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Old 07-10-2010, 04:30 PM   #61
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Having some portion of your portfolio in an annuity was frequently suggested, and would work, but this solution always led to "interesting" discussions and back and forth by the anti-annuity gang.
Hey, let's talk about that (yes, I do have an SPIA )...
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Old 07-11-2010, 01:18 AM   #62
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Heretical comment follows.

I think it's useful to at least consider the possibility that the real anomaly has been the US equity performance for the 20th century. That's the data set that FIRECalc and most other simulations are based on, explicitly or implicitly. When we consider the US geopolitical preeminence and the economic boom that resulted, particularly since WW-II, it's quite easy to argue that this data set (this particular nation in these particular years) is really the likely anomaly. The same holds true, to a lesser extent, for the US business environment and conditions favoring US economic expansion over the last century--they were certainly unusually good when considered in the entire context of human history. So, when someone says that the future years are really going to be "different this time," we should ask if they mean "different from the recent very anomalous 'good years' in this one particular country" (7-10% PA total returns) or "different from what most developed countries in the modern age have experienced" (2-3% total returns)? Put another way--it's very possible that it really was "different this time" for the last century, and now we're going to experience the "normality" most countries have experienced.

By the same token, technological advances or even advances in our understanding of how economic systems function might result in even higher growth rates than those recently experienced. Or, an asteroid could hit us. We don't know

If a person is ever going to retire, they have to make some assumptions. But (IMO) anybody believing they can set up a fixed 40 year ironclad SWR based on history is fooling themselves. Anyone who comes away from FIRECALC believing there's a meaningful difference going forward between a portfolio allocation/withdrawal rate that generates an 80% historic survival rate and one that generates a 95% survival rate might be overestimating the power and precision of the tools and underlying data in forecasting the future.

What's the solution? I don't know. My particular answer has been:
- Continue to work and squirrel away money longer than "the data" says I need to. Quitting work now and possibly returning to the work force in 5-10 years is not a good answer for me for several reasons. But, I downshifted into work that is more psychologically sustainable.
- Plan to take a year-end percentage rather than a fixed percentage adjusted for inflation. I'm going to use 3.0 - 3.5% at first.
- Plan to be flexible. Monitor the buying power of my portfolio and make adjustments if it starts to slip. Adjustments would include lower annual withdrawals and taking more risk. If the buying power climbs, we'll raise withdrawals and/or reduce the risk we take in our portfolio ("risk" being broadly defined: due not only to volatility, but also from higher inflation, long-term reduced equity returns going forward, etc. Figuring out how to do this might be my new "career").

Sorry, no huge revelations in the foregoing observations. We're all in "measure with micrometer, mark it with a grease pencil, cut with an axe" territory, and what we're measuring is a blob of Jello. And the world going forward might be pudding. (italics added)
When I read your comment, my first reaction was: "I could agree with this if we were talking about a Monte Carlo simulation, but with FIRECalc, a 95% success rate means that your portfolio would have survived what actually happened, 95% of the time." It occurred to me later that if the historical data only cover part of the spectrum of potential results, there could be market downturns that have no precedent in the available data. FIRECalc shows that your portfolio would have survived the Great Depression, the mid-century bear market, 1970's inflation, the Tech Wreck, and the Market Meltdown of 2008—great! But maybe Mr Market has bigger and blacker swans than those, in store for us in the future. Is that why you say there's no meaningful difference, between 80% success and 95%?
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Old 07-11-2010, 02:01 AM   #63
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My guess is that if you go back and look at those old posts, what you'll find is that those people who advocated stretching to meet an aggressive retirement goal; using complicated formulas to arrive at higher withdrawal rates; using 100% equities; maybe borrowing against the house to invest even more, etc. etc. . . . well, I'm guessing those folks aren't posting any more because they're too busy working. Meanwhile, those of us who advocated caution back then are still here saying the same thing today.
Hardly. I just figured people do not want to read the same post from me repeatedly.

