How to decide if you can live off investments or need to draw them down

[orbops]

It may seem fairly straightforward to some people, but as the DW & I are planning for ER in either 2025/2026 @ the ages of 55/56, we are having a problem deciding which way to go, if there is even a choice. As most folks here, we saved, invested for growth and let the market work its magic. Now, as we start to make the transition to this next phase and start talking buckets and withdrawal strategies, how do you plan this? How do you know if you need to draw down your portfolio or if you can live off of the income it could throw off? We do not have pensions or annuities. We will have a hair above 2 million spread out among SEPs, Roths, Simple iras, HSAs, I-Bonds and taxable accounts. Annual expenses will be around 52,000. DW may take SS (around 18,000) @62 while I will wait until 70 (around 30,000).

Also, where is a good site for a portfolio tester to check different allocations and investments?
Vanguard has one, but it doesn’t show prior performance.
Morningstar now charges for there portfolio X-Ray.

Morningstar offers 7 days free for their portfolio X-Ray.
Vanguard's Monte Carlo Simulator is a very simple nice one. You don't need prior performance for a Monte Carlo Sim.

Your situation is somewhat similar to mine. I retired at 50 with around 1.7M while my DW still works as a writer, so her income is not really counted. I plan on taking SS at 70, while DW at 67 since I don't want ordinary income to increase due to SS. Since the market has hit new highs, our portfolio has doubled in 7 years. We withdraw about $60-70K/year - and had originally assumed $50K/year.

Currently our withdrawals are from non-retirement funds that are generally sitting in CDs or T-bills so that I minimize ordinary income from dividends, and then each Dec I do a Roth conversion of around $30-40K/year to keep us in the 10% tax bracket as well as keeping our Marketplace medical insurance very low. We shifted our allocation from 85/15 to 70/30 and in my tIRA am gradually converting lower performing stocks/funds to CDs and T-bills while increasing my stocks/funds in my Roth account. My DW's Roth can be touched if our AGI gets too high.

The goal is to try and stay in the 10 or 12% tax bracket until we take SS, and slowly drain the tIRA with Roth conversions for the next 10-15 years. By the time we hit 75 and the RMDs kick in, hopefully the RMDs will start with about $25-30K/year - replacing the yearly Roth conversions.

 

[eyenitnoy]

It may seem fairly straightforward to some people, but as the DW & I are planning for ER in either 2025/2026 @ the ages of 55/56, we are having a problem deciding which way to go, if there is even a choice. As most folks here, we saved, invested for growth and let the market work its magic. Now, as we start to make the transition to this next phase and start talking buckets and withdrawal strategies, how do you plan this? How do you know if you need to draw down your portfolio or if you can live off of the income it could throw off? We do not have pensions or annuities. We will have a hair above 2 million spread out among SEPs, Roths, Simple iras, HSAs, I-Bonds and taxable accounts. Annual expenses will be around 52,000. DW may take SS (around 18,000) @62 while I will wait until 70 (around 30,000).

Also, where is a good site for a portfolio tester to check different allocations and investments?
Vanguard has one, but it doesn’t show prior performance.
Morningstar now charges for there portfolio X-Ray.

Two million plus SS with expenses of around $52,000 should be just fine to retire right now.

But there is one important question. Do you plan to spend ALL of your retirement savings over the 30+ years of retirement ahead you should have OR do you want to leave money to heirs?

It's a big question. I want to spend every penny of my savings over the course of my retirement, but many people want to leave money to children, charities, etc.

This must be planned for as the expense it is. If you want to leave your kids $1 million, then you don't have $2 million saved for retirement, you have only half that much!

 

[Koolau]

There are 2 financial aspects to the "can I live off my investments" question- income & expenses. Lots of good thoughts on investment income. I'm also a big fan of firecalc, especially its 'what if' graphs illustrating how sequence of returns can make or break things even at the same average rate of return. But the other key component is the expense side. The longer the retirement the wider the cone of financial uncertainty. IMHO any long term plan of predicted expenses should include alternative plans should major unexpected expenses rear their ugly head(s).
The 'can I live off my investments' question can be a difficult one, especially for those whose well-paid career is difficult to re-enter should they experience a future financial need to do so.

