4% rule.

[NW-Bound]

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.

 

[Koolau]

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.

 

[racy]

...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.

 

[GravitySucks]

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.

 

[audreyh1]

The distribution yield on VTSAX is around 1.3%, so that’s pretty low.

It doesn’t appear to pay out capital gains distributions.

 

[CRLLS]

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.

 

[Safire]

...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!

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?

 

[disneysteve]

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).

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.

 

[marko]

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).

 

[disneysteve]

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.

 

[CRLLS]

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.

 

[disneysteve]

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.

 

[TheWizard]

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...

 

[Safire]

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?

 

[CRLLS]

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.

 

[CRLLS]

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?

50 years is a very, very long time. I wouldn't fret about it too much this early. As the Wizard said, focus now on the savings. Later you can play with optimizing the various buckets. Many things will change between now and then. Who is to say at the time he inherits he won't be FI himself and not need the inheritance. Maybe he will be thinking how do I maximize this for my grandchildren? One can only hope.

 

[disneysteve]

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

Look at two options:


1) You have $1,000 worth of shares. They pay a $10 dividend that you take out. You still have $1,000 worth of shares and $10 in your pocket.


2) You have $1,000 worth of shares. They pay a $10 dividend that you reinvest, so you now have $1,010 worth of shares. You sell $10 worth of shares. You're back to $1,000 worth of shares and $10 in your pocket.


It doesn't matter if you take the $10 from the dividend payment or from the sale of shares. The end result is the same.


Does that make sense? Maybe someone else can explain it differently.

 

[TheWizard]

Look at two options:


1) You have $1,000 worth of shares. They pay a $10 dividend that you take out. You still have $1,000 worth of shares and $10 in your pocket.


2) You have $1,000 worth of shares. They pay a $10 dividend that you reinvest, so you now have $1,010 worth of shares. You sell $10 worth of shares. You're back to $1,000 worth of shares and $10 in your pocket.


It doesn't matter if you take the $10 from the dividend payment or from the sale of shares. The end result is the same.


Does that make sense? Maybe someone else can explain it differently.

You explained it fine.

I suppose another way is to think of dividends being immediately reinvested. I own 1200 shares of an index fund, the end of a quarter comes and BLAMMO, I now have 1205 shares of that fund.

Safire needs to focus on Total Return of index funds. There's not much "math" involved, actually...

 

[Koolau]

Look at two options:


1) You have $1,000 worth of shares. They pay a $10 dividend that you take out. You still have $1,000 worth of shares and $10 in your pocket.


2) You have $1,000 worth of shares. They pay a $10 dividend that you reinvest, so you now have $1,010 worth of shares. You sell $10 worth of shares. You're back to $1,000 worth of shares and $10 in your pocket.


It doesn't matter if you take the $10 from the dividend payment or from the sale of shares. The end result is the same.


Does that make sense? Maybe someone else can explain it differently.

Yes, that explains it nicely. I tried to explain that within, say a Vanguard or Fidelity Mutual Fund (which, apparently OP owns within IRAs or 401(k)s etc.) there isn't really any opportunity to ONLY take out the dividends. Dividends, capital gains, etc. end up in a pot full of values of other stocks. SO picking out the actual dividends isn't really possible. If one wants to slavishly "LIVE" on dividends, one has to hold individual stocks and laboriously place the dividends into some sort of OTHER receptacle to make that happen. Doing so, takes away the advantages of owning mutual funds (mixed batches of several stocks that give diversification.) Otherwise, diversification becomes owning dozens of DIFFERENT individual stocks - each with its own dividend that must be slavishly harvested. What a royal pain!

I'm just trying to convince OP to FORGET about dividends. Let the money all go into the mutual fund pot and then take out what you need to live on. It doesn't matter where the value within the mutual fund came from. I understand the theory of "living only on dividends" - folks used to do that with indivdiul phone company or utility stocks and such. Now, we have mutual funds that commingle everything - dividends are like Prego - they're "in there" but you only notice them as an increase (hopefully) of your total mutual fund value every 3 months or whatever. Forget dividends!! Concentrate on earning what you need to meet your financial goals. Sorry, hope I'm not sounding like an ogre (any more than usual). And, as always remember that YMMV and my advice is officially worth what you pay for it.

