 4.72%. This is over 50% higher than the rate you assumed meaning after a few years, your projections indicate a withdrawal rate that has a substantially lower standard of living than you started with.

Rather than assume a fixed rate of inflation, you need to work with more realistic data. Using your low fixed inflation rate will explain a significant portion of your higher "safe" withdrawal rate.

For a withdrawal rate to truly be safe, it needs to work in all environments, including a period where inflation is high dividend growth is low.



Failure Mechanism

Because there are no sales, the failure mechanism would be a drop in the purchasing power of dividends. The worse case for the S&P500 index after 1950 (using January values) was a drop from $16.606 in 1967 to $12.567 in 1976. This was a drop to 75.7% of the original buying power. It took until 1990 to gain a full recovery.


I'm sorry, but this is unacceptable to me. How many people in retirement are capable of reducing their buying power by 25%? The purpose of setting up a retirement portfolio and increasing your withdrawal rate with inflation is to maintain a constant standard of living throughout retirement. True safe withdrawal rates will maintain the same standard of living throughout AT LEAST the active portion of retirement.

Acme
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I think that you are in excellent shape.

Evaluate retirement needs based on expenses. They are amazing low, especially after Medicare kicks in.

You can do OK with $20K per year in most parts of this nation. You will do exceptionally well with $30K to $40K per year (pre-tax)--in terms of today's buying power. You will have housing expenses, but you have will have enough income to handle them.

For the moment, I would emphasize preserving your capital. [This might translate to a stock allocation of only 20% to 30%.] History suggests and I strongly believe that multiples (price to earnings, price to dividends, price to book, price to sales) will contract dramatically the next time that we have a recession. The payoff from waiting will be worth it--according to my analysis. If not, the penalty of owning TIPS in a tax sheltered account will be minimal.

Have fun.

John Walter Russell
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I think I figured the drawdown wrong, didn't I? I was using 4% of $400,000 which is the inflation adjusted amount, rather than the physical amount of $1,100,000 - shouldn't I use this after-tax future value instead, therefore 4% of that is $44,000? So $44,000 is the annual drawdown plus $27000 in Social Security in 2037 (I get about $15K in 2008, so I estimated a 2% COLA every year until 2037.) That would make a total income of about $71000. Will that be a decent amount on which to live in 30 years?
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No, you did it right. It is best to think in terms of today's dollars.

Have fun.

John Walter Russell
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I have just posted my direct response to sheople2's original question.

Suppose that you are 40 and you have $100000. You have limited income. You are worried. Will you have enough at age 70? Will you be out on the street?

You will be OK. Use commonsense and pay attention to dividends.

http://www.early-retirement-planning-insights.com/I-am-40-and-worried.html

[NOTE: I do not sell anything. I do not advertise at my site.]

Have fun.

John Walter Russell
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Also, most people are not really capable of reducing their lifestyle 20% after a couple of years in retirement.

But that's mainly because they didn't start with enough money.

Figure with a portfolio of $2,000,000. 5% gives you $100K per year. 4% gives you "merely" $80K.

I would submit that anybody who had the discipline to get $2M is not going to be living a $99,000 per year lifestyle, so an occasional reduction from $100K to $80K is perfectly feasible. Actually, their base lifestyle will probably be more like $65K-$75K, with $35K-$25K budgeted for luxury vacations to Monaco when/if the whim arises.
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Figure with a portfolio of $2,000,000. 5% gives you $100K per year. 4% gives you "merely" $80K.

I would submit that anybody who had the discipline to get $2M is not going to be living a $99,000 per year lifestyle, so an occasional reduction from $100K to $80K is perfectly feasible. Actually, their base lifestyle will probably be more like $65K-$75K, with $35K-$25K budgeted for luxury vacations to Monaco when/if the whim arises.