Yeah, my c@reer ended up in such a tiny box (expert on a very limited subject) that I would never have found an equivalent j*b (though my major field would have offered a "living" if need be.) Thankfully, I never even had to consider such a return to the w*rk place.

Though I found myself in the 2008 debacle soon after my retirement, I never panicked. Now, with a good portion of my retirement life behind me, I only worry about black swan events - and try not to think about them too often. YMMV

 

[marko]

Yeah, my c@reer ended up in such a tiny box (expert on a very limited subject) that I would never have found an equivalent j*b (though my major field would have offered a "living" if need be.) Thankfully, I never even had to consider such a return to the w*rk place.

+1. There's another side to that coin as well. Despite a stellar resume and industry wide name recognition, at age 52 I was unable to find a new job. I was either over qualified or over priced...not that we even discussed pay.

At one point I was told that I was just some rich guy looking to play golf with clients for the next 10 years and do nothing else, which wasn't true. "Why should I invest in you when you'll be gone in 5 or 10 years? "

Ageism is very real. I would advise anyone to not plan for an age 65 retirement and instead plan on 10 years earlier...just in case.

 

[Koolau]

+1. There's another side to that coin as well. Despite a stellar resume and industry wide name recognition, at age 52 I was unable to find a new job. I was either over qualified or over priced...not that we even discussed pay.

At one point I was told that I was just some rich guy looking to play golf with clients for the next 10 years and do nothing else, which wasn't true. "Why should I invest in you when you'll be gone in 5 or 10 years? "

Ageism is very real. I would advise anyone to not plan for an age 65 retirement and instead plan on 10 years earlier...just in case.

I saw ageism happen at Megacorp. Once folks reached 50 (unless you were an executive) your c@reer became stagnant and no one paid much attention to you. Then the layoffs and downsizing started, and guess what? The over 50's were the ones who seemed to be still looking for a chair when the music stopped. Didn't happen to me. They simply stuck me in a place I didn't want to be. Since I had options, I took them and bailed.

 

[LateToFIRE]

^^^

Ahh, the topic of ageism in the megacorp workplace. I know it well.

Would still be toiling for the man, but for the fact that was made clear no further advancement would be in the cards - after all, why would they "invest" in an oldie (early 60's) like me regardless of how much revenue I was facilitating for them. And where was I gonna go at my age? Ha, they figured, we'll just keep him reeling in the profits, skim all the fat off the top, have him baby sit the youngsters, and throw him a bone here and there.

At the income I was clocking, another 3-4 years would have had a multi-seven-figure impact on NW - both in terms of avoiding drawdown on portfolio, as well as additional savings, RSU's, portfolio growth, etc. I really loved my work, but, honestly, I just could not stand feeling arbitrarily cheated.

So, here I am, class of 2024. Perhaps blessing in disguise. Right now I'm feeling like it was definitely the right decision. Whole point of reaching FI is so you have choices, don't have to put up with BS, get to play (or not play) on your own terms!

 

[wdwwildbill]

just a novice trying to understand but if you are just pulling dividends then arn't losing shares. If selling I know porfolio will go up over time but what if you have several bad market years and you are selling shares ? Seems like you can't get those shares back and can deplete baance quickly ? Is my thinking incorrect ? Not debating one over the other just trying to understand.
In my case I have a special needs son that I will need to leave as much as possible for him to suvive after I'm gone

 

[mrfeh]

just a novice trying to understand but if you are just pulling dividends then arn't losing shares. If selling I know porfolio will go up over time but what if you have several bad market years and you are selling shares ? Seems like you can't get those shares back and can deplete baance quickly ? Is my thinking incorrect ? Not debating one over the other just trying to understand.
In my case I have a special needs son that I will need to leave as much as possible for him to suvive after I'm gone

The only thing that matters is total return. The number of shares you own is not relevant; only their value.

You can avoid selling assets that are down in value by holding less volatile assets (cash, bonds) and using those for expenses.

Go over to bogleheads.org and search for "total return" for hours and hours of fun. Here's an example: https://www.bogleheads.org/forum/viewtopic.php?t=276554

 

[mathjak107]

just a novice trying to understand but if you are just pulling dividends then arn't losing shares. If selling I know porfolio will go up over time but what if you have several bad market years and you are selling shares ? Seems like you can't get those shares back and can deplete baance quickly ? Is my thinking incorrect ? Not debating one over the other just trying to understand.
In my case I have a special needs son that I will need to leave as much as possible for him to suvive after I'm gone

this is incorrect .

