Alternative to straight allocation...

[rayinpenn]

Why?
The wife's grandmother lived well into her nineties....
She has that super low cholesterol too..

The simple allocation suggestions have there risk too - it is called inflation.

Alternative ..
1) Keep 3 years living expenses in low risk cash like instruments
2) keep the rest in a diverse set of low cost dividend paying ETFs.. Yeah I've got a few single name equities .. Brick and mortor pretty boring stuff.
3) live on dividends (some will be taxed at 15%..) and social security.

Assumptions
Dividends are generally not as fickle as the market - though some will take a hit in a bad turndown
Ride out the downturn like we did ever other one
Long term a portfolio rich in equities will out perform the mixed portfolio - actually not an assumption.

I know this won't work for everyone (no debt, live simply) but for us I think it may be the safest bet.




Sent from my iPad using Early Retirement Forum

 

[pb4uski]

It depends on what your WR is. If your WR is low (2.5% or less) I would think 100% value equities would have a low failure rate.

If your WR is more normal (3.5% or more) then you have to think about sequence of returns risk in addition to inflation risk. What you could do is start at a more moderate mix (say 50/50) and then migrate to 100/0 over time.

When you say hold 3 years of living expenses in cash, do you mean gross or net of 3 years of taxable account dividends?

 

[rayinpenn]

Three years gross as it will be taxable... I'll need to make estimated payments.
I've looked at dividend returns in bad markets - with a diverse portfolio the money will be less but it still will roll in.
WR: 3% very comfortably...

S&P 500..
Current Yield: 2.12% +1.08 bps
4:10 pm EDT, Fri Apr 29

Historical yield ..mine will be a bit higher as I concentrate on steady Eddie dividend payers...

Mean:4.39%
Median:4.33%
Min:1.11%(Aug 2000)
Max:13.84%(Jun 1932)


Sent from my iPad using Early Retirement Forum

 

[Gone4Good]

Living off of portfolio income is certainly a viable strategy.

But just know that from 2008 to 2009 dividends on the SPX dropped 24%. It took them about 3 years to recover that previous high not accounting for inflation.

So I'd want to make sure I had some cushion to protect against downturns in my income. Dividends aren't quite as reliable or as stable as is widely assumed.

 

[eta2020]

Living off of portfolio income is certainly a viable strategy.

But just know that from 2008 to 2009 dividends on the SPX dropped 24%. It took them about 3 years to recover that previous high not accounting for inflation.

So I'd want to make sure I had some cushion to protect against downturns in my income. Dividends aren't quite as reliable or as stable as is widely assumed.

They did not drop on ETFs like for example VIG. If you have 3 years in cash you can easily weather out market downturns.

Good thing about your plan is that it is fool proof. You do not need to know when to sell and when to buy I like simple strategies that outperform 90% of investors.

BTW I do not think dividend yield will support 3% WR. More like 2.5%. But it will very likely grow faster then inflation.

 

[Gone4Good]

They did not drop on ETFs like for example VIG. If you have 3 years in cash you can easily weather out market downturns.

It might be accurate to say that some ETFs didn't cut their dividend. It's not true that none did.

And while VIG may have owned companies that retained payouts there were plenty of dividend income oriented portfolios and ETFs that were heavily weighted towards financials in 2008. Many of those blew up spectacularly in 2009 and never fully recovered.

So like every strategy, this one has it's risks too. No such thing as a free lunch.

 

[dixonge]

Why?
The wife's grandmother lived well into her nineties....
She has that super low cholesterol too..

My great aunt lived to 102. When she hit 100 I thought "I'm gonna need more money..." As in, I might live a lot longer than originally anticipated.

 

[walkinwood]

Have you back-tested your plan?

 

[papadad111]

Living off of portfolio income is certainly a viable strategy.

But just know that from 2008 to 2009 dividends on the SPX dropped 24%. It took them about 3 years to recover that previous high not accounting for inflation.

So I'd want to make sure I had some cushion to protect against downturns in my income. Dividends aren't quite as reliable or as stable as is widely assumed.

Didn't Ray suggest 3 years of living expenses in cash? Presuming he lives off the dividends and they drop by 25 percent, his 3 years of cash should provide at least 10 years of cushion using the cash to fill in for the lost dividends.

That's a similar strategy, Ray, that I'm shooting for. Although I avoid individual equities all together and use ETF's. VTI/VXUS/SPY/VYM. Current dividend yield is around 2.5%. Div yield Did not fall 24% in financial crisis either. Broadly diversified. No bonds.

Safe withdraw at this level is estimated to be 2.5% or so and still be able to keep up with inflation.

Our WR right now is higher at 3.5% , but we are using part time side hustles to make that 1% up, and to keep portfolio WR to just dividends for the next 5-7 years - sort of a test drive and to reduce longer term SOR risk. We are upper 40s.. Long long time horizon hopefully (God willing).

Edit: And being older of social security age makes this even more feasible as some portion of your income is annuitized and your actual portfolio WR is likely lower due to SS