Unless you are fixated on early retirement, you will be getting social security, which is a nice supplement. Pension? Another supplement. And, don't forget, during retirement, the money allocated for savings is no longer a factor. House is paid off? No more house payments. So going from a $100,000 lifestyle to $80,000 or less doesn't seem far fetched. If it is, postpone retirement until you don't have to restrict your lifestyle more than you want.

cliff
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I would submit that anybody who had the discipline to get $2M is not going to be living a $99,000 per year lifestyle, so an occasional reduction from $100K to $80K is perfectly feasible. Actually, their base lifestyle will probably be more like $65K-$75K, with $35K-$25K budgeted for luxury vacations to Monaco when/if the whim arises.

I would submit that you are way off base. Do you truly believe that people living on $100K/yr are spending 25% of their money on luxury vacations? I assure you this is not typical.

Acme
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Unless you are fixated on early retirement, you will be getting social security, which is a nice supplement. Pension? Another supplement. And, don't forget, during retirement, the money allocated for savings is no longer a factor. House is paid off? No more house payments. So going from a $100,000 lifestyle to $80,000 or less doesn't seem far fetched. If it is, postpone retirement until you don't have to restrict your lifestyle more than you want.

I think you are missing the point of the discussion. It is not that you are going to go from a $100K to an $80K lifestyle when you decide to retire. It is that, some years into retirement you have to drop your lifestyle by 20% because you're in danger of running out of money.

These two scenarios are completely different. Dropping to 80% of your income when you retire is feasible for most. But setting up your life one way and then, 5 years later, having to make a 20% reduction is not so easy.

Also, Ray is the one that chose to use $100K --> $80K as the baseline. I made no such stipulation. Let's reduce things to someone that is retiring on $40K/yr. How easy will it be for them to suddenly shift to $32K/yr?

Acme
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>> I think you are missing the point of the discussion. It is not that you are going to go from a $100K to an $80K lifestyle when you decide to retire. It is that, some years into retirement you have to drop your lifestyle by 20% because you're in danger of running out of money.

These two scenarios are completely different. Dropping to 80% of your income when you retire is feasible for most. But setting up your life one way and then, 5 years later, having to make a 20% reduction is not so easy.
<<

You're right...but show me someone who had to cut their income by 20% after starting retirement and I'll show you someone who, with perhaps a few exceptions, probably botched their retirement planning.

Maybe they overestimated their safe withdrawal rate.

Maybe they underestimated their true income needs in retirement.

Maybe their retirement savings are dwindling because they took too much risk in their portfolio and the market crashed badly.

Maybe their retirement savings are dwindling because they didn't take enough risk and inflation is killing them.

Maybe they didn't include large, non-recurring expenses (new roof, new car every 10 years, new furnace) as a part of their budget.

Maybe they suffered a significant loss event and they were underinsured or uninsured for it.

Maybe they underestimated inflation or overestimated their expected return on investments.

But in almost all cases, I think if someone suddenly has to cut their withdrawals from their retirement accounts by 20% because of shortfalls, they made a mistake in planning *somewhere* along the way.

#29
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You're right...but show me someone who had to cut their income by 20% after starting retirement and I'll show you someone who, with perhaps a few exceptions, probably botched their retirement planning.

Maybe they overestimated their safe withdrawal rate.


I feel like I am going in circles...

This RIGHT HERE is the whole point of what I am getting at. JWR states that using his "safe withdrawal rate" and allocation plan, the worst case scenario is that you will have to reduce your withdrawals by 20% for a few years. My contention ALL ALONG has been that this is, by definition, not a safe withdrawal rate.

Somehow this message keeps getting lost as people drift to other places. But the only point I was trying to make is that JWR's methods clearly overestimate the safe withdrawal rate (both because of the above issue and because of his low and simplistic inflation assumptions) and, therefore, his numbers are bogus.

Acme
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>> Somehow this message keeps getting lost as people drift to other places. But the only point I was trying to make is that JWR's methods clearly overestimate the safe withdrawal rate (both because of the above issue and because of his low and simplistic inflation assumptions) and, therefore, his numbers are bogus. <<

I think that's true, yes. I'm just saying it's not the only reason. For one reason or another, if you fall that short, you booched the planning. In this particular case it would be because someone assumes they can safely take out more than 4% per year in perpetuity.