You get no additional compounding then you had without the dividend .

You only lose the compounding you had pre ex div if You don’t reinvest .

As an example if you have a 100 dollars invested and the stock pays 10% , when the stock goes ex div you get 10 bucks in hand and the mandatory price roll back leaves you with 90 dollars invested .

If the stock market doubled that stock you have 180 in the investment and 10 bucks in hand , so you have 190 .


If you reinvested the 10 bucks you have the same 100 back you had before it went. Ex div and if it doubles that is 200 dollars in value .

That is the same balance you would have had if the stock never went ex div and you never reinvested .

It’s a wash .


You are no different than pulling 10% out of a portfolio of non div payers and deciding you don’t need the money so you put it bac

 

[Digger1000]

This thread made me look into how much I have sold since I retired Apr 2017.

I have withdrawn $10,519.69 in the 7 years I've been retired. No SS or pension (I'm 58). I've lived off dividends and I think I had 20k in savings when I retired. Otherwise I am all in the market (most of my life 99-100% in the market including now, almost all S&P 500). I do have a less than 1k rmd every year from an inherited IRA. I retired with 625k which has more than doubled now.

So I retired Apr 3,2017 and I sold a few shares in 2020 and a few shares in 2023. Thats it.

 

[mathjak107]

we are retired going on 9 years and our portfolio is higher then the day we retired despite drawing 6 figures a year from it .

so it has nothing to do with dividends but rather total returns being able to support the draw

 

[pb4uski]

This thread made me look into how much I have sold since I retired Apr 2017.

I have withdrawn $10,519.69 in the 7 years I've been retired. No SS or pension (I'm 58). I've lived off dividends and I think I had 20k in savings when I retired. Otherwise I am all in the market (most of my life 99-100% in the market including now, almost all S&P 500). I do have a less than 1k rmd every year from an inherited IRA. I retired with 625k which has more than doubled now.

So I retired Apr 3,2017 and I sold a few shares in 2020 and a few shares in 2023. Thats it.

Living off dividends is withdrawing. Withdrawals are all money taken out of the pot, whether income or principal.

 

[mathjak107]

Living off dividends is withdrawing. Withdrawals are all money taken out of the pot, whether income or principal.

it always amazes me how so many don’t know dividends are a withdrawal, no different then just pulling the same dollars from a non div payer .

balances will always be the same assuming same total return.

only taxes may differ

 

[OldShooter]

Living off dividends is withdrawing. Withdrawals are all money taken out of the pot, whether income or principal.

+1

For a deeper dive: https://corporatefinanceinstitute.com/resources/equities/homemade-dividends/

 

[Fermion]

The only sometimes advantage about dividend paying companies is that at least some of the money is not available for the CEO and board to squander on bad purchases or stock grants.

But Seadrill paid a very nice dividend, until it drilled the shareholders.

 

[mathjak107]

if only that would be the case but corporate stupidity is not isolated because stocks pay dividends . these stocks can squander more money than their non div payer relatives .

case in point .

AT&T paid $100 billion to enter the cable business

AT&T thought it would be a good idea to diversify by paying $100 billion to take on cable company TCI. It was wrong! AT&T broke itself up a few years later and sold off the cable assets.

AT&T tried to elbow its way into the personal computer business with a hostile $7 billion takeover of NCR. It didn't work, and AT&T later spun the company back out at a $4 billion valuation.

Microsoft paid an estimated $500 million for mobile phone company Danger. It was supposed to be working on new phones for Microsoft, but most of the key employees left the company. The end result of the acquisition was the Kin, a social smartphone from Microsoft that totally bombed.

Cisco probably bought Pure Digital, the company that makes the Flip, right at the peak of its value in 2009. Since then high definition video cameras have been built into just about every smartphone making the Flip pretty much worthless in the long run. Which is probably why Cisco killed the $590 million acquisition .

