FIRE withdrawal strategies

[Montecfo]

The monthly income from my big bond fund is based on the number of shares I own and the number of cents per share the fund pays, not the NAV of each share. The NAV mattered the most when I first bought most of my shares back in late 2008. And at that time, when all markets were tanking, I was able to buy LOTS of shares at dirt-cheap prices. Since that time, the NAV has risen and fallen (mostly risen) but the dividends per share have mostly fallen slightly. I have been able to buy more shares in that time to offset the decline in dividends per share.

I was not suggesting the dividend is based on the principal balance. What I said was the loss in value of the investment is real, and it is a loss of purchasing power. Let's say you bought an investment for 1000, and it yields $50 annually. After a year, suppose you have collected $50, and the investment value or principal has declined to $925. You now have less value than before, as your investment is only worth $975, including the dividend you collected.

Scarambler1, Now, you (or socca) may say you do not care, but it is real, and it does matter. Go try to sell your investment and buy $1000 of groceries: you can't as you have lost money.

More generally, for an income-oriented investor fluctuation in the market value of income-producing assets is largely irrelevant as long as such fluctuation doesn't suggest future impairment of income producing ability.

To Socca-Language I bolded represents a very big IF. Not sure if I have ever seen a stock not begin to decline in advance of a dividend cut, which then results in permanent loss of principal.

I have been income-oriented since the day I started investing some 36 years ago, and have never regretted it. The many asset-valuation-oriented investors on this board may find the income-oriented investor perspective a bit odd, but variety is the spice of life.

I think everyone that is retired can be described as "income-oriented". I am just saying be careful. The 36 years you have been using your approach track perfectly with the long-term decline of interest rates, which has been a persistent tailwind. Any of us that ignore the value of our investments does so at his or her peril, or so it seems from here.

Having said that, I like a good solid dividend as much as the next person, just not at the expense of total return.

Cheers!

 

[scrabbler1]

I was not suggesting the dividend is based on the principal balance. What I said was the loss in value of the investment is real, and it is a loss of purchasing power. Let's say you bought an investment for 1000, and it yields $50 annually. After a year, suppose you have collected $50, and the investment value or principal has declined to $925. You now have less value than before, as your investment is only worth $975, including the dividend you collected.

Scarambler1, Now, you (or socca) may say you do not care, but it is real, and it does matter. Go try to sell your investment and buy $1000 of groceries: you can't as you have lost money.

Cheers!

But I have no plans to ever sell my shares. Their sole purpose is to generate monthly dividends. These are shares in a bond fund, not a stock fund. Bond funds are not really designed for capital growth - they don't have an limited maximum value, as they have an inverse correlation to interest rates which aren't going to go below zero.

As long as that bond fund of mine continues to generate monthly dividends, albeit slightly smaller ones (which is why I have bought many more shares to compensate), I won't really care if each share price drops in value. I am far more concerned with their monthly dividends per share. I recently did some rebalancing in my taxable account, selling off some high-priced stock fund shares at a small profit (even compared to the high price I paid for them in 1998-1999) and bought some more low-priced bond fund shares (not quite as low as they were in late 2008, but still).

 

[socca]

What I said was the loss in value of the investment is real, and it is a loss of purchasing power.

If I define my means as my annual net income, then a reduction in my annual net income represents a reduction in my purchasing power as long as I'd like to live within my means. A reduction in the market value of my assets has no impact on my purchasing power. The market value of a particular asset can vary for a wide variety of reasons other than future income production potential (for example, a mania to buy the asset or a mania to sell it), so I may or may not be motivated to investigate whether a change in the market value of an asset implies a change in its future income production potential.

It's good that we're having this discussion. Some folks are so utterly embedded within the SWR conceptual framework that they forget how retirement planning used to be done back in the old days.

 

[redduck]

I
Scarambler1, Now, you (or socca) may say you do not care, but it is real, and it does matter. Go try to sell your investment and buy $1000 of groceries: you can't as you have lost money.
Cheers!

Well, yeah, I guess you might be right if scrambler or socca try to buy groceries with their entire $1000 investment the same day the company gives them their dividend.

