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Old 02-06-2011, 01:13 PM   #101
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We have been planning on 3-4% SWR. This may go down to 2-3% if social security payments (about $40K @age 62) were included, keeping our fingers crossed.
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Old 02-06-2011, 03:56 PM   #102
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Originally Posted by haha View Post
I doubt that anyone on the board has been living solely from his portfolio longer than I have. Whatever may be better in theory (and this is debatable anyway), if a collection of high quality stocks with growing dividends can fund your retirement you are much more secure than hoping that you can liquidate shares when you need to.

That's about all I will say on the topic, other than long term success speaks a lot louder than anything one might read.

Ha
To amplify Ha's comments. I think it is important to remember that vast majority of retirement articles are written by WORKING folks, many of whom are university professor with COLA pension and as such they focus strictly on the numbers, rather than practical and psychological aspects of investment.

So while I suspect that number support the studies conclusion, it isn't all about the numbers.
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In conclusion, the total-return approach to spending
is identical to the income approach for investors whose portfolios generate enough cash flow to meet their spending needs. For those investors
who need more cash flow than their portfolios yield, the total-return approach is the preferred method.
Like bond income, dividend income is sticky i.e. less volatility than equity prices. Thus for the first few months of the 2008 crisis, I wasn't overly concerned about the market collapse (and if you recall junk bond prices collapsed and even some muni also). In fact, I looked at it as buying opportunity. It wasn't until banks and few non-banks slashed dividends that I started getting worried. Since my withdrawal rate is mostly dependent on my dividend/interest income, and independent of my initial or current assets, it was psychologically easier to avoid panic selling near the bottom. I don't how you quantify but I can tell that having a bunch of blue chips stocks like 3M, Johnson & Johnson, Intel, plus pipeline stocks, with a long history of paying dividends and generally low payout ratio is pretty comforting. Perhaps not as comforting as having a bunch of CDs in many banks under the FDIC limit but close. I will say that watching a bunch of "blue chip" banks slash dividends has turned me from a dividend income zealot to merely a proponent.

The hard part for both total return folks and dividend income people like Ha and myself is what happens when returns are bad like they've been for the last few years. Following a 4% SWR is painless in a bull market, it is largely an act of faith in a bear market. It is perfectly understandable and logical to remember that 4% SWR isn't scripture and even it is authors don't advocate a blind faith obedience.
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Old 02-06-2011, 04:45 PM   #103
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In this last go-round SPX dividends fell by 25% and interest rates fell anywhere from 50%-90+% depending on the portfolio's duration. The 12-month distributions from the Dow Jones Select Dividend ETF declined 45%. It seems to me that portfolio income is every bit as volatile as portfolio value.

Where the rubber meets the road, though, is that the "Income Approach" is now requiring a much lower withdrawal rate than 4%. That may be prudent, but requires a certain amount of discipline. The temptation for the income investor will be to try to enhance the portfolio's yield, which may result in worse outcomes than sticking with a "Total Return Approach" with a well diversified portfolio.

It's worth noting that distributions from the Dividend Select fund declined far more than those of the S&P 500 as a whole, as did its NAV. Concentrating in dividend paying stocks is not necessarily a low-risk strategy.
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Old 02-06-2011, 04:54 PM   #104
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In this last go-round SPX dividends fell by 25% and interest rates fell anywhere from 50%-90+% depending on the portfolio's duration. It seems to me that portfolio income is every bit as volatile as portfolio value.
While SPX dividends fell by 25% (not insignificant), SPX fell by 50%.
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Old 02-06-2011, 05:09 PM   #105
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While SPX dividends fell by 25% (not insignificant), SPX fell by 50%.
Yes, but what about the payout on all that cash previously earning 5% in a Money Market fund? Or 6% CDs that need to be reinvested at 2%?
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Is inflation rate over the years included in the graphic analysis?
Old 02-06-2011, 07:23 PM   #106
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Is inflation rate over the years included in the graphic analysis?

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Well for those 1-3% swr people. You should never run out of money but you'll almost certainly go with a huge stash left behind. Does anyone besides myself see that as a huge opportunity cost ?

for fun, here's a link to the flip side of the 4% SWR....

Beware the 4% rule

the 4% SWR will probably insure that if you retire into a severly falling market that you won't end up eating dog food. However mostly that doesn't happen per the link above.
All those years shown in the graph, don't they reflect a significant growth period in this country? I guess if you can shrewdly invest in the global economy, then you can get enough returns to justify 4% SWR or more. But just investing in a S&P 500 index for the future might not get you there.

