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WR based on yield only?
Old 04-27-2015, 02:48 PM   #1
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WR based on yield only?

I am 5 years into FIRE and my current WR is less than 1%. I am not cheap or excessively frugal and I do pretty much whatever I want, however, I have no family and I am not into golf, country clubs, lavish vacations, etc. A few trusted friends have been giving me crap criticism advice about increasing my WR. After years of badgering contemplation I am beginning to think they are right. What to do with the money is a subject for discussion at another time. The quandary for today: I have studied and understand the various WR calculators but there is one scenario that I have never seen clearly explained. My current portfolio could support a 2% WR on yield alone. My assumption is that WR calculators are based on total return but I am curious if withdrawing only yield would affect the projections. Your thoughts?
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Old 04-27-2015, 03:04 PM   #2
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Yield is simply part of the total return that the SWR calculators are based on. If currently you are drawing only the yield, that % is your withdrawal rate. It's based on the current portfolio value, not the initial one, so it's a % of remaining portfolio type withdrawal.

With that kind of setup, you will probably leave a very large legacy. You just have to decide it you are OK with that or not.
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Old 04-27-2015, 03:06 PM   #3
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I think living on dividends alone is/was often referred to as the "Norwegian widow" retirement income method. Withdrawal calculators don't apply exactly as your portfolio can't "fail" if you never touch principle. You are just modeling a lower withdrawal rate by withdrawing dividends only.

Even if dividends fall short later in your plan for some reason, you're probability of success will still be (much) greater by virtue of your lower 2% WR vs a 3-4% SWR retiree.

Obviously a larger portfolio is required for dividend and interest only withdrawals, but you could do it based on your OP. Well done...
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Old 04-28-2015, 06:46 AM   #4
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Originally Posted by MN317 View Post
I am not cheap or excessively frugal and I do pretty much whatever I want, however, I have no family and I am not into golf, country clubs, lavish vacations, etc. .... My current portfolio could support a 2% WR on yield alone.
This also describes me. I consider the quarterly dividends from my taxable account to be "small sell orders." Those sell orders are my withdrawals and support my lifestyle.
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Old 04-28-2015, 08:25 AM   #5
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My original plan was when DW and I are both FIRED, we plan on an initial 1-2% WR. The problem is that our income streams will vary in retirement and our pensions are not inflation indexed. The other complication for us is that to avoid large taxation around age 70 when RMDs and SS begins for both of us, we realize that we need to Roth Convert our tax-deferred retirement assets along the way -- this may add another 1% to our WR between ages 52 and 70 to pay Fed/State income taxes on the Roth conversions.

Another complication for us is that all of our tax-deferred retirement accounts are in 401ks in funds that do not pay dividends.

The concept of a dividend only withdrawal has been appealing to me, but is complicated by the issues mentioned above.

I believe that that the retirement calculators show a 0% failure rate for us, but they of course do not include the effects of changes to Social Security or private pensions that we are exposed to.

-gauss
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Old 04-28-2015, 08:27 AM   #6
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This also describes me. I consider the quarterly dividends from my taxable account to be "small sell orders." Those sell orders are my withdrawals and support my lifestyle.
"Small sell orders" - that's a good way to look at it, IMO.

Too many people, (again, IMO), think of dividends as some kind of magic. But in effect, it is just the company selling off bits for you, rather than you deciding when and how much to sell. And again, it is total return that matters. A buck is a buck (except for tax considerations, which often favor controlled selling).

Given two stocks that doubled over the same time period (assuming divs re-invested - so same total return), the div payer would have been taxed along the way, so actually less money to re-invest (or lower after-tax return). A company paying no dividend would have that return included in their stock price.

When it is time to sell, as long as you hold > 1 year, the tax rates are the same. But the non-div stock will only be taxed on the gain, not the whole amount withdrawn. The more I think about it, the more I hate dividends.

To the OP: audreyh1 gave you the answer in post #2 - yield is part of the total return. No need to think of it any differently in terms of the calculators.

Now, how you gonna spend the money (not that you have to, but if you want to)?

-ERD50
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Old 04-28-2015, 08:48 AM   #7
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Originally Posted by ERD50 View Post

When it is time to sell, as long as you hold > 1 year, the tax rates are the same. But the non-div stock will only be taxed on the gain, not the whole amount withdrawn. The more I think about it, the more I hate dividends.

-ERD50
Isn't it true that for the investor who has reinvested the dividends, when he/she goes to sell, the cost basis will be different, so their capital gains tax will be lower? In essence, the investor has already paid some of the taxes each year as the dividends were paid out.
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Old 04-28-2015, 09:04 AM   #8
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Isn't it true that for the investor who has reinvested the dividends, when he/she goes to sell, the cost basis will be different, so their capital gains tax will be lower? In essence, the investor has already paid some of the taxes each year as the dividends were paid out.
Basically yes, assuming there is a gain. And the qualified dividends may have been tax exempt depending on total income/bracket.
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Old 04-28-2015, 09:07 AM   #9
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1.5 years into ER and my spending is at the 2% level.....so it could easily be supported by dividends. I have a pension starting in a year's time that will cover my expenses and I will only be making future withdrawals to cover large expenses or to satisfy required distributions. Once SS starts I will probably invest most of it. My plan is to live comfortably and to leave a large inheritance to my family and a couple of local charities.
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Old 04-28-2015, 09:49 AM   #10
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Many thanks to all for your explanations, thoughts, and suggestions. They are very helpful.



Quote:
Originally Posted by audreyh1 View Post
....With that kind of setup, you will probably leave a very large legacy. You just have to decide it you are OK with that or not.
audreyh1 - You are correct, and that is another quandary to address. I have talked to the lawyers several times about this but no definitive answer yet.




Quote:
Originally Posted by SCGamecock View Post
......I consider the quarterly dividends from my taxable account to be "small sell orders."
SCGamecock - An excellent analogy - Thank you.
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