 

[NW-Bound]

I looked up the share price of BND, Vanguard Total Bond ETF. It was $75.49 on March 2007 and $81.17 currently. The cumulative inflation is about 20% for this 10-year period, so the $81.17 is worth $81.17/1.20 = $67.64 in 2007's dollar.

That's a loss of 10% in value($67.64/$75.49), if one spent all of the interest and did not reinvest any.

So, how much is BND paying now? 2.47%. Subtract out the inflation of 1.5-2% to reinvest, and the rest is what one can spend if he wants to preserve his principal.

 

[DawgMan]

Wow! Been away from this thread for a while, but interesting discussion/debate. In an effort not to beat a dead horse, my final take away is those who subscribe to the dividend only income generating solution vs. the pure total return investor choose that approach because they get comfort in supporting their income needs solely off dividends, regardless of any drop in share price. I think that's great for those who can/choose to fund their RE that way. However, I do think conciously or subconsciously you are potentionaly ignoring the possible overall better benefits of a total return return portfolio from a pure numbers perspective. I know we all live in the real world where emotion & perceived risk/reward is measured individually, so that must be taken into account. I get why many choose the approach and there is no wrong/right answer, but I would just suggest if we are intellectually honest then perhaps the pure dividend investor might acknowledge they are willing to give up some potential growth in overall total return in exchange for the "warm fuzzies" that their nut is covered solely by dividends. OTOH, if a dividend investor could illustrate a portfolio that beats a total return portfolio and provides the needed dividend income then I suppose you would have the best of both worlds.

 

[socca]

...if a dividend investor could illustrate a portfolio that beats a total return portfolio and provides the needed dividend income then I suppose you would have the best of both worlds.

There are other sources of income than just stock & bond dividends. Of course, some of these other income sources require more w*rk to properly manage than some people would like to expend during their 'retirement'. In my case, I will never be able to 'retire' in part because the assets I manage are rather high-maintenance (but also provide excellent inflation protection). However, managing assets & running a small business are an entirely different ballgame than running frantically on the corporate treadmill. I consider myself lucky rather than cursed by this situation. YMMV.

 

[Rickt]

I'll be FIREing in just over a month. We'll be living on our taxable portfolio (60% of total assets) until I take SS/RMDs in 17 years. My dividends/interest/CG has been reinvested but will be transferred to my Alliant savings account. This will cover about 40% of our spending. The other 60% will come from savings, short-term bonds or asset sales, all depending on the market at the time and rebalancing needs. We've got over 3 years of spending in cash/ST bonds, so I think my fairly simple plan works well. Thoughts?

That's pretty much what I plan on doing when we RE later this year. We too have 65% in taxable accounts, 25% in ROTH and 10% in IRAS. We plan to keep 7 Yrs expenses(21% of portfolio) in CDs/Short term/intermediate term government bonds. If the market returns are negative we plan to use cash/CDs/bonds to fund living expenses but if the market does well we plan on selling equity to fund living expenses. When we start receiving SS in 2030 we will reduce the cash to 5% of portfolio. We expect SS to cover 65% of living expenses.

Thanks
Rick

 

[Montecfo]

If I define my means as my annual net income, then a reduction in my annual net income represents a reduction in my purchasing power as long as I'd like to live within my means. A reduction in the market value of my assets has no impact on my purchasing power. The market value of a particular asset can vary for a wide variety of reasons other than future income production potential (for example, a mania to buy the asset or a mania to sell it), so I may or may not be motivated to investigate whether a change in the market value of an asset implies a change in its future income production potential.

It's good that we're having this discussion. Some folks are so utterly embedded within the SWR conceptual framework that they forget how retirement planning used to be done back in the old days.

I do not agree that a reduction in your asset value has no impact on your purchasing power. You may choose to view it that way, of course.

And I think you are being a little hard on SWR. In essence, you are advocating a SWR = to dividends or cash flow. You are deeming that rate "safe" even if it, in effect, eats into the value of your principal, which you view as a no-no.

