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Okay, Iíve saved enough to retire, now what?
Old 12-09-2019, 01:35 PM   #1
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Okay, Iíve saved enough to retire, now what?

Simple, right? I should just quit my job and start living off my savings. I thought it would be that easy when I was accumulating. I figured that once I hit my goal of $XXX, that I could just retire and live off my Xís but now that Iím knocking on retirementís door Iím struggling on how to take that next step. Iíve been thinking a lot about dividends lately. If I could average around 4% dividend income, Iíd never have to touch my principal. Is that a realistic goal? Of the 50 dividend aristocrats, only 6 yield 4% or more and the highest yielding dividend ETFs Iíve looked into only pay around 3%. The plan Iím trying to draft would likely call for a mix of aristocrats, ETFs, and some REITS & MLPs to bring up the overall average, but at this point itís just an idea and Iím trying to figure out if itís a good idea.

My details:
  • The date Iíve penciled in to retire is March/April of 2021, but a lot of things could happen to move that date forward or back.
  • My wife and I are both 58. She plans to keep working for another 5 years. She only makes about $30k, but we can get health care through her.
  • Nest egg consists of about $1.4m earmarked for retirement ($1m traditional IRA/401K, $400k ROTH) and another $500k in taxable accounts.
  • No debt.

Iím in a good place, but Iím struggling on how to get from here to there. Do I just start taking out %4 from my principal and paying the capital gains taxes? Seems that I ought to be able to figure out a reasonable plan to generate income from my nest egg and never touch the principal. Iíd appreciate any thoughts and advice.
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Old 12-09-2019, 01:49 PM   #2
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FIRE withdrawal strategies

Here is a thread regarding withdrawal strategies. Can I assume that you need 4% from a total of 1.9 so basically 75-76K/yr? Good luck. I would say find a way to get some $ in your overall AA between now and April 2021. If you end up with say 150K cash in your AA by then and then your overall throws off say 3% div you should be good. SS reserves coming at 62-70 for you and DW. Not to mention she wants to work for 5 more making 30/yr or so. Guess you just have to sit down and work numbers and which pot to draw from. Might be a good time to visit a fee only FA for a one time consult.
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Old 12-09-2019, 01:51 PM   #3
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and BTW great first post and welcome.
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Old 12-09-2019, 01:53 PM   #4
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Congrats on your plan, welcome, and also congrats that your spouse gets health insurance at work. That's a biggie!
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Old 12-09-2019, 01:58 PM   #5
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Yes, it is possible to earn enough in passive investment income to not have to touch principal. We earn 4% to 6% in a mix of individual bonds and bond/preferred stock/high yield stock ETFs. Our passive income comfortably exceeds our annual expenses, so when DH retires, we anticipate being in good shape.
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Old 12-09-2019, 02:03 PM   #6
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Check out SPHD. Its a low volatility equity ETF that pays a monthly dividend at a 4+% annual rate.
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Old 12-09-2019, 02:06 PM   #7
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Is it important to never touch the principal? Why? It seems doubtful that the investments you have now are all going to be good investments in 25 years, unless you have it it broad index funds.

If you don't have heirs to leave money to, why not spend down the principal gradually as you age? You may not even find your money decreasing if the market does well. If my portfolio pays 2% in dividends and increases another 5% in value, I am 3% ahead.

If you do have heirs, it may still make sense to go with a total return approach, and sell at times when needed, and let your stash increase with big gainers in bull market years.

I doubt many here sell to draw a full 4% or whatever their WR is each year. Instead, consider not reinvesting whatever dividends you draw, and spending that money first. Also consider setting up a CD or bond ladder to some short term reliable flow of cash. Sell stock funds as needed to replenish the ladder, and occasionally if you need more spending money for unusual expenses.

A double risk of relying on high dividend paying stocks is that if they run into hard times, not only might they reduce their dividend, but the stock price may also fall. So you're no longer getting your 4%, and you can't trade it out as easily for a stock that does get you the dividend stream you were relying on. That may be rare, but it's not unprecedented.