#29
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Combine a high yield portfolio (such as preferred shares) with a lower yielding portfolio that grows its dividend amount rapidly, manage cash flow carefully, and you can get to 5% safely. But again, never sell any shares.


I understand the "high yield portfolio" (stock in companies with high dividend payouts or a fund of them), but I don't understand "lower yielding portfolio that grows its dividend amount rapidly". Examples, please!

Also, isn't setting a reasonable withdrawal rate the same as "manage cash flow carefully"? Or is there some more specific actions needed?

joe
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I understand the "high yield portfolio" (stock in companies with high dividend payouts or a fund of them), but I don't understand "lower yielding portfolio that grows its dividend amount rapidly". Examples, please!

I use the Exchange Traded Fund DVY as a realistic example that you should be able to beat. It currently yields 3.6% and grows 6% or 7% (latest reading) per year. However, dividend Exchange Traded Funds are new.

Mergent's has a paperback on Dividend Achievers--companies that have long histories of dividend growth.

The Motley Fool has an income product that specializes in stocks. I don't know how well it does, but I would consider it.

Morningstar's Josh Peters has a goal of 8% to 10% growth in his lower yielding portfolio. So far, so good--but it is new.

There are other sources.

Right now, the drug companies are well priced. Johnson N Johnson JNJ has a very long history of fast dividend growth. I don't know its current yield. But consider the entire sector. Pfizer has an outstanding yield. There is some concern over its new drugs, but I think that it is overdone.

Have fun.

John Walter Russell
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>> I use the Exchange Traded Fund DVY as a realistic example that you should be able to beat. It currently yields 3.6% and grows 6% or 7% (latest reading) per year. However, dividend Exchange Traded Funds are new. <<

One of the reasons why ETFs like DVY and PEY have such high yields is that they are significantly overweight in financials. Their share prices have stumbled which has led to rising yields at its current share value. There's also the possibility (largely priced into the underlying stocks) that some of these dividends may be cut or suspended if the companies continue to flounder in the mortgage and liquidity mess.

#29
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Also, isn't setting a reasonable withdrawal rate the same as "manage cash flow carefully"? Or is there some more specific actions needed?

You need to set up a spreadsheet. During the first few years, your high yielding portfolio will generate more income than needed. After about a decade, the growth portfolio will be yielding enough.

But in the middle years, there is a dip. You need some money from the early years to fill in the void.

Have fun.

John Walter Russell
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I use the Exchange Traded Fund DVY as a realistic example that you should be able to beat. It currently yields 3.6% and grows 6% or 7% (latest reading) per year. However, dividend Exchange Traded Funds are new.


Hmm. I thought that was what you're referring to. I just looked on www.ishares.com. Current SEC yield for DVY is 3.58% (pretty close), but the distribution yield is 3.52%. Looking at the distribution history, it appears that the average quarterly distribution for the life of the fund is closer to 0.5, or 2.0 annually. Rather than the current 3.6. Or am I reading that chart wrong?

Also, the actual fund price has only gone up from about $55 to the current $65 in 4 years. That's not anywhere near 6% annual growth. More like 2 or 2.5% per year.

So, not really sure where you're getting these numbers from.

joe
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You need to set up a spreadsheet. During the first few years, your high yielding portfolio will generate more income than needed. After about a decade, the growth portfolio will be yielding enough.

But in the middle years, there is a dip. You need some money from the early years to fill in the void.


Which should be accounted for in the withdrawal rate calculation. Or are you saying that I have to plan on a reduced withdrawal while waiting for the growth portfolio to catch up?

joe
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Also, the actual fund price has only gone up from about $55 to the current $65 in 4 years. That's not anywhere near 6% annual growth. More like 2 or 2.5% per year.

I am NOT talking about price growth.

I am talking about the growth in the dividend AMOUNT.

The price is only a secondary consideration. The focus here is on the INCOME STREAM. Remember, you never sell any shares.

Have fun.

John Walter Russell
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Which should be accounted for in the withdrawal rate calculation.

Yes.

Or are you saying that I have to plan on a reduced withdrawal while waiting for the growth portfolio to catch up?

No.

Have fun.

John Walter Russell
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I am NOT talking about price growth.