After Google bought DoubleClick, Microsoft tried to keep up by buying ad company aQuantive for $6 billion. The acquisition never really worked out. The aQuantive executives left two years after the deal closed and the technology was discarded.
..
AOL-Time Warner is obviously the worst

i can go on and on

 

[Koolau]

if only that would be the case but corporate stupidity is not isolated because stocks pay dividends . these stocks can squander more money than their non div payer relatives .

case in point .

AT&T paid $100 billion to enter the cable business

AT&T thought it would be a good idea to diversify by paying $100 billion to take on cable company TCI. It was wrong! AT&T broke itself up a few years later and sold off the cable assets.

AT&T tried to elbow its way into the personal computer business with a hostile $7 billion takeover of NCR. It didn't work, and AT&T later spun the company back out at a $4 billion valuation.

Microsoft paid an estimated $500 million for mobile phone company Danger. It was supposed to be working on new phones for Microsoft, but most of the key employees left the company. The end result of the acquisition was the Kin, a social smartphone from Microsoft that totally bombed.

Cisco probably bought Pure Digital, the company that makes the Flip, right at the peak of its value in 2009. Since then high definition video cameras have been built into just about every smartphone making the Flip pretty much worthless in the long run. Which is probably why Cisco killed the $590 million acquisition .

After Google bought DoubleClick, Microsoft tried to keep up by buying ad company aQuantive for $6 billion. The acquisition never really worked out. The aQuantive executives left two years after the deal closed and the technology was discarded.
..
AOL-Time Warner is obviously the worst

i can go on and on

My Megacorp did a couple of real stupid acquisitions that totally failed. Somehow, they are doing just fine now, but both acquisitions were table-talk fodder to employees at lunch break for several months. Even more talk and "I told you so's" when it all hit the fan (both times.)

 

[Al18]

Warner Bros seems to be toxic to every company who acquired it over the years, including the most recent split from AT&T to WBD - check the stock price

 

[mathjak107]

the thought that somehow dividend payers are somehow immune to squandering money is just false .

if anything because of their size the money squandered is a lot

 

[marko]

it always amazes me how so many don’t know dividends are a withdrawal, no different then just pulling the same dollars from a non div payer .

balances will always be the same assuming same total return.

only taxes may differ

This is true. But this discussion ( and tax time) had me re-look at things. In my case, when I say "dividends" I'm lumping in dividends, MF Cap Gains and interest.

I found that almost 80% of what I call "dividends" is actually interest derived from the likes of Floating Bank Rates, HY bonds, regular bonds and TBills. AFAIK, and unless someone shows me differently, such interest does not reduce the price of those sources accordingly and are true cash payments.

Or, am I out in the weeds again?

 

[mathjak107]

actually it depends on the fund .

bond etfs usually include interest in the nav and take a hit when ex div .
most bond funds do not include it daily so no hit . it is kept separately in a bucket.

but it is best to check anyway as i am sure not all follow this format

 

[Closet_Gamer]

the thought that somehow dividend payers are somehow immune to squandering money is just false .

if anything because of their size the money squandered is a lot

To me it just means they should be paying even higher dividends. Idle cash in the hands of most execs is like idle hands ... The devil's plaything.

 

[mathjak107]

To me it just means they should be paying even higher dividends. Idle cash in the hands of most execs is like idle hands ... The devil's plaything.

i don’t need them withdrawing my money for me , if i want to take withdrawals i rather take them myself .

dividends in a taxable account have poor taxation in that the whole dividend is taxed unlike if i take it myself only the gain portion is taxed .

but the fact is 80% of the s&p pay dividends so they are unavoidable.

my taxable account holds a lot of berkshire and vti since they are tax efficient.

all the higher dividend does is subtract more off the investment value … meh

 

[GravitySucks]

Other than dividends, how should a company return capital?
I like dividends better than stock buy backs. Dividends are steady or if not draw a good amount of attention. Buybacks are timed randomly. Are they buying back when you would be buying more? Also, I’m still not convinced that buybacks arent used for corporate shenanigans timing them to cover issues or at a boards/C-suite convenience.

 

[mathjak107]

why does a company have to hand me back my money when i can take it myself from a portfolio, or stock even if non div payers.

berkshire has no problem compounding investor money with out forcing investors to withdraw their dollars invested.

if i believe in a company enough to invest in it , i want them to compound my invested dollars . i dont need them to hand me my dollars back