Don't forget that once you start collecting SS, you no longer need 4% from your investments. So you can have a plan to get you to SS, in which you draw down some of your investments along with spending whatever dividends they produce, and then a plan to supplement your SS benefits.
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Old 12-09-2019, 02:17 PM   #8
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Question: Let's say you're earning $80K in dividends, on $2M in investments. Then, the investments drop in value to $1M. How many $ in dividends would you then receive?
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Old 12-09-2019, 02:33 PM   #9
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Question: Let's say you're earning $80K in dividends, on $2M in investments. Then, the investments drop in value to $1M. How many $ in dividends would you then receive?
I don't know. Neither do you. Dividends can be cut.
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Old 12-09-2019, 02:36 PM   #10
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I don't know. Neither do you. Dividends can be cut.
That's my point. Trying to live off dividends only, and counting on them always being at a certain level, rather looking at total return, doesn't make sense to me, as they aren't guaranteed...
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Old 12-09-2019, 02:46 PM   #11
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Right. And for proof of that, look at Bank of America (BAC). Aug 2006, it was over $50/share, and had just increased it's dividend from .50/share/quarter to .56. Over 4%/yr. Aug 2010, it's at around $11/share, not even it's low point, and paying .01/quarter. If you happened to put all of your $2M in that, you went from about $90,000/yr in dividends to about $1600. Extreme case, but real life too.
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Old 12-09-2019, 02:52 PM   #12
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Welcome. Joining this forum is a great help in moving from where you are into retirement. I hit my number at 55 and retired at almost 57. You’ll need a couple years to get comfortable with how you move forward. There are a lot of questions you’ll have and several strategies you’ll need to consider. You’re off to a good start. Again, welcome to the forum.
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Old 12-09-2019, 02:58 PM   #13
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Originally Posted by Crnhzkr View Post
.... I’ve been thinking a lot about dividends lately. If I could average around 4% dividend income, I’d never have to touch my principal. Is that a realistic goal?...
No. Equities yield about 2% on average in dividends and bonds a bit north of 3%.

However, it is quite realistic to withdraw 4% and never run out of money.

You need to decide, did you save that money for your retirement or did you save to hoard it? If the former, retire and adopt a 4% withdrawal rate ane enjoy life. If not and principal is sacrosanct, then keep working until you can live on a 3% or 3.5% withdrawal rate.

Also, research "total return retirement strategies".

What I do, and many here do, is to have a balanced and diversified portfolio and set up a automatic withdrawal to our personal checking account that we use to pay our monthly bills... I call my monthly automatic withdrawal my monthly "paycheck".
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Old 12-09-2019, 02:59 PM   #14
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Originally Posted by gwraigty View Post
Yes, it is possible to earn enough in passive investment income to not have to touch principal. We earn 4% to 6% in a mix of individual bonds and bond/preferred stock/high yield stock ETFs. Our passive income comfortably exceeds our annual expenses, so when DH retires, we anticipate being in good shape.
Thanks, gwragty. These are the types of funds I am researching. Some I have held for years are PGX and PFF. I'll bet these are in your portfolio too. These are both preferred stock ETFs and they pay a monthly dividend of about 5.5% annually. They're not too exciting to watch, as the share price barely moves, but they're consistent.
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Old 12-09-2019, 03:12 PM   #15
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I have been in 100% dividend growth stocks for 26 years, the last 13 in retirement living on those dividends (no other income). In 2008-2009 my portfolio dropped over 40%, but the dividend flow (and profits behind them) kept growing each year, so no cause for concern. I typically have about a 3.5 - 5% yield on the portfolio, with a 5-9% dividend growth rate.

I have been subject to 3 dividend cuts (GGP,GE,KMI) over the decades, but in each case the total portfolio dividend flow still increased year-over-year - if you take this approach you do not want a concentrated portfolio.
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Old 12-09-2019, 03:12 PM   #16
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Right. And for proof of that, look at Bank of America (BAC). Aug 2006, it was over $50/share, and had just increased it's dividend from .50/share/quarter to .56. Over 4%/yr. Aug 2010, it's at around $11/share, not even it's low point, and paying .01/quarter. If you happened to put all of your $2M in that, you went from about $90,000/yr in dividends to about $1600. Extreme case, but real life too.
That is an extreme example. Of course, if you had invested the $2m into the dividend aristocrats and not BAC then your dividend income would have continued to increase over time even though your principal had gone into the toilet. At least that's the "theory". All of the aristocrats took a dive when the R hit in 2008, but they all continued to increase their dividend payment to outpace inflation. Does history guarantee the future? We'd all look like geniuses if it did.
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Old 12-09-2019, 03:19 PM   #17
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That is an extreme example. Of course, if you had invested the $2m into the dividend aristocrats and not BAC then your dividend income would have continued to increase over time even though your principal had gone into the toilet. At least that's the "theory". All of the aristocrats took a dive when the R hit in 2008, but they all continued to increase their dividend payment to outpace inflation. Does history guarantee the future? We'd all look like geniuses if it did.
BAC was a dividend aristocrat back then. If you only look at the current list and go back 11 years or even 25 your results would be great, because by definition those companies have held or increased their dividends. But the list does not stay the same, and I'd be willing to bet any amount of money it will not stay the same for the next 25 years.

