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How do you factor dividends into the SWR?
Old 08-24-2010, 08:13 AM   #1
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How do you factor dividends into the SWR?

Hey gang, I have a question, that I've never really thought about before. How do dividends factor into the SWR. Right now, I'm still some years away from retiring, so I'm reinvesting all of my dividends.

But, when I retire, let's say I have $1M, and want a 3% SWR. That's $30K per year. But, say the portfolio pays out 30,000 per year in dividends.

If I just live off those dividends, is that still considered taking the 3%, or would it be taking 0%?
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Old 08-24-2010, 08:32 AM   #2
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Yes, that would be considered withdrawing 3% of the portfolio. The growth of the portfolio in all these studies is dividends plus capital appreciation - in other words, total return of the portfolio.

Audrey
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Old 08-24-2010, 08:34 AM   #3
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Your example is very similar to what I am doing right now. In my spreadsheet, my SWR includes those dividends, so my SWR is ~3%. This is because those dividends could be reinvested. Because I do not spend all those dividends, I have in my spreadsheet any excess dividends reinvested which, via compounding, work their way into future dividends and the SWR going forward.

Also remember that inflation will require you to spend more of those dividends (and principal, perhaps) going forward. So using the 3% SWR is appropriate because at some point the dividends may not be enough to cover your expenses.
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Old 08-24-2010, 08:39 AM   #4
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Originally Posted by Andre1969 View Post
Right now, I'm still some years away from retiring, so I'm reinvesting all of my dividends.
I've been in retirement since early 2007. Before I retired, I (like you) reinvested all dividends/distributions.

In retirement, I do the same since I'm a total return investor.

While you should do what's best for you in retirement, don't think it's an automatic situation of using dividends/distributions for income, but rather what is best for your retirement income plan (yes, another plan that you should make - before retirement).

BTW, most of my retirement income comes from my portfolio (no pension nor SS).
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Old 08-25-2010, 07:22 AM   #5
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Thanks for the inputs, everyone. I had a feeling that the SWR rate would account for dividends. Taking, say, the 3% PLUS dividends just seemed too good to be true!

Plus, just because a stock is paying a dividend right now, doesn't mean it always will be. I bought some Cedar Fair stock last year (parent company of Cedar Point and other amusement parks), mainly because it was paying a nice dividend. Within a few months of buying it, the dividend stopped! But, then the share price shot up, so I'm not complaining!
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Old 08-25-2010, 08:52 AM   #6
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Originally Posted by rescueme View Post
I've been in retirement since early 2007. Before I retired, I (like you) reinvested all dividends/distributions.

In retirement, I do the same since I'm a total return investor.

While you should do what's best for you in retirement, don't think it's an automatic situation of using dividends/distributions for income, but rather what is best for your retirement income plan (yes, another plan that you should make - before retirement).

BTW, most of my retirement income comes from my portfolio (no pension nor SS).
Rescueme, can you elaborate on how you extract income from your portfolio without skimming dividends?
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Old 08-25-2010, 10:25 AM   #7
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Rescueme, can you elaborate on how you extract income from your portfolio without skimming dividends?
See post #37 in the following thread where I outlined my "method of madness":

Lot's of fear here lately - Anyone still believe in FireCalc?......

It outlines my method to "harvest" from my holdings, based upon a total return approach, over the long term. Distributions/dividends are reinvested and decisions for drawing is based upon that total return view.

If I would change my/DW's portfolio to go primarily for dividends (to fund our retirment), that would make me a different type of investor and require me to change my "skills", learned over many years. Rather than to rethink/study another way to invest, I just continue to invest and change my technique to fund my retirement years.

I know that a lot of folks direct their monthly/quartly distribution/gains to cash accounts for immediate income in retirement, but that's just not my style for the way I've invested over the years. If it works for them? I have no argument. We all have to play the game based upon our own rules.
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Old 08-25-2010, 11:19 AM   #8
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Are we headed for worse times than we have had since the late 1800's which pretty much negates FireCalc?
I'm using about a 1.5% SWR. I don't use firecalc. I have a custom retirement spreadsheet where I coded all of the calculations myself. We compared what I came up with to what the Fidelity people came up with just to see if my stuff was in the same ballpark and I think what I'm doing is much more accurate, especially for us. Places like Fidelity really just try to get you to save as much as possible into products they can make commissions off of, so they are never going to push stuff like TIPS.

Like the old saying, hope for the best, plan for the worst. I am not counting on any better returns than I can get on average today. I'm okay with not making 40% in the stock market some years because I know other years it might go down by that much. I'm willing for give up the possibility of huge gains in exchange for not having to worry about the possibility of huge losses.

We have a couple of businesses that are very scalable, so if we need more money we can always put more hours into those instead of hoping for high stock market returns.
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Old 08-25-2010, 11:39 AM   #9
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We have a couple of businesses that are very scalable, so if we need more money we can always put more hours into those instead of hoping for high stock market returns.
So if you never plan to retire, why worry about a withdrawl percentage?

Just wondering ...
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Old 08-25-2010, 02:30 PM   #10
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So if you never plan to retire, why worry about a withdrawl percentage?
Most businesses do not last forever, just like the Who Moved My Cheese book. I'm not counting on any business income in five years. A yogurt shop just moved next to our local Jamba Juice, so that has to cut into the Jamba Juice stores profits. Stuff like that happens no matter what kind of business you have.

I meant I'd rather work more now and in the coming years if we feel our nest egg, along with social security, won't be enough to fund a comfortable retirement.

After the last stock market crash I started reading books like Worry Free investing, and the ideas clicked with me. I don't have a total plan laid out yet, but I have been buying TIPS and reading more on fixed income investments and how the different types have performed compared to inflation.
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Old 08-25-2010, 02:34 PM   #11
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I meant I'd rather work more now and in the coming years if we feel our nest egg, along with social security, won't be enough to fund a comfortable retirement.
OK; I belive you are trying to tie your pre-retirement withdrawl rate against a "gold standard" (e.g. 4%) in a retirement scenerio.

I'm retired and of course my view is completely different from you. I neither want (or need) any income from a j*b nor an "enterprise" for this time of my life ...
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Old 08-25-2010, 07:18 PM   #12
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Dividends are simply cash flow within the total withdrawal. Unfortunately no 3% plus dividends.
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