On the other hand, I like the idea of living off dividends and interest very much. I am also ok with using the principal if it is consistent with my plan and the plan passes firecalc and other safety measures. I think NW Bound provided an effective further illustration of how principal can decline over time, unless you are actively maintaining it.

I have gotten a good deal out of the discussion in an understanding of the views expressed and for that I am definitely grateful!

Enjoy!

 

[audreyh1]

Wow! Been away from this thread for a while, but interesting discussion/debate. In an effort not to beat a dead horse, my final take away is those who subscribe to the dividend only income generating solution vs. the pure total return investor choose that approach because they get comfort in supporting their income needs solely off dividends, regardless of any drop in share price. I think that's great for those who can/choose to fund their RE that way. However, I do think conciously or subconsciously you are potentionaly ignoring the possible overall better benefits of a total return return portfolio from a pure numbers perspective. I know we all live in the real world where emotion & perceived risk/reward is measured individually, so that must be taken into account. I get why many choose the approach and there is no wrong/right answer, but I would just suggest if we are intellectually honest then perhaps the pure dividend investor might acknowledge they are willing to give up some potential growth in overall total return in exchange for the "warm fuzzies" that their nut is covered solely by dividends. OTOH, if a dividend investor could illustrate a portfolio that beats a total return portfolio and provides the needed dividend income then I suppose you would have the best of both worlds.

I think you're just pointing out that dividend income investors are willing to live off a lower percentage of their portfolio than the SWR investors.

And from the responses given here, the dividend/income investors appear to be aware of this, and are fine with it. I get the impression that many of them have a big enough portfolio that they don't "need" to take more than the dividend and interest income, that many of them are naturally frugal and simply don't feel the need to spend more, and that many of them want to pass along the bulk of their fortune to their heirs. It's their choice, and lucky heirs!

For people seeking to retire early, waiting until their portfolio was large enough to support taking only the dividend and interest income could mean many more working years, so that would be a really tough trade off. How many years of your life spent working instead of retired are worth the larger required portfolio? However, for folks who are already there, with a portfolio large enough to live off dividends and interest only, who can criticize them for choosing to do so? So what if they haven't maximized the potential income from their portfolio? Clearly that is not their goal.

I also notice that some SWR investors here are also living off of very low percentages (~2%) of their portfolio even though 3-4% would be very very safe (depending on age and AA). So clearly not everyone is seeking to maximize income.

I get the impression that a lot of folks here wouldn't know what to do with a 50% or more increase in income, so they simply let it reinvest. Again, nothing wrong with that unless they regret it later, and how do you predict that? If they aren't depriving themselves in their spending today, I doubt it matters.

 

[NW-Bound]

...I get the impression that a lot of folks here wouldn't know what to do with a 50% or more increase in income, so they simply let it reinvest. Again, nothing wrong with that unless they regret it later, and how do you predict that? If they aren't depriving themselves in their spending today, I doubt it matters.

I think I can train myself to spend another 50%, if I can get it from the stash without seeing it going down. But I'd rather get it from investment returns rather than from the principal. It is not for fear of depleting my stash, but rather the unhappiness of seeing it shrink instead of growing. Old habits die hard, plus I am scroogey.

But, but, but, our SS can be drawn in 2 years if I want it early. And that provides roughly the 50% boost you were talking about. Combine that with 3%WR, we are talking 4.5% WR equivalent, and that's an amount that exceeds our most profligate years with several non-recurring expenses.

Can I overcome my stinginess to buy business-class seats now? Only time will tell. I need to see what higher taxes leave us with before thinking about spending it, as we would be way into the 25% bracket for a married couple.

Maybe the higher taxes will make me cut back my own WR to avoid taxes. I don't call myself Scroogey for nothing.

 

[samclem]

There are plenty of companies that paid a steady dividend long after they should have reduced the dividend or eliminated it entirely, and the company (and the stock) paid the price. "Income investors" who spent those dividends were surely spending down their principal. Maybe they thought it was okay since somebody else was making the "withdrawal" decision and they were still abiding by their grandpappy's strict rule never to sell any shares. Still, somebody else, at the company, effectively raided those shares and just paid them out as dividends.

