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Old 05-09-2021, 10:58 PM   #21
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@Safire do you have a model (in Excel, for example) of your financial situation? I suggest you build one if you don't already have one. This will tell you everything you want and need to know.

Is your pension indexed or COLA'd for inflation?

Social Security is guaranteed income and is COLA'd.

You said dividends from "retirement accounts". What exactly are these accounts? Dividend stocks? Mutual funds? If they have any equity component, their value will fluctuate with the underlying asset.

In a worst case bear market, your ability with withdraw your needed income may be in question. You need to either build a model in Excel or share your complete financial picture on this thread so people can help you. Bogleheads uses a good format for this to allow others to give input on a standard format from the poster.
Our entire portfolio is VTSAX, VTIAX and VWILX, and is in 401Ks & IRAs. No investment a/cs. 80% of this portfolio is in ROTHs. 20% is in a pre-tax 401K. Our daughter's college funds are in a Coverdell and not included in our portfolio.

The pension is not COLA-ed. We apparently also have the option to take a lumpsum distribution and roll it over into a pre-tax IRA at retirement. it's over 2 decades out, so we'll cross that bridge and make that decision if / when we come to it.

We're renters.

NO debt.

6 months emergency savings in a low yield savings a/c at a local credit union.

8x annual expenses in the retirement a/c. We hope to retire with 25x (and since this portfolio will double by the time of our retirement, using the rule of 72 and assuming an annual return of 5%), we *may* hit our retirement goal unless we have a long and gut wrenching bear market or hyper inflation like in the 70s. My prayer is that that will not happen. Again, hope.

My biggest concern is not if we will reach our retirement goal. My biggest concern is how to conserve whatever principle we end up with at retirement for our disabled son's use for his lifetime needs after we're gone.
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Old 05-09-2021, 11:03 PM   #22
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I would like to add to my earlier post about the dividend yield and the 4% WR.

As mentioned, right now when the dividend yield of the market is about 1.36%, way below 4%, it is of course very safe to spend only that much.

But in the past, the dividend yield was often way above 4%, such as 5-7%. If you spent that much, your stash actually shrank in value because the inflation rate was high during those times. You had to reinvest some of the dividends, in order to add to your principal which was actually shrinking due to inflation.

And as I mentioned earlier, there were times when reinvesting all dividends was still not enough to keep your stash from losing value. Yes, it was that bad.

My point is that by spending only dividends, right now you are underspending the return from your investment, but in the past it often meant you were overwithdrawing from your investment.

See this: https://www.multpl.com/s-p-500-dividend-yield
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Old 05-09-2021, 11:16 PM   #23
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I would like to add to my earlier post about the dividend yield and the 4% WR.

As mentioned, right now when the dividend yield of the market is about 1.36%, way below 4%, it is of course very safe to spend only that much.

But in the past, the dividend yield was often way above 4%, such as 5-7%. If you spent that much, your stash actually shrank in value because the inflation rate was high during those times. You had to reinvest some of the dividends, in order to add to your principal which was actually shrinking due to inflation.

And as I mentioned earlier, there were times when reinvesting all dividends was still not enough to keep your stash from losing value. Yes, it was that bad.

My point is that by spending only dividends, right now you are underspending the return from your investment, but in the past it often meant you were overwithdrawing from your investment.

See this: https://www.multpl.com/s-p-500-dividend-yield
Will check out the link now.

I understand that we live in times of artificially low interest rates. No one knows how long the Feds will be able to keep it this low OR if they want to keep it this low. I do worry that there may be a period of hyper inflation and I'm hoping that IF that has to happen, it happens when we're still working and not when we're retired. But no one can control what tomorrow brings.

In your opinion, what size of an egg would be enough to even withstand hyper inflation? 3M? 4M? More?


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This has been alluded to upthread, but I just cannot help feeling that you are attributing some special characteristics to dividends (that I do not believe exist). As Audrey says, if you are spending the dividends, then you ARE drawing down your portfolio. IMHO, there is nothing special about spending dividends vs. spending capital gains.

Now, the "good" news is that the dividend rate on something like VTSAX is nowhere near 4% (too lazy to look it up). Ergo, if you manage to accumulate a big enough stash that the dividends from something like VTSAX is enough to meet your needs, than you are likely WAAAY over funded. You probably worked many more years than you needed to in order to meet the financial needs of you and your son.
We're nowhere close to retirement age. We're very frugal and live on as little as possible without feeling deprived or "poor". We have nice things - good quality cars, smart phones etc. But our retirement a/cs are just 8X current annual expenses, so are not overfunded at all. Luckily, DH intends working for as long as he can (although I'd like him to retire when he still is "young" enough and and has the good health to enjoy at least a few years in retirement).