I am talking about the growth in the dividend AMOUNT.

The price is only a secondary consideration. The focus here is on the INCOME STREAM. Remember, you never sell any shares.


OK, then show me where that 6% growth is coming from. I can't find it.

Understand, I know very little about dividend paying stocks, so mutual funds or ETFs based on dividend stocks are also a bit of a mystery. If I owned the stocks outright, the dividends would be ordinary income, correct? So taxed at my marginal rate. If I own an ETF, the dividends are paid into the fund (not to me), so the value of the fund just goes up. Or do ETFs pay out like normal mutual funds? If they don't pay the dividends out, how do you get the cash without selling some shares of the ETF?

joe
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Which should be accounted for in the withdrawal rate calculation.

Yes.

Or are you saying that I have to plan on a reduced withdrawal while waiting for the growth portfolio to catch up?

No.


So there really is no other "cash flow management" to do. OK, just wanted to clarify that.

joe
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>> OK, then show me where that 6% growth is coming from. I can't find it. <<

I haven't double checked his numbers, but I think he only means the dividend amount is rising by 6% per year, not that the dividend yields are up 6%.

For example, if a stock trading for $50 went from a $1.00 annual dividend to a $1.06 annual dividend, the dividend *amount* is up 6% even though the dividend *yield* is up only 0.12% -- all assuming a static stock price, anyway.

#29
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I haven't double checked his numbers, but I think he only means the dividend amount is rising by 6% per year, not that the dividend yields are up 6%.

For example, if a stock trading for $50 went from a $1.00 annual dividend to a $1.06 annual dividend, the dividend *amount* is up 6% even though the dividend *yield* is up only 0.12% -- all assuming a static stock price, anyway.


Yeah, I figured that was what he meant, but I still can't find any information that would verify that there really is a historical 6% annual dividend growth in DVY (or other investment vehicle). But it could just be that I don't know where to find that info, since I've never tried researching dividend-based investments.

joe
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But it could just be that I don't know where to find that info, since I've never tried researching dividend-based investments.

Try Yahoo Finance. Look at Historical Prices. Then select Dividends Only for the time period.

It looks as if DVY has done better than advertised (cursory glance).

Additional NOTE: the only price that matters is the initial purchase price since you never sell any shares. Yields can fluctuate with prices. Dividend amounts are more reliable.

Have fun.

John Walter Russell
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Which should be accounted for in the withdrawal rate calculation. Or are you saying that I have to plan on a reduced withdrawal while waiting for the growth portfolio to catch up?

This "reduced withdrawal" is the whole thing I am talking about being problematic. We are not starting with a safe withdrawal rate if the rate has to be reduced at some point in the process!

Acme
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Try Yahoo Finance. Look at Historical Prices. Then select Dividends Only for the time period.

It looks as if DVY has done better than advertised (cursory glance).


Found it. There's something weird about those numbers. Not counting the Dec 03 initial period (very low, and probably due to fund start up), the numbers were basically flat at .46 or so for 2 years, then jumped to .568 in Mar 06, and pretty flat from there (.597 now). What happened in Q1 06 to account for the jump? Will it repeat? If not, I don't think you can really count on any predictable dividend growth from this fund.

What other investments are examples of this type?

joe
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Or are you saying that I have to plan on a reduced withdrawal while waiting for the growth portfolio to catch up?

No.


Previously, you stated that you may have to do exactly this -- reduce your withdrawal rate by up to 20%. And for that reason, you are not describing a safe withdrawal rate.

Of course, there is also that problem with your inflation assumptions that you keep ignoring rather than addressing...

Acme
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What other investments are examples of this type?

Unfortunately, DVY is the granddaddy of the dividend ETFs.

As a reference point, the S&P500 has grown its dividend amount (in nominal dollars) almost constantly at 5% per year since 1950 (actually, since WW2). Getting a 5% growth rate at a higher yield than S&P500 index should be easy. Just toss out the non-dividend stocks.

Reaching 6% or 7% growth per year should be easy for a do it yourself-er. For fund buyers, DVY's performance seems reasonable.

Have fun.

