4% rule and dividends

[eryx]

I searched around the forum and the web and didn't much of an answer on this.

Are dividends part of the 4% rule? How should they be calculated into SWR?

Here's an example with round numbers:

You have 1 million in index funds. In a typical lazy portfolio asset allocation.
Say this puts out 25K annually in dividends.
You want 40K per year to live off of. (4% rule)

So-- you only need to sell off 15K a year? That's 1.5%.

Do this year after year, and it's not really following the 4% rule. Not even close.

Withdraw 4%, and then you have 65K available each year, when you only wanted 40K.


So what's the deal?

 

[Montecfo]

The dividends are part of the 4 percent assuming you are spending them. The 4% is all spending from investment accounts, net of any investment advisor fees.

Does not matter whether you spend dividends interest gains or capital, it all counts.

 

[RxMan]

Technically you can set it up however you want. You could reinvest all dividends and then withdraw your 4% as planned. Or you could calculate what percentage is needed after dividends, take the dividends as cash, and withdraw enough to reach your total target percentage which in your example is 4%.

It may also depend on how often you want to do your withdrawals for living expenses versus how often you receive the dividends. If you get monthly dividends but you only want to withdraw for living expenses once a year that might impact when and how much you withdraw for your living expenses allowance for that year. Some people set up monthly cash transfers as if they are still receiving a paycheck while others may do quarterly or even one large withdrawal once a year.

I think I will have all dividends placed in my cash equivalent account when I get to retirement and then withdrawal my allocated percentage needed for living expenses at regular intervals first using up that cash from my dividends and then selling off shares to make up any difference needed. Because I am currently still working all of my dividends are automatically reinvested in additional shares.

The only other considerations are things like minimum distributions etc which may impact how much you must take out of certain accounts each month. But that could all be factored into your overall 4% withdrawal rate plan and handled accordingly.

 

[Chuckanut]

Money is fungible. You can get your spendable money from stock dividends, capital gains or interest on bonds and CDs. It's all just dollars.

Definition of fungible:

1. Returnable or negotiable in kind or by substitution, as a quantity of grain for an equal amount of the same kind of grain.
2. Interchangeable.
3. Able to be substituted for something of equal value or utility; interchangeable, exchangeable, replaceable.

 

[Plantman]

The 4% rule only applies to year one of retirement. Subsequent year withdrawal amounts are determined by inflation rates. For example: $1,000,000x4%=$40,000 in year 1. If inflation is 5% then year 2 withdrawal is $40,000x5%=$42,000. Year 3 withdrawal is $42,000 x year 2 inflation rate. And so forth.

 

[mrfeh]

I searched around the forum and the web and didn't much of an answer on this.

Are dividends part of the 4% rule? How should they be calculated into SWR?

Here's an example with round numbers:

You have 1 million in index funds. In a typical lazy portfolio asset allocation.
Say this puts out 25K annually in dividends.
You want 40K per year to live off of. (4% rule)

So-- you only need to sell off 15K a year? That's 1.5%.

Do this year after year, and it's not really following the 4% rule. Not even close.

Withdraw 4%, and then you have 65K available each year, when you only wanted 40K.


So what's the deal?

Dividends are essentially a forced sale, with potentially worse tax implications.

In your example, if dividends are used for expenses, you'd only be able to withdraw another 1.5% from your portfolio before hitting 4%.

 

[disneysteve]

As others have said, all money that you withdraw from your portfolio to spend counts toward the 4% withdrawal rate. It doesn't matter if that money comes from interest, dividends, capital gains, or selling holdings. It's all the same. Money is money.



If you have $1 million and take out $25,000 in dividends, that would be a 2.5% withdrawal rate. You could take another $15,000 beyond that to get to the 4% figure.

 

[Gumby]

As I look at it, the 4% Rule implicitly adopts a "total return" view of investing. In other words, the source of that 4% doesn't matter. Yes, I am aware of the tax implications of dividends, but if it is coming out of a tIRA, it's all ordinary income. And even if it isn't coming out of a tIRA, that just changes your spending amount as the tax treatment changes.

 

[OldShooter]

@eryx, you seem to be thinking that somehow dividends are free money. This is a fairly popular fallacy but definitely a fallacy. Here is a very simple example to show that:

Suppose you own two shares in a company that has $500/share in the bank, no other assets, and no ongoing business. No surprise, the company is trading at $500/share. Now suppose that the company declares a $250/share dividend.

The ex dividend day is the day when the shareholders receiving the $250 are determined, so on that day the share price drops to $250. (Because half the value of the company is now being paid out.) On that day your share holdings together are worth $500 and you have a $500 check coming in the mail. So ... $1,000 total.

But maybe the company doesn’t want to pay a dividend but you want the $500. Simply sell one of your shares. Now your share holdings are worth $500 and you have a $500 check coming on the settlement date. So ... $1000 total.

In either scenario, as others have pointed out, you have $500 in fungible money that you can use however you like.

Here is an excellent (and short) video by an acknowledged investment expert: Dr. Kenneth French on Dividends: https://famafrench.dimensional.com/videos/homemade-dividends.aspx

 

[jazz4cash]

I searched around the forum and the web and didn't much of an answer on this.



Are dividends part of the 4% rule? How should they be calculated into SWR?

I can’t vouch for the source, but this is consistent with what others are saying here.

https://retirecertain.com/does-the-4-rule-include-dividends/

 

[Koolau]

Yeah, I'd say forget about dividends. It's all in the pile and you take about 4% of the pile the first year. YMMV