You can never be "overfunded" when you have a child to take care for the rest of his life (after your own lifetimes). We're essentially funding not only our retirement but also his.
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Old 05-09-2021, 11:37 PM   #24
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In your opinion, what size of an egg would be enough to even withstand hyper inflation? 3M? 4M? More?

The US has not had true hyperinflation, like experienced by the Weimar, Zimbabwe, and currently Venezuela. The highest inflation the US experienced was 20%/year, and that did not last long.

A few millions of cash would become worthless in no time with true hyperinflation. My guess is a few millions in stocks or other hard assets would do better, but how much better I don't really know.

PS. Some Web sites define hyperinflation as 50%/month. Compounded, it is more than 100x/year or 10,000%. It means $1 becomes 1c in a year. Inflation in Venezuela got as high as 65,000% in 2018.
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Old 05-10-2021, 12:01 AM   #25
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The US has not had true hyperinflation, like experienced by the Weimar, Zimbabwe, and currently Venezuela. The highest inflation the US experienced was 20%/year, and that did not last long.

A few millions of cash would become worthless in no time with true hyperinflation. My guess is a few millions in stocks or other hard assets would do better, but how much better I don't really know.

PS. Some Web sites define hyperinflation as 50%/month. Compounded, it is more than 100x/year or 10,000%. It means $1 becomes 1c in a year. Inflation in Venezuela got as high as 65,000% in 2018.
That is awful.

But assuming no such thing and maybe a 5% inflation, if we only "ate" the dividends on our portfolio, along with SS and pension, then we should preserve the capital and maybe even grow it a little bit by the time of our exits?
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Old 05-10-2021, 12:24 AM   #26
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That is awful.

But assuming no such thing and maybe a 5% inflation, if we only "ate" the dividends on our portfolio, along with SS and pension, then we should preserve the capital and maybe even grow it a little bit by the time of our exits?

Probably so. I am not sure. The US has not had inflation above 5% since 1982, except for 1990 (5.65%). Things have not been bad for 40 years.

PS. The average inflation from Jan 1982 to Jan 2021 is 2.65%/year.
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Old 05-10-2021, 04:13 AM   #27
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You'll just have to think this through on your own, but I suggest you "forget" about dividends within your portfolio. You don't have specific stocks which might be purchased for their "increasing dividends." You don't have funds which emphasize dividends. Once earned, those dividends more or less disappear into your total number. Yes, you could calculate what those dividend numbers were for any given period and withdraw only that much - but why would you? There's nothing particularly magical about co-mingled dividends in my humble opinion.

Our typical approach here is more along the lines of 1) How much do you need/mo or/year in retirement? 2) Figure how much you need to save in order to meet that need (figuring in SS and pension and any other side hustles or sources of income.) 3) Save like crazy. 4) Invest wisely - whatever that is 5) Retire early 6) Take what you need to live within a reasonable stone's throw from 4 (or 5%) for the first year. Maybe adjust for inflation in subsequent years, but, in any case, be flexible in case the market tanks for a few years.

Regarding looking after your offspring when you are gone: That can be done as a "line item" in your retirement withdrawal OR, more likely, you will need to work out survivor provisions (such as, but not limited to a trust) through the proper professionals.

One thing I would be concerned about is going with essentially 100% equities - even now that you are young AND in your accumulation phase. Maybe it's just me, but I could never go all stocks. Lots do that, but not me - even during accumulation. Very much a YMMV situation.
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Old 05-10-2021, 05:28 AM   #28
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[QUOTE=Safire;2604635]...we're currently shopping for LTC insurance.../QUOTE]

I suggest researching the pros and cons of LTC insurance carefully. Things like the average need, the length of stay, the cost of care, what the policy actually covers, etc. An alternative is to self insure.
LTC is expensive and many report large annual increases in premiums. And, some insurance companies much prefer selling polices than paying benefits.
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Old 05-10-2021, 06:00 AM   #29
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Instead of thinking it as spending the dividends consider it as having a 1.5% (which is probably close to your actual dividend rate is.) WR.
A 1.5% WR has always succeeded.
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Old 05-10-2021, 07:53 AM   #30
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The distribution yield on VTSAX is around 1.3%, so that’s pretty low.