 

[redduck]

... my final take away is those who subscribe to the dividend only income generating solution vs. the pure total return investor choose that approach because they get comfort in supporting their income needs solely off dividends, regardless of any drop in share price... However, I do think conciously or subconsciously you are potentionaly ignoring the possible overall better benefits of a total return return portfolio from a pure numbers perspective...

I'm one of those people who receive some comfort receiving dividends. I also have come to realize over the years that the vast majority of the more logical thinking investors prefer "total return" portfolios--although occasionally you can find some investors who have done quite well with their dividend portfolios. I have approximately 20% of my portfolio in individual dividend stocks. It's become hobby and I find enjoyment following my dividend portfolio (especially since lately it's outperforming the rest of my portfolio).

There are plenty of companies that paid a steady dividend long after they should have reduced the dividend or eliminated it entirely, and the company (and the stock) paid the price. "Income investors" who spent those dividends were surely spending down their principal...

Sure, there are plenty of companies that should have reduced/eliminated their dividends, but didn't. But, the wise income investor (such as myself ) would be wary of owning these types of companies. Some investors stretch for dividend yields, but they should be aware of the increased risk they are taking.

 

[pb4uski]

I'm a total return guy... to me whether cash flow is dividend, or interest or appreciation doesn't matter. As an example, I don't see much difference between a 3% WR on a equity portfolio tilted towards high dividend payers or an equity portfolio tilted towards low dividend payers... let's say both portfolios earn the same total return and the only difference is the different mix of income between dividends and appreciation (realized gains).. to me it is a distinction without a difference.

I think people get too wrapped up in not touching "principal"... you saved it for your retirement so what's the problem? I don't consider principal sacrosanct. The main problem I have with a not touching the principal approach is that if that is your mindset then you have to work longer than you would if you are willing to dip into principal.

That said... we've been retired for 5 years and our retirement portfolio is 10% higher today than when we retired... 20% higher if I include the value of our winter condo that our retirement funds paid for as a real estate investment so despite a willingness to spend principal if necessary we haven't done so.

 

[NW-Bound]

I think people get too wrapped up in not touching "principal"... you saved it for your retirement so what's the problem? I don't consider principal sacrosanct...

I own many individual stocks, to the point that it's like I am running my own MF. And although I do not sell/buy that often - my portfolio turnover is lower than that of conservative MFs like Wellesley and Wellington - I never own a stock with the idea of owning it forever. I sell some of the winners and buy more of the losers all the time. So, what is principal, if not the number at the bottom of my Quicken screen, as the numbers of shares vary as I "rebalance" between my holdings?

So, I don't consider principal sacrosanct because I do not know what is principal anymore after the buying/selling/rebalancing. It's just fungible money, and the more I have of it, the happier I feel.

 

[pb4uski]

I concede that is it hard after numerous rebalancings, tax loss repositioning, gains trading, etc. ... I was referring to people who are vehemently opposed to spending anything other than interest or dividends based on a view that they would then be spending "principal"... there are some out there... even selling some shares to spend appreciation would be "spending principal" in their minds... that is what I think is a bit silly, but if it works for them then good for them.

 

[NW-Bound]

I concede that is it hard after numerous rebalancings, tax loss repositioning, gains trading, etc. ...

I know. My point is that unless people own individual stocks and bond issues and hold them forever, they do not know what their principal is either.

Else, the shares of your bond or stock funds are churned internally by the fund managers without you seeing, even if the funds are indexed.

So, the money valuation of the assets is all one gets to look at. And be sure to index it to inflation, else one could be losing principal without realizing it.

 

[bmcgonig]

I would imagine that many people who don't wish to spend principal would look at their starting portfolio balance as their 'principal' below which they don't want to go.

 

[Taxman59]

I have been building a dividend based portfolio. The hope is that with SSI and an annuity kicking in around 67 (8 years), my monthly spend will be covered, and any special items (family trips, weddings etc) will come from selling shares. For the next 8 years, I have dividends and my underperforming stocks to supply the cash I need.
I generally am a total return investor, but I noticed high paying, we'll run companies have been outperforming the market. I don't know how long I will keep this up, but for now, it is working.

