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4% rule.
Old 05-09-2021, 05:03 PM   #1
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4% rule.

For retirees who plan to live off a combination of pension, social security and dividend payouts from retirement accounts, never touching the retirement account principal, does the 4% rule really matter?

I understand that retirees may end up touching principal on years of negative market returns or if the promised pension never materialises or abruptly stops, if Social security goes bankrupt, or they end needing intensive care but have no LTC insurance etc.

But if none of these things happen, does "withdrawing rate" still matter?

I understand that not reinvesting dividends might reduce growth.

Thanks for clarifying.
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Old 05-09-2021, 05:06 PM   #2
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The guy that came up with the 4% ruled just changed it to 5%
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Old 05-09-2021, 05:14 PM   #3
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The guy that came up with the 4% ruled just changed it to 5%
Does it matter if your intention is to solely life off the dividends generated by the portfolio?
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Old 05-09-2021, 05:19 PM   #4
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For retirees who plan to live off a combination of pension, social security and dividend payouts from retirement accounts, never touching the retirement account principal, does the 4% rule really matter?
Yes, but only on the difference between your expenses and (the pension plus social security) - if the pension has a COLA feature.

Taking a dividend payout for living expenses is no different than selling some shares for living expenses.
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Old 05-09-2021, 05:22 PM   #5
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Does it matter if your intention is to solely life off the dividends generated by the portfolio?
Might be fine if you aren't trying to live off QYLD of similar investments.
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Old 05-09-2021, 05:32 PM   #6
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I understand that not reinvesting dividends might reduce growth. ...
The consequences of deciding to rely on dividends can be subtle and probably not optimum for your financial health. Here is a worthwhile way to spend six minutes. https://famafrench.dimensional.com/v...dividends.aspx
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Old 05-09-2021, 05:38 PM   #7
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Originally Posted by Safire View Post
For retirees who plan to live off a combination of pension, social security and dividend payouts from retirement accounts, never touching the retirement account principal, does the 4% rule really matter?

I understand that retirees may end up touching principal on years of negative market returns or if the promised pension never materialises or abruptly stops, if Social security goes bankrupt, or they end needing intensive care but have no LTC insurance etc.

But if none of these things happen, does "withdrawing rate" still matter?

I understand that not reinvesting dividends might reduce growth.

Thanks for clarifying.
No, if you don’t need to withdraw from your investments to fund any of your retirement there is no applicable X% rule.
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Old 05-09-2021, 05:55 PM   #8
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When you say “does it matter”, what is it you are asking? If you live entirely off existing income streams and never sell any of your assets you will just leave all of the remaining money to your heirs. Is that your intent? Or are you trying to determine what your withdrawal strategy should be given that you don’t need the money to live on?
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Old 05-09-2021, 05:56 PM   #9
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Originally Posted by FANOFJESUS View Post
The guy that came up with the 4% ruled just changed it to 5%
About 15 years ago, he changed it to the 4 1/2 percent rule.

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Does it matter if your intention is to solely life off the dividends generated by the portfolio

Dividends are factored in as is government inflation figures, which I find to be lower than my real experienced inflation.
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Old 05-09-2021, 05:58 PM   #10
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For retirees who plan to live off a combination of pension, social security and dividend payouts from retirement accounts, never touching the retirement account principal, does the 4% rule really matter?
As I understand it, the withdrawal rate calculation would not include pension and SS, but it would include dividend payouts from retirement accounts.

If you're covering retirement expenses with pension, SS, and dividends, then the 4% rule "matters" only in the sense that it gives you a benchmark against which to gauge your own withdrawal rate.

I'll use myself as an example, since I'm in a similar position to the one you describe. I'm retired, and I cover my expenses with a small pension + dividend payouts. My withdrawal rate (based on dividends, not pension) is about 1.8%.