It doesn’t appear to pay out capital gains distributions.
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Old 05-10-2021, 10:34 AM   #31
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4% vs 4.5% vs 5% can be easy to quote. The same author said so. But he changed his data set in each of the updates. He didn't used the same reference data. So his analysis showing the increased "safe" WR may not be real accurate. Kind of scary to me. Pick which study your investments more closely match and hope for the best.

To the OP, One of the first things I learned in this group is that money is fungible. In a pre-tax retirement account, it makes no difference at all if you sell shares and withdraw those or withdraw dividends. My personal belief is that taking dividends vs selling shares is a carry over concept from pre IRA and 401K times. A person held a piece of paper stating the number of stock shares you owned. It was a drawn out process process to sell part of your holdings and they paid a lot of fees to sell those shares. Times have changed over the last 50 years.
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Old 05-10-2021, 10:38 AM   #32
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[QUOTE=racy;2604687]
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...we're currently shopping for LTC insurance.../QUOTE]

I suggest researching the pros and cons of LTC insurance carefully. Things like the average need, the length of stay, the cost of care, what the policy actually covers, etc. An alternative is to self insure.
LTC is expensive and many report large annual increases in premiums. And, some insurance companies much prefer selling polices than paying benefits.
Can you suggest a good site or resource that helps us understand and then assess LTC plans (aside from Google)? My husband's employer offers an external plan but I have no idea how to evaluate it and cannot find any reviews about it online.

Thanks!

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4% vs 4.5% vs 5% can be easy to quote. The same author said so. But he changed his data set in each of the updates. He didn't used the same reference data. So his analysis showing the increased "safe" WR may not be real accurate. Kind of scary to me. Pick which study your investments more closely match and hope for the best.

To the OP, One of the first things I learned in this group is that money is fungible. In a pre-tax retirement account, it makes no difference at all if you sell shares and withdraw those or withdraw dividends. My personal belief is that taking dividends vs selling shares is a carry over concept from pre IRA and 401K times. A person held a piece of paper stating the number of stock shares you owned. It was a drawn out process process to sell part of your holdings and they paid a lot of fees to sell those shares. Times have changed over the last 50 years.
What does "fungible" mean?

I tried to do the math behind the assumption that selling shares is the same thing as taking dividends (share prices drop when a dividend is distributed) but then the prices always seem to eventually go back up. Additionally, the total number of shares remain the same when you only eat the dividend vs selling shares.

Can someone explain this with a mathematical example, please?

To answer the tax question - except for a 20%, the rest of our investments is all after taxes. We plan to raid that pre tax a/c at retirement first.

Maybe my question should really be - how can we live off SS (assuming only 60% of the amount estimated to be our payout at retirement) & small pension to preserve the retirement a/cs for our son's trust to inherit 100%. What circumstances would make that doable / possible?
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Old 05-10-2021, 10:58 AM   #33
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In a pre-tax retirement account, it makes no difference at all if you sell shares and withdraw those or withdraw dividends.
True.


In a taxable account, however, it definitely makes a difference since dividends and capital gains are taxed differently.


About half of our portfolio is in taxable accounts so I'm definitely planning to draw out dividends rather than sell shares as much as possible (unless of course future tax changes alter that plan).



Quote:
My personal belief is that taking dividends vs selling shares is a carry over concept from pre IRA and 401K times. A person held a piece of paper stating the number of stock shares you owned. It was a drawn out process process to sell part of your holdings and they paid a lot of fees to sell those shares.
Also true. I remember those days well. Brokers charged a LOT to buy and sell stock, like $75 or $100 per trade. And if you were trading an "odd lot" not a multiple of 100 shares, you paid even more.


Times are far different now when with just a few clicks on your phone, you can buy and sell stocks free of commission, one share or 20 or 100 or whatever.


I do still have some of those pieces of paper in our lock box though.
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Old 05-10-2021, 11:01 AM   #34
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Does it matter if your intention is to solely life off the dividends generated by the portfolio?
Careful. As others have mentioned, the 4% includes dividends. Whether your withdrawals are from dividends, cap gains or organic growth of share price doesn't matter.

I personally live off our dividends and mutual fund cap gains. We do not sell shares. There's been tons of discussion here on the pluses and minuses of this strategy but it works for us.