 

[scrabbler1]

I would imagine that many people who don't wish to spend principal would look at their starting portfolio balance as their 'principal' below which they don't want to go.

You would be imagining incorrectly. Some of my principal is in what I call my second-tier emergency fund, a fund I tap into for large, unexpected expenses when my dividends can't cover them. I have spent money from that fund a few times over the years.

In my medium-term ER spreadsheet, I anticipate having to tap into that fund a few more times in the next few years before I gain unfettered access to the first of my "reinforcements," my IRA, at age ~60, 4 years from now.

 

[Danmar]

OTOH, if a dividend investor could illustrate a portfolio that beats a total return portfolio and provides the needed dividend income then I suppose you would have the best of both worlds.

I agree and through luck or whatever, I have achieved this since I started investing in 1997. "Blue chip" div payers have done very well, at least in Canada, over a long period. Past performance obviously no guarantee.

 

[YVRRocketSurgery]

Question for the dividend portfolio folks, mainly those already FIRE'd...

How steady has your dividend income been?
How impacted has it been by dividend cuts? eg. Did you have to cut spend?
How positively has it been impacted by dividend growth? eg. Has your dividend income outpaced inflation?


For the sake of transparency and context, I have a bit of a hybrid solution going on with mainly Canadian dividend growth equities in my non-registered taxable account and mainly broad based indices with a bit of fixed income in my registered tax sheltered accounts.

 

[scrabbler1]

Question for the dividend portfolio folks, mainly those already FIRE'd...

How steady has your dividend income been?
How impacted has it been by dividend cuts? eg. Did you have to cut spend?
How positively has it been impacted by dividend growth? eg. Has your dividend income outpaced inflation?


For the sake of transparency and context, I have a bit of a hybrid solution going on with mainly Canadian dividend growth equities in my non-registered taxable account and mainly broad based indices with a bit of fixed income in my registered tax sheltered accounts.

Just under 75% of my dividend income comes from bond funds, mainly one bond fund. Compared to 8 years ago when I first ERed, it is down. I have bought many more shares of the main bond fund to offset the decline in monthly dividends per share. I have about 25% of my dividend income from a stock fund, and that income has risen in the last few years.

I have not made any changes to my spending habits. But back in 2014, I stopped reinvesting the stock fund's dividends and began taking them as cash to supplement the bond fund's declining income. My expenses had risen slightly, too. I had always anticipated doing this at some point after I ERed.

With the recent big rise in the stock market along with a decline in bond fund prices, I saw this as a good time to rebalance. I sold some shares of the stock fund and bought more shares of the bond fund. This will increase my overall average monthly income but not enough to resume reinvesting the stock fund's dividends. It will restore the size of the cushion between my expenses and dividend income.

 

[explanade]

With the recent big rise in the stock market along with a decline in bond fund prices, I saw this as a good time to rebalance. I sold some shares of the stock fund and bought more shares of the bond fund. This will increase my overall average monthly income but not enough to resume reinvesting the stock fund's dividends. It will restore the size of the cushion between my expenses and dividend income.

If you FIRE'd in the last 7-8 years, isn't there a good chance that the values of your portfolios are greater than when you retired?

Unless one is withdrawing a lot more than the nominal return from those years?

Regardless of if you're just withdrawing dividends or a percentage of the total portfolio at the end of the prior year?

 

[socca]

For people seeking to retire early, waiting until their portfolio was large enough to support taking only the dividend and interest income could mean many more working years, so that would be a really tough trade off.

So ... the folks who don't qualify as FI under the old definition (income > expenses by a healthy margin) have now embraced a new definition more to their liking? OK - whatever works.

Most of the discussion on this thread seems to be related to the income generated by highly liquid assets such as stocks & bonds. If I had to rely entirely on this type of income to support my 'lifestyle', things would be a tad tight. I hope I never have to go there.