I live on the dividends of a 100% individual equity portfolio filled with stocks with long term records of increasing earnings / dividends at a good clip and no big clouds (IMO) on the horizon (currently PG, JNJ, KO, SYY, ADP, ABT,etc). These dividends have grown about 40% in the four years since I retired at 48. I feel very comfortable with this allocation and lose no sleep during the interesting market conditions we have experienced since I focused on individual stocks around 1993. Only a sustained cut in earnings/dividends in the companies I invest in would concern me, and since around 1/2 of my spending is travel / entertainment / toys I could handle a fair amount of pain. Changes in market value of the stocks is not important to me.
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Old 07-11-2010, 06:31 AM   #64
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I live on the dividends of a 100% individual equity portfolio filled with stocks with long term records of increasing earnings / dividends at a good clip and no big clouds...Only a sustained cut in earnings/dividends in the companies I invest in would concern me
I am not a dividend investor so I have never studied that approach so I have a dumb dividends 101 question. I always read about dividends being expressed as a percentage - e.g 2.5%. Also, as I understand it dividends tend to grow over time - e.g. from 2% to 4%. What is the percentage of - current share price, price paid at purchase, something else? If it is based on current share price wouldn't the amount paid out while stable and/or growing as a percentage still be volatile to the degree that share price varies from year to year?
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Old 07-11-2010, 08:51 AM   #65
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Expressed as a percentage -- yes.
Grows over time as a percentage -- no.

Dividends are paid out as $X per share. When we say "dividends grow", we mean that X becomes larger. Take a look at this: KO: Historical Prices for Coca-Cola Company (The) Common - Yahoo! Finance That's why CyclingInvestor says he doesn't care about changes in the stock price.

In 1990, KO had 2.5% dividend yield. $0.20 (split adjusted).

In 2009, KO had 2.9% dividend yield. $1.64.

The price of KO in 1996 was about 50 and now it's about 50--with excursions up to 86 and down to 40.
But the dividend has grown from $0.50 to $1.64.
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Old 07-11-2010, 09:48 AM   #66
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Is that why you say there's no meaningful difference, between 80% success and 95%?
The best answer I've seen to this question is in this article. Not sure which part of the article it's in.
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Old 07-11-2010, 09:59 AM   #67
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Expressed as a percentage -- yes.
Grows over time as a percentage -- no.

Dividends are paid out as $X per share. When we say "dividends grow", we mean that X becomes larger. Take a look at this: KO: Historical Prices for Coca-Cola Company (The) Common - Yahoo! Finance That's why CyclingInvestor says he doesn't care about changes in the stock price.

In 1990, KO had 2.5% dividend yield. $0.20 (split adjusted).

In 2009, KO had 2.9% dividend yield. $1.64.

The price of KO in 1996 was about 50 and now it's about 50--with excursions up to 86 and down to 40.
But the dividend has grown from $0.50 to $1.64.
The split adjusted price of Coke in 1990 was 10 so the price of the stock has increased 500% and the dividend has increased 800%.
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Old 07-11-2010, 10:03 AM   #68
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The split adjusted price of Coke in 1990 was 10 so the price of the stock has increased 500% and the dividend has increased 800%.
Interesting. Are their profits up that much, or are they distributing a larger share of their profits in dividends?
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Old 07-11-2010, 10:16 AM   #69
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My bold.

The world will end next week! Can you prove me wrong today?
No! In fact, I can confirm it. For a tremendous number of people it will. Check daily newspaper Obituary for details.
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Old 07-11-2010, 10:49 AM   #70
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The split adjusted price of Coke in 1990 was 10 so the price of the stock has increased 500% and the dividend has increased 800%.
So if a stock is worth $100/share and pays a 2% dividend you get $2. If the dividend doubles to 4% but the stock price falls to $50 you get the same $2? Your portfolio is worth 1/2 what it was though - doesn't matter as long as the dividend income remains the same, but having bought BofA stock when it was paying big dividends I am sensitive to the thought that a big fat percentage dividend of a tiny amount (say, 50% dividend of a $1 stock) is bupkiss. Don't understand the focus on dividend alone and ignore stock and thus portfolio value reasoning. I'm missing something - presumably Cycling Investor's ability: "I live on the dividends of a 100% individual equity portfolio filled with stocks with long term records of increasing earnings / dividends at a good clip and no big clouds (IMO) on the horizon (currently PG, JNJ, KO, SYY, ADP, ABT,etc)". That choosing of the safe stocks with ever increasing dividends thing.
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Old 07-11-2010, 11:05 AM   #71
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Interesting. Are their profits up that much, or are they distributing a larger share of their profits in dividends?
Both, over the span of my database.