https://en.wikipedia.org/wiki/S%26P_...nd_Aristocrats

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Since the 2008 financial crisis, the S&P 500 Dividend Aristocrat list has evolved as follows:
2009 - The list declined from 52 companies in 2008 to 43 companies in 2009, as nine companies cut their dividend payouts due to the 2008 financial crisis. They were: Anheuser Busch (BUD), Bank of America (BAC) , Comerica (CMA), Fifth Third Bank (FITB), Keycorp (KEY), Progressive Corp (PGR), Regions Financial (RF), Synovus Financial (SNV), and Wm. Wrigley (WW), which was acquired by Mars.
Also in 2009, there were two additions - Bemis (BMS) and Leggett & Platt (LEG).
2010 - A second round of ten companies were dropped: Avery Dennison (AVY), BB&T , Gannett (GCI), General Electric (GE), Johnson Controls (JCI), Legg Mason (LM), M&T Bank (MTB), Pfizer (PFE), State Street Bank (STT), and US Bancorp (USB).
It seems you are set on an income flow strategy, and there are many who have done it successfully, at least so far. Good luck to you.
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Old 12-09-2019, 03:32 PM   #18
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Is it important to never touch the principal? Why?
No, I wouldn't say it is "important". When I was saving and saving I had always assumed once I retired I'd start using the pile of money I'd built up, but as I'm now close to that date and starting to plan my strategy, I'm looking at alternatives for income. I could spend down 3 - 4% per year and it'd last for the rest of my life. I'm confident of that, but why if I don't need to? For one thing, I'd have to start guessing which stock or fund to sell and I'm a terrible guesser. In 2012, I bought a new pickup and I sold a pile of Apple stock because I'd made a killing on it so I figured I'd cash in and take my profit. I learned the best time to sell Apple is never. Also, that 4% would be almost entirely capital gains. Those are the types of reasons that concern me about selling my stocks and funds for retirement and why I'm exploring the feasibility of a dividend income producing strategy.
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Old 12-09-2019, 03:45 PM   #19
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What I do, and many here do, is to have a balanced and diversified portfolio and set up a automatic withdrawal to our personal checking account that we use to pay our monthly bills... I call my monthly automatic withdrawal my monthly "paycheck".
Thanks, pb4uski. I need to check into that approach, that is, about setting up an auto withdrawal from your total portfolio. I'm not quite sure how that would work. Gives me something to research.
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Old 12-09-2019, 03:47 PM   #20
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No, I wouldn't say it is "important". When I was saving and saving I had always assumed once I retired I'd start using the pile of money I'd built up, but as I'm now close to that date and starting to plan my strategy, I'm looking at alternatives for income. I could spend down 3 - 4% per year and it'd last for the rest of my life. I'm confident of that, but why if I don't need to? For one thing, I'd have to start guessing which stock or fund to sell and I'm a terrible guesser. In 2012, I bought a new pickup and I sold a pile of Apple stock because I'd made a killing on it so I figured I'd cash in and take my profit. I learned the best time to sell Apple is never. Also, that 4% would be almost entirely capital gains. Those are the types of reasons that concern me about selling my stocks and funds for retirement and why I'm exploring the feasibility of a dividend income producing strategy.
My reason for not waiting to retire until I could sustain myself on dividend and income flow only is that by my calculations it would take a larger sum of investment assets than if I used a total return approach.

If I need to sell, I don't decide what to sell by guessing, but rather by selling what is overweighted according to my asset allocation plan. The bulk of my equities are invested in VG Total (US), VG Total Intl, so there's not a lot to choices to be made. My non-equities are more spread between VG Total Bond, VG Core Bond, a CD ladder, and a few other non-equity funds.

Not at all saying you should do this, but just pointing out that there are valid answers to your questions with a total return approach.

Above all your portfolio has to be one you'll stick to without panic selling, and one you can sleep with. If it's an income based approach, that would be a good one for you and it may work better than mine. There's nothing to say that a total return approach actually returns a higher total return, but that is the goal I prefer rather than an income based approach. One of the uncertainties in retirement is how much income you will actually want/need. There are surprises there, just like there are surprises in the market.
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