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Old 01-09-2017, 01:57 PM   #41
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Both arguments make sense depending on one's situation.

In my personal case it's been drilled into me since childhood to "never touch the principal" with examples pointed to where "things got so bad for them they had to go into the principal! (horrors)"
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Old 01-09-2017, 02:41 PM   #42
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Originally Posted by Sunset View Post
By default we are a mixture, many of our investments pay dividends, but when needed we will sell stock.
I don't chase divs, so maybe that makes us a total return type investor.

The nice thing about divs is even if the market tanked 40%, most divs would remain the same, but selling any stock then would hurt !
Having to sell stocks low certainly hurts, hence most people keep some cash or bonds.
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Old 01-09-2017, 02:42 PM   #43
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Both arguments make sense depending on one's situation.

In my personal case it's been drilled into me since childhood to "never touch the principal" with examples pointed to where "things got so bad for them they had to go into the principal! (horrors)"
I think I read somewhere that the idea of never touching principal came from an earlier era e.g., 1800-1900, when there was no inflation and bank rates were around 4%. Certainly made sense then.
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Old 01-09-2017, 02:44 PM   #44
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I think that is correct if the returns are inflation-adjusted (i.e. "real"). But if the account went up 5% (nominal), inflation was 3%, and you withdrew 3%, you are spending principal (because, in real terms, your account is worth less at the end of the period than it was at the start).
+1

Money is fungible. If your stash can keep up with inflation after withdrawals, then why do you care whether the withdrawals come from dividends or cap gains?

Now, there are arguments that dividend-paying or rather value stocks are better at providing long-term total returns than growth stocks, but that is a different issue.
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Old 01-10-2017, 02:25 PM   #45
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I get psychologically that if your dividends can support your SWR than you may feel "safe" or like you are not touching your principal (regardless of its value, including a devalue), but isn't this smoke & mirrors?
It appears that you are elevating SWR to a position as supreme conceptual framework for retirement financial management, and then trying to fit the old-fashioned approach of defining financial independence as being able to live comfortably within one's income (mostly passive) into the SWR framework. I don't think that this valid. I don't bother calculating my WR because the number has no utility for me (I use the old-fashioned approach). I'm definitely not suggesting that this approach is right for everyone, however.
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Old 01-10-2017, 04:33 PM   #46
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It appears that you are elevating SWR to a position as supreme conceptual framework for retirement financial management, and then trying to fit the old-fashioned approach of defining financial independence as being able to live comfortably within one's income (mostly passive) into the SWR framework. I don't think that this valid. I don't bother calculating my WR because the number has no utility for me (I use the old-fashioned approach). I'm definitely not suggesting that this approach is right for everyone, however.
You were responding to another poster. But it seems to me if I understand you correctly, that it is the definition of "income" that is the hangup.

If your accounts have lost value, you have a loss. This is true whether the dividend was cut, or not. If your dividends that you are living on exceed your total return, you are spending principal. As the OP suggested, there may be psychic benefits from ignoring this, but it is true nonetheless.
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Old 01-10-2017, 04:41 PM   #47
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If your dividends that you are living on exceed your total return, you are spending principal.
A specific example (with numbers) would clarify your point (which I currently don't understand). Don't forget that there can be other sources of passive income than just dividends from stock, but if you want to concentrate on that - fine.
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Old 01-10-2017, 08:07 PM   #48
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A specific example (with numbers) would clarify your point (which I currently don't understand). Don't forget that there can be other sources of passive income than just dividends from stock, but if you want to concentrate on that - fine.
See post 32, there is a simple example in the last paragraph. I used a stock and dividend example, but the concepts hold for other securities.
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Old 01-11-2017, 06:55 AM   #49
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To put a finer point on it, if you have a 2% total return (consisting of a 4% dividend and a 2% loss of investment value) and you spend 3%, I would view that as spending principal, even if you are just "spending the dividends". The earning power of your investment and its balance in dollars would have declined, and that is the measure as I see it.
No - stock dividends are paid per share, not based on current market value.

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. 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.
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Old 01-11-2017, 08:02 AM   #50
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No - stock dividends are paid per share, not based on current market value.

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. 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.
+1.

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.
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Old 01-11-2017, 12:43 PM   #51
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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.

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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.

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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!
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Old 01-11-2017, 01:21 PM   #52
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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).
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Old 01-11-2017, 09:26 PM   #53
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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.
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Old 01-11-2017, 10:43 PM   #54
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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.
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Old 01-12-2017, 04:26 AM   #55
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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.
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Old 01-12-2017, 05:03 AM   #56
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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.
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Old 01-12-2017, 05:55 AM   #57
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...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.
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Old 01-12-2017, 06:11 AM   #58
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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.

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Old 01-12-2017, 06:47 AM   #59
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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!
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Old 01-12-2017, 09:08 AM   #60
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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.
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