My spreadsheet runs back to 1994, so these are 1994 to 2010 split adjusted comparisons for earnings and dividends of my 3 biggest holdings :

JNJ e 77 to 481 d 29 to 216
KO e 98 to 345 d 39 to 176
PG e 72 to 384 d 35 to 193

Compounded growth rate

JNJ e 12% d 13%
KO e 8% d 10%
PG e 11% d 11%

Payout ratios

JNJ 38% to 45%
KO 40% to 51%
PG 49% to 50%
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Old 07-11-2010, 11:31 AM   #72
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So if a stock is worth $100/share and pays a 2% dividend you get $2. If the dividend doubles to 4% but the stock price falls to $50 you get the same $2? Your portfolio is worth 1/2 what it was though - doesn't matter as long as the dividend income remains the same, but having bought BofA stock when it was paying big dividends I am sensitive to the thought that a big fat percentage dividend of a tiny amount (say, 50% dividend of a $1 stock) is bupkiss. Don't understand the focus on dividend alone and ignore stock and thus portfolio value reasoning. I'm missing something - presumably Cycling Investor's ability: "I live on the dividends of a 100% individual equity portfolio filled with stocks with long term records of increasing earnings / dividends at a good clip and no big clouds (IMO) on the horizon (currently PG, JNJ, KO, SYY, ADP, ABT,etc)". That choosing of the safe stocks with ever increasing dividends thing.
That is a key point. This is not just a buy-and-hold strategy. I monitor the companies and watch for the clouds on the horizon. I held C and BAC for some time, but sold both early and profitably (May to Oct 2007) when the credit crisis started showing signs of spreading beyond sub-prime. I held GGP (owner of shopping malls) for a long time, but sold them over the next year when they borrowed heavily to buy Rouse (owner of very nice shopping malls, office properties, and residential developments) - I do not like when a company changes direction - I 'hired' them to do what they had done well for many years. I am sensitive to (IMO) questionable capital allocation decisions. What I do not care about is stock price fluctuations - to me these are just noise - or a chance to buy / sell to someone who's valuation method is much different from mine.

If earnings and dividends are rising at a good clip, valuations (IMO) are good, and I see no trouble coming (as with most high quality REITs in 1998-1999), then I see dropping stock prices as a buying opportunity - especially when other good companies have valuations which are way too high (almost all non-REIT stocks in 1998-1999). When REITs valuations rose to higher than the alternatives (the PG / JNJ / KO stocks I own now) in 2005-2007 I switched back.
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Old 07-11-2010, 01:01 PM   #73
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So if a stock is worth $100/share and pays a 2% dividend you get $2. If the dividend doubles to 4% but the stock price falls to $50 you get the same $2?
No. You still don't get it.
Companies don't pay dividends in percent. Companies pay dividends in dollars.

The yield percentage is what we calculate for our own information & amusement.

In the past few months Jim Cramer has been talking about "accidental high-yielders"----which are stocks where the price has collapsed, so the yield (D / P) now calculates to a high number.
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Old 07-11-2010, 03:13 PM   #74
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When I read your comment, my first reaction was: "I could agree with this if we were talking about a Monte Carlo simulation, but with FIRECalc, a 95% success rate means that your portfolio would have survived what actually happened, 95% of the time." It occurred to me later that if the historical data only cover part of the spectrum of potential results, there could be market downturns that have no precedent in the available data. FIRECalc shows that your portfolio would have survived the Great Depression, the mid-century bear market, 1970's inflation, the Tech Wreck, and the Market Meltdown of 2008—great! But maybe Mr Market has bigger and blacker swans than those, in store for us in the future. Is that why you say there's no meaningful difference, between 80% success and 95%?
In addition tot he link posted by onward, these other Bernstein "Retirement Calculator from Hell" articles are well worth a read.