 

[audreyh1]

Look at two options:


1) You have $1,000 worth of shares. They pay a $10 dividend that you take out. You still have $1,000 worth of shares and $10 in your pocket.


2) You have $1,000 worth of shares. They pay a $10 dividend that you reinvest, so you now have $1,010 worth of shares. You sell $10 worth of shares. You're back to $1,000 worth of shares and $10 in your pocket.


It doesn't matter if you take the $10 from the dividend payment or from the sale of shares. The end result is the same.


Does that make sense? Maybe someone else can explain it differently.

Yes, that’s right on the money! (Yuck, yuck)

 

[Koolau]

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!

No help here on sources of info - this site often addresses the topic, and as you might guess, the opinions are all over the place.

DW and I DO have LTC policies. Even so, I'd say I have no idea if that was a good idea or not. Ask me in 10 years.

The same rule that applies to ANY kind of insurance applies to LTC insurance. Insure against ONLY those losses you can't make up on your own. For instance, most folks MUST have liability insurance (first, it's the law in most states) but also because there is no technical limit on what you might be on the hook for in an accident. BUT you actually may NOT need collision insurance. What if you wreck your car and it's totaled. Can't you go out and buy a new car? If it has $5000 damage. Couldn't you just write a check for $5000 to a body shop? If the answers are "yes", then technically you don't need collision coverage. Of course, if you finance a car, the title owner will insist on collision coverage.

What about LTC insurance? There is a school of thought that says "poor" people don't need it because they will quickly go on Medicade. Rich people (whatever that means) don't need it because they have enough to write $10,000 checks every month. Folks in between MAY need it to protect either their spouse from bankruptcy or to protect their estate from depletion. Because OP has someone they wish to protect after they are gone, I'd suggest (only suggest) they may want to consider LTC to protect their assets.

How to find the right policy with right features, etc., isn't so easy to answer. There are lots of problems with LTC (like the increasing premiums that WE have experienced.) The LTC policy writers didn't realize that folks would own these for a few years and then NOT drop them. Folks hung onto them and suddenly, the companies had to start paying out! So, they went back to the insurance regulators and begged to increase the premiums - which the regulators granted. Will that happen in the future? Hard to say. I hope not. Local LTC facilities charge $10,000/month. So it becomes a real problem very quickly if one or both need that service for a long time. I don't have an answer so YMMV.

 

[Safire]

Look at two options:


1) You have $1,000 worth of shares. They pay a $10 dividend that you take out. You still have $1,000 worth of shares and $10 in your pocket.


2) You have $1,000 worth of shares. They pay a $10 dividend that you reinvest, so you now have $1,010 worth of shares. You sell $10 worth of shares. You're back to $1,000 worth of shares and $10 in your pocket.


It doesn't matter if you take the $10 from the dividend payment or from the sale of shares. The end result is the same.


Does that make sense? Maybe someone else can explain it differently.

That is only if I spend only the number of shares that my dividend reinvestment could have gotten me. If I spend more shares than what my dividends would have purchased I would soon be spending down the principle. Spending only the dividend forces me to conserve the principle. Am I getting this right?

Yes, that explains it nicely. I tried to explain that within, say a Vanguard or Fidelity Mutual Fund (which, apparently OP owns within IRAs or 401(k)s etc.) there isn't really any opportunity to ONLY take out the dividends. Dividends, capital gains, etc. end up in a pot full of values of other stocks. SO picking out the actual dividends isn't really possible. If one wants to slavishly "LIVE" on dividends, one has to hold individual stocks and laboriously place the dividends into some sort of OTHER receptacle to make that happen. Doing so, takes away the advantages of owning mutual funds (mixed batches of several stocks that give diversification.) Otherwise, diversification becomes owning dozens of DIFFERENT individual stocks - each with its own dividend that must be slavishly harvested. What a royal pain!

