Originally Posted by cashflo2u2
Ha, SamClem. I thought with a 4%+- dividend income return on the 50%-55% plus the interest income I could possible count on the 4% cash flow for living and the capital growth in the equity portion would take care of protecting the purchasing power of the principal. I am not concerned with passing it on- just consumption for the reminder of our time before the ultimate malfunction. I could live with volatility up to say 20%, but several people have made the point- if you are getting the 4% forget the volitility. But I find as many other people say that is a flawed concept and total return is what you need to look at.
Just a back-of-the-envelope appraisal of your approach:
-- If you get 4% dividends on 50% of your portfolio, then that equates to 2% of your portfolio to be withdrawn. The interest income on the other 50% of your portfolio, if history is any guide, will be approx 1-3% above inflation (depending on the source of this interest--safer, more stable sources will produce less yield above inflation). Together, then, you'd be able to withdraw only 3% each year while keeping up with inflation. And, you still are taking risk: Companies sometimes cut dividends, there's no gaurantee that the share price of the equities wil go up in lock-step with inflation, and the value of the assets producing the interest income could go down a lot (e.g. if you choose LT Treasuries to provide this income and interest rates go up, the value of your bonds will plummet).
While I see where you are coming from, I don't think this segmentaton approach ("this portion of my portfolio gives me dividends from which I get my living money, this portion I don't touch-it's job is to keep up with inflation" etc) is particularly valuable. Instead, I'd build a well diversified portfolio that has performed well over the last 50+ years and use one of the withdrawal strategies that you are comfortable with. There's no getting around the fact that asset classes with higher returns (over many years) tend to have higher volatility. Getting 4% above inflation
for many years cannot be done without a considerable chunk of volatile assets in the portfolio mix. The holy grail of asset allocation is to mix assets with relatively high volatility but low correlation to each other so that when some classes are down, others are up (or at least not as far down). This allows the investor to gain the benefits (higher overall return) of holding these riskier assets while the overall portfolio volatility is reduced.
Now, a market like the one we are having now surely shows the problems with this approach, since nearly every type stock is down right now. But, they will come back (at least they always have inthe past). Having a chunk of cash (money market funds, or even a CD ladder that you can cash in rather than rol into more CDs) can allow the investor to avoid/reduce selling of stocks when the market is down, which provides some degree of comfort.