Retirement Calculator from Hell Part II

Retirement Calculator from Hell Part III

Retirement Calculator from Hell Part IV

Retirement Calculator from Hell Part V


From Part 3: After detailing the very wide variety of infrequent but cataclysmic social events that rock human societies, Bernstein writes:
Quote:
A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless.
But, in a nuthell: Yes, I think it's possible a black swan bigger and badder than any we've seen in the US in the last 100 years might pay us a visit. But, that's not what I'm most concerned about. Instead, I'm concerned that the good fairy has been sitting on our shoulder for the last 60 years, and that the wonderful average returns we've experienced during that time are now the base set of the data in FIRECalc and other models (Monte Carlo or not). If the good fairy has left us (and there are many reasons to believe she has), then we'll be getting about 2-4%% real total return on our portfolios for a long time, and it won't take a terrific black swan to wipe out retirees who need 6-8% real total return just to stay even.
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Old 07-11-2010, 03:25 PM   #75
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No. You still don't get it.
Companies don't pay dividends in percent. Companies pay dividends in dollars.

The yield percentage is what we calculate for our own information & amusement.

In the past few months Jim Cramer has been talking about "accidental high-yielders"----which are stocks where the price has collapsed, so the yield (D / P) now calculates to a high number.
Very likely that I don't get it. Sort of sounds like this: we have rentals - our rents haven't gone down, in fact they've gone up a bit over the last couple years. Property value has dropped though, so one could say, even without the rent increases, that our yield has gone up. Some other people have rental property in the rust belt and buy the places for very little while renting them out for about the same money we charge. Their effective yield is much greater than ours. While what counts day to day is the amount of rent that comes in, not the percentage, it seems to me that the value (quality?) of the underlying investment is of some importance. If I'm looking at the same property or stock and the rent or dividend remain about the same but the percentage changes it indicates a change in the value of the property or stock. Maybe that change means Detroit is becoming a ghost town or BofA is about to go kerschitt, but Cycling Investor's "Changes in market value of the stocks is not important to me." needed his clarification - for me anyway.

You are saying that the companies don't pay a percentage of their current stock value as the dividend but so many cents per share and that we create the percentage. A worthy distinction, still, if my rents stay constant or grow a bit but property values drop a bunch or go up a lot my yield expressed as a percentage would show that and maybe indicate a good time to sell. I do appreciate your distinction - rents or dividends are what we spend, percentages are just mathematical conceits.
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Old 07-11-2010, 04:20 PM   #76
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From Part 3: After detailing the very wide variety of infrequent but cataclysmic social events that rock human societies, Bernstein writes:But, in a nuthell: Yes, I think it's possible a black swan bigger and badder than any we've seen in the US in the last 100 years might pay us a visit. But, that's not what I'm most concerned about. Instead, I'm concerned that the good fairy has been sitting on our shoulder for the last 60 years, and that the wonderful average returns we've experienced during that time are now the base set of the data in FIRECalc and other models (Monte Carlo or not). If the good fairy has left us (and there are many reasons to believe she has), then we'll be getting about 2-4%% real total return on our portfolios for a long time, and it won't take a terrific black swan to wipe out retirees who need 6-8% real total return just to stay even.
I worry about the same thing. Will history look back at the 20th century as the golden age of equities?
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Old 07-11-2010, 05:36 PM   #77
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You are saying that the companies don't pay a percentage of their current stock value as the dividend but so many cents per share and that we create the percentage. A worthy distinction, still, if my rents stay constant or grow a bit but property values drop a bunch or go up a lot my yield expressed as a percentage would show that and maybe indicate a good time to sell. I do appreciate your distinction - rents or dividends are what we spend, percentages are just mathematical conceits.
"mathematical conceits" I like that way of putting it.