The 4% rule doesn't figure into my financial calculations, but it does give me a sense of where I stand, so to speak. To put it another way, knowing that I'm withdrawing at 1.8%, when the safe withdrawal rate is 4%, gives me a sense of security. If 4% is safe, 1.8% must be really safe.
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Old 05-09-2021, 06:01 PM   #11
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For retirees who plan to live off a combination of pension, social security and dividend payouts from retirement accounts, never touching the retirement account principal, does the 4% rule really matter?
You have no obligation to use the 'safe withdrawal rate' (SWR) approach for your retirement financial planning. If you would like to define your 'means' as your actual annual income (AAI) and live within that, fine! The AAI approach isn't nearly as popular as the SWR approach on ER.org, but there are a few folks scattered around who use AAI. Like anything, there are pros and cons with each approach. One advantage to AAI: market crashes are exceedingly boring as long as annual income isn't impacted (meanwhile, during a crash the SWR folks tend to stagger around clutching their bellies looking supremely injured - very sad ).
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Old 05-09-2021, 06:08 PM   #12
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The 4% "rule" is used in general for calculating if one is in good shape for retirement. It is not really meant to be an actual withdrawal strategy and I don't know of anyone who strictly uses it in that sense.
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Old 05-09-2021, 06:08 PM   #13
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If you are using (withdrawing) dividends from your investments, you do have a withdrawal rate.
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Old 05-09-2021, 06:11 PM   #14
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If you are using (withdrawing) dividends from your investments, you do have a withdrawal rate.
Exactly, not the same as a pension or SS.
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Old 05-09-2021, 08:20 PM   #15
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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.
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Old 05-09-2021, 08:43 PM   #16
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The consequences of deciding to rely on dividends can be subtle and probably not optimum for your financial health. Here is a worthwhile way to spend six minutes. https://famafrench.dimensional.com/v...dividends.aspx
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). We own no total bond fund so that's something we need to think of soon. We haven't decided an appropriate allocation yet but will not be 100% stock when we decide 20 years from today.

The dividends will only be withdrawn to the extent needed to supplement whatever gap exists between expenses and the amounts covered by SS and pension. For now, I am assuming our SS will only be 60% of what the calculations on the SS site shows. The way I see it, between SS, pension, and drawing some of the dividends, we should be OK. We're not big consumers, we're currently shopping for LTC insurance, and our other kid's college fund is doing well enough to cover her education costs. We may have access to employer paid health insurance after retirement. But we're renting. If we could somehow manage to purchase a small condo by the time we retire in an LCOL area, we should be able to conserve the principle for an eventual inheritance for one of our kids who is disabled.

Is this accurate thinking? Is there anything I'm missing? I'm aware that there is a component of hope here -- that the pension will still exist when it's time to draw it (not overly concerned about this, TBH) and that SS is still solvent then. My worry is not whether we will reach our retirement number. My concern is how to spend as little of our portfolio as possible so our disabled kid is taken care of after our time, barring exceptional circumstances and complete devastation of the markets, the pension, and social security.
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Old 05-09-2021, 10:09 PM   #17
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I thought this was more of what you would call a guideline than an actual rule. Shameless reference to a movie quote!
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4% rule.
Old 05-09-2021, 10:15 PM   #18
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4% rule.

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Originally Posted by FANOFJESUS View Post
The guy that came up with the 4% ruled just changed it to 5%


“The Code is more what you call guidelines than actual rules. Welcome aboard the Black Pearl, Miss Turner.”
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Old 05-09-2021, 10:42 PM   #19
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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)...

When people read about your plan to spend only dividends, they immediately think about the danger faced by people chasing stock yield and only buying high-dividend-paying stocks. Many such stocks trail the market because their principal value erodes with time.

But if you hold a broad index, then the approach is safe. The dividend of the total market has been below 4% since the mid 1980s, and is only 1.36% now. If you can live on just such a small WR, you are safe.

The dividend yield of the total market is not likely to climb back up to 4% or more anytime soon. If it does, many people will be in a lot of hurt. It's because when the dividend was that high, both inflation and interest rate were outrageous.

For example, in 1980 the dividend hit 5%, but inflation was 12-15%. Even if you totally reinvested all dividend, your stash still lost value at the tune of 7-10%/year. It was that bad.
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Old 05-09-2021, 10:47 PM   #20
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Thank you for sharing that link.

The dividends will only be withdrawn to the extent needed to supplement whatever gap exists between expenses and the amounts covered by SS and pension.
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.
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