John Walter Russell
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Previously, you stated that you may have to do exactly this -- reduce your withdrawal rate by up to 20%. And for that reason, you are not describing a safe withdrawal rate.

This is not an expected outcome. It is a worst case estimate in the event of a failure. It is realistic. It is derived specifically from the stagflation experience.

Today's market suggests no such outcome. Payout ratios are relatively low. Dividends are well covered by (smoothed) earnings.

BTW this is a continuing withdrawal rate. It extends indefinitely. You never sell any shares.

In contrast, liquidation strategies have bankruptcy (before Year 30) as their failure mechanism. Such an outcome is a real concern given today's market.

Have fun.

John Walter Russell
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This is not an expected outcome. It is a worst case estimate in the event of a failure. It is realistic. It is derived specifically from the stagflation experience.

And it means you are *not* starting with a safe-withdrawal rate. There is nothing in "safe withdrawal rate" that says it is for use under expected outcomes. It is called SAFE precisely because it works when the unexpected occurs.



Today's market suggests no such outcome. Payout ratios are relatively low. Dividends are well covered by (smoothed) earnings.

Oh, thank goodness you have that crystal ball working so well.



BTW this is a continuing withdrawal rate. It extends indefinitely. You never sell any shares.

BTW, you have said this over and over and over and over....

It's also bogus since you are putting people in a position of either dramatically reducing lifestyle -- which might not be feasible -- or selling shares despite your instructions not to do so.

So if we say they cannot reduce lifestyle, they sell shares. And then everything comes crashing down around them. With fewer shares in the portfolio, they cannot get the needed dividends the next year, so they sell more shares. Uh-oh...



In contrast, liquidation strategies have bankruptcy (before Year 30) as their failure mechanism. Such an outcome is a real concern given today's market.

Despite your protests to the contrary, YOUR method has bankruptcy as a failure mechanism as well. You refuse to acknowledge that there are cases where people have to sell shares in your system. Stating that they can just reduce lifestyle by 20% is a red herring at best.

And I will repeat one more time -- you refuse to acknowledge the true rate of inflation. Your silly fixed 3% or 3.5% rate of inflation is a joke. As long as you continue to promote this research without explaining the significant errors, I will continue to poke the holes in it. Maybe eventually you will acknowledge the problems and try to fix them rather than stick your head in the sand.

Acme
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So Acme, what your saying is - If you have to reduce your Safe Withdrawl Rate -then it wasn't a Safe Withdrawl Rate.

WOW, does that make sense or what?

JWR is using number from history - 1950+ and it shows his magical number. Other folks, intercst and the like use numbers that include the great depression, and the number comes out a little lower.

Here is my rub.

Could it be because the number post WWII are not as bleak as those across and post the great depression??? The answer - YES

IIRC The failure in most studies, trinity blah blah happen because of a 6-7 year average 10% down period after the depression. I think the average over the next dozen was -2% for the broad market. This is not included in JWR's and so a higher number, - and you never have to sell any stocks. But if you ran this scenario over the same time ?? And as the companies in the 30's went bankrupt - I think they reduced thier dividends?? No?

Listen, I appreciate a good honest attempt at retirment portfolio construction and dividends are definitley an avenue. We are all using history as our crystal ball - how good is that anyway?

BTW - mathematically speaking - the "expected outcome" of a SWR of 4% is not going broke in 30 years it actually results in an expeted outcome of a substantial portfolio in 30 years - it is the outlier that goes belly up!

d(SWR)/dT
I think I got what ACME said?
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So Acme, what your saying is - If you have to reduce your Safe Withdrawl Rate -then it wasn't a Safe Withdrawl Rate.

WOW, does that make sense or what?


It does not seem to make sense to JWR.



JWR is using number from history - 1950+ and it shows his magical number.

Even during HIS period, there is a time when -- by his own admission -- his "magical number" fails. So how can he call this a safe withdrawal rate?



Listen, I appreciate a good honest attempt at retirment portfolio construction and dividends are definitley an avenue. We are all using history as our crystal ball - how good is that anyway?