Your comment brings me back to a question that has been haunting me ever since I started buying preferred stocks.

Suppose I buy a stock with a coupon rate of 8% ($2.00 per year) at a discount of 9.8% (vs. par) (22.62). My yield at the purchase is therefore 8.84%. Subsequently the price rises to par (25.00).

I'm still getting the same $2.00 a year. But is my yield 8.84% or 8%?
I think that what CI is saying is, "Who cares? I'm still getting $2 amd that's all that matters."
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Old 07-11-2010, 07:35 PM   #78
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I'm still getting the same $2.00 a year. But is my yield 8.84% or 8%?
I think that what CI is saying is, "Who cares? I'm still getting $2 amd that's all that matters."
I'd say it does matter in terms of - 'could I sell it and get a better return somewhere else?'.

Take an extreme case where you buy a stock for $20 and it pays a $1 dividend, 5%. The stock goes up to $200/sh, same $1 div., but only 0.5% You could sell and probably move the money to something where you could 'lock in' a safe dividend over 0.5%.

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Old 07-13-2010, 01:39 AM   #79
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In addition tot he link posted by onward, these other Bernstein "Retirement Calculator from Hell" articles are well worth a read.

Retirement Calculator from Hell Part II

Retirement Calculator from Hell Part III

Retirement Calculator from Hell Part IV

Retirement Calculator from Hell Part V


From Part 3: After detailing the very wide variety of infrequent but cataclysmic social events that rock human societies, Bernstein writes:But, in a nuthell: Yes, I think it's possible a black swan bigger and badder than any we've seen in the US in the last 100 years might pay us a visit. But, that's not what I'm most concerned about. Instead, I'm concerned that the good fairy has been sitting on our shoulder for the last 60 years, and that the wonderful average returns we've experienced during that time are now the base set of the data in FIRECalc and other models (Monte Carlo or not). If the good fairy has left us (and there are many reasons to believe she has), then we'll be getting about 2-4%% real total return on our portfolios for a long time, and it won't take a terrific black swan to wipe out retirees who need 6-8% real total return just to stay even.
I'll check those links. I know I've read some of the RCFH articles, but don't remember there being that many, so perhaps I've missed some. I think we're saying kind of the same thing about the swans. Could be that future swans will be bigger and blacker because (due to the influence of the good fairy), what we thought were black swans the last several decades were actually only big, dark-colored ducks. If the good fairy leaves, the regular and extra-large swans may put in an appearance at some point. More likely than not, what with mean reversion and all.
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Old 07-13-2010, 08:45 AM   #80
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IMO - One should be fairly confident about being able to provide for their basic lifestyle (for their expected lifespan) if they are considering ER. If not, perhaps the plan should be adjusted.

...

Assuming one can fund their lifestyle (with a conservative estimate/projection)... I believe other factors can present far more risk. People have some level of control over their spending and can exercise it. Plus it is easy to understand.
Amen. I will increase the value of my portfolio by 10% this year, and 6 of those 10 points will come from savings - which is just the reverse side of the "adjusting spending coin". I could try to change my 4% return to 4.5%, with a lot of effort and no certainty, or I can just buy fewer clothes (or rather, suggest to DW that she's got enough already ).

Something I'm finding paradoxical since I joined this fine forum is that there seem to be lots of people who are very (excessively?) cautious on the downside of many things ("assume that every one of your relatives will gamble away all of the inheritance or leave it to the cat's home", "make sure your plans cover what happens when the S&P500 to lose half its value", "dividends will never be the same again", etc), yet are planning to retire early with a relatively fixed income in a way that more or less presumes that society will continue to function pretty much as it does today, with supermarkets, restaurants, overseas vacations, etc.

But if something truly catastrophic happened to society or there were some fundamental change to the economy, everything would change, and we would have to change our plans too. The good news is that, as intelligent humans, we will be able to do that. So much journalism is based on the idea of "OMG, if nothing is done, trend X will kill us all", which is fine except that something will always get done - it may take longer than we'd like, but humanity never just sits there while the floodwaters rise (provided only that we can see them rising).
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