I'm just trying to convince OP to FORGET about dividends. Let the money all go into the mutual fund pot and then take out what you need to live on. It doesn't matter where the value within the mutual fund came from. I understand the theory of "living only on dividends" - folks used to do that with indivdiul phone company or utility stocks and such. Now, we have mutual funds that commingle everything - dividends are like Prego - they're "in there" but you only notice them as an increase (hopefully) of your total mutual fund value every 3 months or whatever. Forget dividends!! Concentrate on earning what you need to meet your financial goals. Sorry, hope I'm not sounding like an ogre (any more than usual). And, as always remember that YMMV and my advice is officially worth what you pay for it.

At retirement, what if I turned off dividend reinvestment option in my a/cs? That would show me what dividend my portfolio has earned and help me withdraw only that cash?

Right now, I don't check what my funds are earning in dividends. That will only change when we no longer have a paycheck each month.

 

[Koolau]

That is only if I spend only the number of shares that my dividend reinvestment could have gotten me. If I spend more shares than what my dividends would have purchased I would soon be spending down the principle. Spending only the dividend forces me to conserve the principle. Am I getting this right?




At retirement, what if I turned off dividend reinvestment option in my a/cs? That would show me what dividend my portfolio has earned and help me withdraw only that cash?

Right now, I don't check what my funds are earning in dividends. That will only change when we no longer have a paycheck each month.

I guess I'm gonna give up on trying to convince you to quit worrying (or even thinking) about dividends. I would strongly suggest (not advise but suggest) you pay a fee-only financial planner (a Certified Financial Planner) to guide you through this and other discussions. You might pay $150/hour or more, so it ain't cheap. But 2 or 3 hours of sharing what you want to accomplish and then receiving specific feed back on how you might accomplish it might give you comfort and direction.

I strongly suggest you ONLY talk to a planner who DOES NOT sell anything but their time. If they sell ANYTHING financial then they have a vested interest in what you do. They will NOT be your fiduciary though they may swear that they are. It is my gentle, humble opinion that you need a better understanding of dividends and perhaps other issues - which a GOOD fee-only CFP might be able to help you with. Good luck. I'm not a good advisor - even though I have no stake in this. Always keep in mind that YMMV.

 

[chassis]

@Safire, you are getting alot of "help" on this thread.

Forget about dividends, capital gains, special distributions and the like. Focus on yield.

To achieve a safe withdrawal rate, your portfolio needs to yield more than your living expenses. Yield and living expenses in this sentence are after tax. When this happens, you have a portfolio whose balance will be preserved under the preponderance of foreseeable scenarios.

I suggest you spend 1 hour with a financial planner to fill in some gaps in your understanding. Reading the quantity of comments from the people on this site, who range in age from 25 to 95, will cause you to chase your tail.

 

[OldShooter]

Thank you for sharing that link. ...

We (husband & I) do not hold single stocks. We hold only VTSAX (total stock), VTIAX (Vanguard Total International stock) and some VWILX (International Growth). ...

Is this accurate thinking? ...

Sorry for the delay responding. You're doing fine.

The main issue with drawing out dividends is, as Dr. French explained in the video, that one might be tempted to chase dividends and hence end up with a distorted aka undiversified portfolio. Even funds with "dividend" in the title represent distortion. But you're not buying those funds anyway. Same-o for someone drawing only the interest from a bond portfolio. A strong focus on adhering to this rule and wanting more money could lead to buying high interest/high risk bonds. "High yield" in the fund name is the giveaway. (The fund titles never say "high risk." )

If you're just using the dividends from diversified equity funds as a budgeting device and you understand the risks of chasing dividends, there's no problem. It's not far from putting all your loose change in a jar to be used for some special treat when the jar is full. It's unlikely this would cause you to seek out loose change as a goal.

As has become obvious in your thread here, this topic has a tendency to get people quite steamed up. Once you understand dividends, you can just ignore any lectures you may get.