I have no problem with the asset mix he is trying to convince people to use. Right now, I only have a problem with a couple things:

(1) His assumptions are flawed and he refuses to acknowledge these flaws; and
(2) He minimizes the downside as if it either cannot happen or it is not a big deal when it does.

Acme
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BTW - mathematically speaking - the "expected outcome" of a SWR of 4% is not going broke in 30 years it actually results in an expected outcome of a substantial portfolio in 30 years - it is the outlier that goes belly up!

This is the fallacy of ignoring valuations. There were only two time periods corresponding to today's market: 1929 and 1965-1966. Inferences from the other periods are irrelevant UNTIL you take valuations into account. At that point, you can use the full data set. At that point, you can talk meaningfully about the probability of success.

Have fun.

John Walter Russell
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Also, Ray is the one that chose to use $100K --> $80K as the baseline. I made no such stipulation. Let's reduce things to someone that is retiring on $40K/yr. How easy will it be for them to suddenly shift to $32K/yr?

Pretty darned hard!
But that's because they had too small of a nest-egg when they retired.

$40K is a 5% withdrawal rate on a portfolio of $800,000. That's just too darned small if that's your sole income.
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BTW - mathematically speaking - the "expected outcome" of a SWR of 4% is not going broke in 30 years it actually results in an expeted outcome of a substantial portfolio in 30 years - it is the outlier that goes belly up!

I think that perhaps some people are over-eager to bash JWR. Which it not helped by JWR's insouciance and disinclination to rigorously defend his position.

My comments: portfolio failure is measured as a percentage of scenarios (or monte-carlo simulations) when the money runs out before XX years. (Where XX is typically about 30.) Generally, around 97% success rate (3% failure rate) is considered good enough.

There is no such thing as 100% success rate. There is ALWAYS a chance of portfolio failure--and you can't avoid it.

The big problem, as we all know, is how to handle the inevitable bad periods---the bear markets. Once you start withdrawing principal (i.e., selling stocks), compounding works against you. So you need a way to alleviate the problem.
You have to either reduce your withdrawal-and hence your income, or spend capital-and risk running out of money later on.

Guyton, et. al. published a withdrawal strategy that purportedly allows a 5.2%-5.6% initial withdrawal rate at a 99% success rate. The key features are a "capital preservation rule" and a "withdrawal increase freeze" which slightly reduce the withdrawals (in dollars, not rate) in bad circumstances.

These rules make more sense to me than keeping the annual withdrawal constant until it's panic time and then cutting it by 20%.

And it is always always always true that if you start out with not enough money you are quite likely to crash and burn.
I'd rather retire with $2,000,000 and swing between $100K and $80K per year that retire with $800K and try to make it on $40K to $32K per year.
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Guyton, et. al. published a withdrawal strategy that purportedly allows a 5.2%-5.6% initial withdrawal rate at a 99% success rate. The key features are a "capital preservation rule" and a "withdrawal increase freeze" which slightly reduce the withdrawals (in dollars, not rate) in bad circumstances.

I didn't save the original reference for that, but I did summarize their rules for future reference. Here's my summary.

joe


MWR is 5.2-5.6% when all rules are followed:

1.If prior year's return is negative (down market), no increase in withdrawal for next year (withdrawal rule).

2. Current withdrawal rate (as adjusted for CPI, other things) is within 20% of original withdrawal rate - increase withdrawal amount by CPI only .

3. Current withdrawal rate (as adjusted) greater than initial withdrawal rate by 20% or more - decrease withdrawal amount by 10% (capital preservation rule).

4. Current withdrawal rate (as adjusted) less than initial withdrawal rate by 20% or more - increase withdrawal amount by 10% (prosperity rule).

Current withdrawal rate is calculated based on current withdrawal amount (previous year) and current asset totals.

Withdrawal amount is then recalculated based on the above rules.
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Hmmm.

JWR's non-responsiveness notwithstanding, January's Money Magazine had an article about constructing a 4% yield portfolio. The stocks:
BAC, TEG, PFE, LEG, VVC, DD yielding 3.7% to 5.9%

ETF: SDY (3.5%) & PGF (6.4%)
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