The Crossover Point

[DTCS]

I used passive income as the point I could jump ship as I don't get a pension for several years and don't want to touch my IRA until 59.5. To me this was the safest approach. This translates to a less than 2% withdrawal rate in combined pre and after tax accounts. My core investments are Wellington and Wellesley in both accounts.


Sent from my iPhone using Early Retirement Forum

[Onward]

Dividend folks: the value of your holdings in a dividend payer drops every time the stock goes ex-dividend. From the investor's point of view, it's the same thing as selling shares.

You're touching "principal," usually four times a year, whether you intend to or not.

Spending only dividends and leaving principal untouched is an illusion.

[dtbach]

Quote:

Originally Posted by Onward Dividend folks: the value of your holdings in a dividend payer drops every time the stock goes ex-dividend. From the investor's point of view, it's the same thing as selling shares. You're touching "principal," usually four times a year, whether you intend to or not. Spending only dividends and leaving principal untouched is an illusion.

OK, but its easy. Selling shares reduces the number of shares you have so what the heck is the difference??

[photoguy]

Quote:

Originally Posted by Toocold For me, while I can safely use the 4% WR of my investable assets to cover my current expenses, I still feel uncomfortable that this is enough.

Quote:

Originally Posted by Toocold The dividend income is between 3-4% yield and the yield rates based on cost go up as companies raise their dividend payments.

If your dividend yield is 4% and you spend it all, your withdrawal rate for SWR studies/FIRECALC is 4%. I don't know of any safe withdrawal studies where the portfolio is focused on dividend payers (although some programs let you have value stocks), but I doubt it would have any major effect on survivability.

I think the bigger factor in terms of increasing 30-year success rates is that dividends are typically a lower percentage (e.g. 2%), and if you can live on a 2% withdrawal rate it's probably pretty close to bullet proof (regardless of what investing strategy you take as long as you don't do anything stupid).

[scrabbler1]

Most of my dividends are from bond funds, not stock funds. As a percent of what I paid for the shares of the main bond fund (and I bought most of those shares at bargain basement prices), I am getting in the 5-6% annualized rate of return.

I haven't seen bond fund prices drop at the end of every month when they pay dividends. This is probably due to a daily Mil Rate which is part of its monthly dividend.

[38Chevy454]

Maybe I view this too simplistically. If you have X amount of assets, and you get Y percent income off them, you are still living off Y percent. It does not really matter what is used to make up the Y, except for the fact you are getting dividends vs increase in share price. I would fall into the total return thought process, if I understand that correctly.

If the X assets yield Y percent of income, and the value of X after that year is equal or more than the start of the year, then you sustain the withdrawal rate essentially forever - assuming that returns are fairly consistent and conservative.

While share price can be more visible as share value drops, dividends can also be reduced. I guess I do not see any real difference. In the end you are striving to get Y percent income off the X assets, while having that Y percent last forever such that the basic X amount of principle stays equal or increases.

[sunnysideup]

So my parents did this and have done very well over the past 30 years--the market worked well for them. Their problem is that at their advanced age, they no longer can spend the money they have, and it's piling up, and they keep reinvesting!

Having gone through the depression, it's hard for them to let go of the need to make and save money, even though they don't need it anymore. Yes, my siblings and I will reap the benefit at some point, but I am learning from their situation.

As I approach my retirement, I have leaned toward investing for passive income also, but I don't want to leave a ridiculous pile of money for my single heir, who is doing quite well - having learned about finance at a young age. And I have a small amount of pension money too, so I want to spend most of my savings--I like that "die broke philosphy". The problem comes back to having enough to last....

[mrfeh]

Quote:

Originally Posted by Toocold I find myself leaning toward another approach -- which is another popular one -- in which you generate enough passive income, which grows over time that hopefully match inflation, so that you don't ever need to touch principal. Passive income comes from dividend, interest, annuities, rentals. Does anybody else approach FIRE this way?

Go over to bogleheads.org and search for "liability matching portfolio".

[Another Reader]

Money is fungible but assets are not. My real estate investments provide me a steady income that is largely protected from income tax. My tax deferred accounts allow my paper assets to grow unfettered by income tax. Assets appropriate to that basket are held there. My Roth is tax free until the heirs get whatever remains, and the taxation at that point will depend on whatever the estate tax rules are then. The taxable accounts are allocated to maximize their advantages as well. Each type of asset has a different purpose and a different profile because I have to play the hands I am dealt.