Just remember that if you withdraw dividends that equal 6% of your portfolio, you are "over-withdrawing" by 2% (of the 4% 'rule'...which is not really a rule).
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Old 05-10-2021, 11:28 AM   #35
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What does "fungible" mean?
Fungible means that a dollar is a dollar is a dollar. It doesn't matter if you take out $100 in dividends or $100 in capital gains or sell shares worth $100. Either way you end up with the same $100. If it is a taxable account, there may be a difference in how that money is taxed though.
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Old 05-10-2021, 11:30 AM   #36
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True.


In a taxable account, however, it definitely makes a difference since dividends and capital gains are taxed differently.


About half of our portfolio is in taxable accounts so I'm definitely planning to draw out dividends rather than sell shares as much as possible (unless of course future tax changes alter that plan).




Also true. I remember those days well. Brokers charged a LOT to buy and sell stock, like $75 or $100 per trade. And if you were trading an "odd lot" not a multiple of 100 shares, you paid even more.


Times are far different now when with just a few clicks on your phone, you can buy and sell stocks free of commission, one share or 20 or 100 or whatever.


I do still have some of those pieces of paper in our lock box though.
The OP mentioned 80% Roth IRA and 20% 401k. My comment of shares vs dividends in a pre-tax also holds true for the Roth (assuming no penalties of course). I agree 100% with your situation. Not only taxes need to be considered but managing ACA subsidies and IRMAA, and, and,..... complicate things. That are further complicated because they are subject to future changes due to possible legislation. None of us have a crystal ball.
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Old 05-10-2021, 11:39 AM   #37
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The OP mentioned 80% Roth IRA and 20% 401k. My comment of shares vs dividends in a pre-tax also holds true for the Roth (assuming no penalties of course). I agree 100% with your situation. Not only taxes need to be considered but managing ACA subsidies and IRMAA, and, and,..... complicate things. That are further complicated because they are subject to future changes due to possible legislation. None of us have a crystal ball.
Agreed. Sorry if I wasn't clear. If OP's money is all in retirement accounts, it doesn't matter where the withdrawal comes from. In our case, however, it will matter since we have so much in taxable accounts. Unfortunately, for the first 22 years of my career, I didn't have an employer-sponsored plan. Only IRAs which have very low contribution limits. So most savings went into taxable accounts.
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Old 05-10-2021, 11:42 AM   #38
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20 years out is too early to get down to the level of specific detail that you're trying to do.
Just focus on increasing your savings/investment percentage at this point.

And fungible means interchangeable...
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Old 05-10-2021, 11:56 AM   #39
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My frustration comes from not understanding the math.

Someone told me it's "mental accounting" to believe that living off dividends or cap gains is not the same as selling shares.

Let's assume the following. At retirement, we own 100 shares each of VTSAX & VTIAX at $100 each, for a principle of $20000. Let's assume that the funds both announce dividends of 0.01 per share for a grand total of a $1 each in dividend each quarter.

The share prices drop to $99 immediately following the distribution. I take out the $2 but continue owning 100 shares of each. About a month after each distribution, the share price climbs back to to $100 each. So, my principle remains the same as pre-dividend. It didn't increase as it could have had I reinvested the dividends but - assuming 0% inflation - I have "conserved principle" by consuming the dividends?

Let's say at the surviving spouse's death 30 years later, VTSAX & VTIAX are now trading at $200. Our son's inheritance is now $40000.

Let's assume someone else sold shares to fund their retirement and only leaves 50 shares each of VTSAX & VTIAX for their heirs. Their heirs end up with a smaller number of shares at the same $200, or $20000, in place of the $40000 my son inherits?

So how is it "mental accounting" to presume that eating dividends isn't the same as selling shares? What am I missing here? Where does my math "suck"?

Over a period of time, with inflation, yes, the purchasing power of the "preserved" capital won't go as far as it did. I get that.

Ideally, we only eat SS & pension, and never nibble at the retirement a/cs at all.

So my question really should be - how do we manage to stretch SS & the small pension so that our portfolio grows for the next 50+ years before our son starts to spend it down?
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Old 05-10-2021, 12:20 PM   #40
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Your mental math on the "assumption" is correct. However the assumption is wrong. If you sell the shares but not withdraw the dividends, what did you do with the dividends? They have to be added to your portfolio. You can't take them out too and not account for them. That would be taking out $2 per share. Presumably you reinvest those dividends of course, buying more shares. You took out 1$ in stock and added $1 in dividends. You have conserved the principle's value if not the principle itself.

Your son's inheritance "value" stays the same either way.
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