Also, the analysis in the graph totally ignores the inflation rate that the US saw in any of the 30-year periods (if this is not correct, please let me know). As you can see in a page like Historical Inflation Rates: 1914-2010, Annual and Monthly Tables - US Inflation Calculator there's enough years with >4% inflation that really makes the argument moot. The analysis has to be done in terms of real buying power rather than nominal dollars.
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Old 02-06-2011, 07:54 PM   #107
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Originally Posted by haha View Post
I doubt that anyone on the board has been living solely from his portfolio longer than I have. Whatever may be better in theory (and this is debatable anyway), if a collection of high quality stocks with growing dividends can fund your retirement you are much more secure than hoping that you can liquidate shares when you need to.

That smells like a poll question (if it hasn't been done already).

How long have you been living off your portfolio?

Do you have a mix of dividend paying stocks that help to fund your yearly expenses?

IMO, I would think that a good mix of dividend paying stocks of long term stable companies (I know, no company is too big to fail) JNJ, PEP, KO, PG, etc. you'd be good. Even if a dividend is cut, as long as you have a number of good stocks and the dividend portion is just a part of the total portfolio you'd be good.
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Old 02-06-2011, 10:27 PM   #108
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It's worth noting that distributions from the Dividend Select fund declined far more than those of the S&P 500 as a whole, as did its NAV. Concentrating in dividend paying stocks is not necessarily a low-risk strategy.
Back in 2007 the DVY ETF would have more appropriately been named the "DOW Dividend Select Financials That Have Been Making Obscene Mortgage-lending Profits" fund. Been a few changes to its holdings since then...

While I agree that concentrating in dividend-paying stocks has its risks, they can be minimized through diversification.
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Old 02-07-2011, 06:36 AM   #109
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Back in 2007 the DVY ETF would have more appropriately been named the "DOW Dividend Select Financials That Have Been Making Obscene Mortgage-lending Profits" fund. Been a few changes to its holdings since then...

While I agree that concentrating in dividend-paying stocks has its risks, they can be minimized through diversification.
Reduced but not eliminated. By definition a portfolio constructed to increase yield is going to be less diversified then the market. The question is how much risk does that concentration add. Unfortunately, we only know in retrospect.

32% of DVY is currently invested in utilities and another 20% in Consumer Products. Are we sure those sectors are immune to some kind of meltdown? In 2000 a lot of the utility sector adopted Enron style accounting practices, invested heavily in telecom and commodity trading. It wasn't pretty. More recently a bunch were racing to be the first to build new nuclear plants that cost more than the company's equity market cap. Maybe that works out as well as it did in the 70's.

So yes, bank exposure has declined, but it has been replaced with higher concentrations elsewhere. Today's portfolio might be named "The Dow Select Utility Sector Specific Risk ETF".

I don't want to overstate this point. But I get the impression from a lot of yield investors that there is some kind of free lunch to be had by owning dividend paying stocks. There isn't.
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Old 02-07-2011, 10:28 AM   #110
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I always enjoy seeing links to threads that I might have missed in the past so appreciate the post. At times, particularly when I'm looking for factual information or a general background that is enough. In fact, I confess that before I ever posted here I actually went back and skimmed through every thread in the Fire and Money forum (to be clear, if the thread didn't look interesting from the subject I didn't always read it). That took me a very long time to do it. And I learned a lot.

Even so, at times I want to actually post about a topic and talk about my thoughts on it and go back and forth with others. For that purpose, reading those old threads does nothing much for me. In fact, they are tantalizing. I so much want to leap in and talk and then I see that, oh, that thread was from 4 years ago.

So, for us newer people, as annoying and tedious as it may be for the long time members, we are probably going to discuss some topics that have been discussed before simply because we haven't discussed them.
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Old 02-08-2011, 06:07 PM   #111
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All those years shown in the graph, don't they reflect a significant growth period in this country?
Well yes they do - and that's the point. Those 4% (or less) SWR's get you through retiring into a depression or a stagflation period. But if you retire into a growing economy then by only taking 4% you'll forego way too much of your nest-egg utility.

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Also, the analysis in the graph totally ignores the inflation rate that the US saw in any of the 30-year periods (if this is not correct, please let me know). As you can see in a page like Historical Inflation Rates: 1914-2010, Annual and Monthly Tables - US Inflation Calculator there's enough years with >4% inflation that really makes the argument moot. The analysis has to be done in terms of real buying power rather than nominal dollars.
There are many withdrawal schemes floating around. But the "normal" withdrawal rate's that are (often) quoted use the fixed rate the first year and then take out that amount indexed up by the CPI every year after that. So the answer to your question is - No you are mistaken - (CPI) inflation is included in the charts.

And as the post indicates, I am not suggesting that these withdrawal rates are safe. I am suggesting that in many (historical) cases a 4% withdrawal rate is too low to fully utilize the nest-egg.

Gummy's data is kind of the flip-side to Bernstein's articles on the Retirement calculator from Hell series.

As to whether past is prologue, I'll leave that for you to ponder and for others to pontificate over.
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