When the value of the real estate assets took a nose dive starting in 2008, my income from them slipped slightly, steadied and then rose. Same with the dividend paying stocks, except the banks. Lost a little money there. Oh, well, that's why we diversify. The dividend checks from a diverse group of companies continued to roll into the cash accounts. A lot of that money was reinvested in cheaper shares.

I retired in early 2007. I was completely stressed out by what happened in 2008 and 2009, until I realized belatedly my income did not significantly decline. Had I needed to sell a property or liquidate shares to eat, I would have been seriously damaged and the recovery time would have been a lot longer. Instead, I bought four new properties from 2009 to 2012.

The point is that relying on income that does not vary with asset value is very different than relying on income that arises from asset liquidation. My approach does a much better job of insulating me from sequence of returns risk than decumulation does. I never have to worry about what the stock or real estate market does on any given day (or year). The bonus is that my approach allows me to buy the assets others are forced to sell when times are bad.

*Edited to correct sentence order.

[eta2020]

Quote:

Originally Posted by Another Reader I retired in early 2007. I was completely stressed out by what happened in 2008 and 2009, until I realized belatedly my income did not significantly decline. Had I needed to sell a property or liquidate shares to eat, I would have been seriously damaged and the recovery time would have been a lot longer. Instead, I bought four new properties from 2009 to 2012. The point is that relying on income that does not vary with asset value is very different than relying on income that arises from asset liquidation. My approach does a much better job of insulating me from sequence of returns risk than decumulation does. I never have to worry about what the stock or real estate market does on any given day (or year). The bonus is that my approach allows me to buy the assets others are forced to sell when times are bad. *Edited to correct sentence order.

I bet that gives you very "different" feeling of FI ......

[BBQ-Nut]

What are folks getting as their annual yield for these dividend investments?

[scrabbler1]

Quote:

Originally Posted by BBQ-Nut What are folks getting as their annual yield for these dividend investments?

As I wrote a few posts up, I calculate my annualized dividend yield as a function of the dividends per share and my own average cost basis (which is rather low becasue I bought most of my shares at bargain-basement prices). Using that measure, my annualized dividend yield is in the 5-6% range.

[ERD50]

Quote:

Originally Posted by scrabbler1 As I wrote a few posts up, I calculate my annualized dividend yield as a function of the dividends per share and my own average cost basis (which is rather low becasue I bought most of my shares at bargain-basement prices). Using that measure, my annualized dividend yield is in the 5-6% range.

I cant see where that measurement is of any value to anyone - all it seems to do is give you an artificial view?

If I had a mutual fund that went from $100 to $120 last year, would it help my understanding of my financial situation to say that it went up 40%, instead of the actual 20%, because when I bought it some years ago I got it at $50?

If you want to understand how your dividend payers are performing, look at what you could replace them with by selling them and buying something else. You might still decide to keep them, but AFAICT, that is the real measure of their worth, not what you paid for them in the past.

Am I wrong?

-ERD50

[daylatedollarshort]

For us the crossover point is mostly lowering expenses to live off < (SS + pensions + 0-1% real (TIPS, I bonds, stable value, etc.) + hobby job income).

It is kind of a Your Money or Your Life Approach only with TIPS for inflation protection instead of Treasuries.

I try to focus on evergreen intellectual property type work so I am still getting what is now pretty much passive income from projects from the 1990s and on.

I have a list of ways to cut recurring expenses and ways to make semi-passive recurring income from home and every week we just tackle a few items on the list. So that is my crossover plan, just like in the book Your Money or Your Life - cut recurring expenses, increase recurring income.

[scrabbler1]

Quote:

Originally Posted by ERD50 I cant see where that measurement is of any value to anyone - all it seems to do is give you an artificial view? If I had a mutual fund that went from $100 to $120 last year, would it help my understanding of my financial situation to say that it went up 40%, instead of the actual 20%, because when I bought it some years ago I got it at $50? If you want to understand how your dividend payers are performing, look at what you could replace them with by selling them and buying something else. You might still decide to keep them, but AFAICT, that is the real measure of their worth, not what you paid for them in the past. Am I wrong? -ERD50

It may be an artificial and personal view, but it is relevant. I paid about $7.50 per share back in 2008 and I won nearly all of those shares today. The fund pays about 3.5 cents per share per month so when I divide 0.035 by 7.50 and annualize it, I get around 5-6%. It doesn't matter to me that the NAV for the bond fund is $9 now which would lower the quotient I described above if I used today's price. As I wrote in another thread, my monthly dividend is a function of the dividends per share and the number of shares I own, not the current price of the shares.