Does the 4% "rule" apply if you spend less than you make?

[robertf57]

4% is a number that results by choosing a certain success probability ( I think it's 95%) from a Monte Carlo simulation of the size of a portfolio after 30 years of withdrawals using historical market returns for various asset allocations. People should first do some serious budgeting and analysis of their individual circumstances and the use the 4% rule to see if they are on the retirement ballpark.

Almost...it arose from success in study of all 30 year periods (vis a vis, FIREcalc)


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[BBQ-Nut]

I use the 4% as a check, not the basis for my drawdown strategy.

Arrrr.....

 

[David1961]

OP, IMO, even though you are living off dividends, etc. I still think the amount you use to live on should be considered a withdrawal.

 

[growing_older]

But I have a very complex spreadsheet model (I'm an economist) that tracks income from different types of investments (dividends, interest, other), sheltered plans (Canadian equivalents of Traditional IRAs and Roth IRAs), a defined benefit pension, public pension and benefits, and the taxation of income and withdrawls.

But does your very complex spreadsheet account for future variability in sequence of returns? That's one of the vexing complications that leads to the 4% "rule" in order to stay inside the envelope of spending that doesn't exhaust the portfolio.

 

[karluk]

OP, IMO, even though you are living off dividends, etc. I still think the amount you use to live on should be considered a withdrawal.

+1 The implied premise in the OP seems to be that it's impossible to run out of money if your initial withdrawals are restricted to interest and dividends, leaving principal untouched. That's incorrect, primarily because interest and dividends may not increase along with inflation, thus making it inevitable in the long run to dip into principal.

Whether the portfolio described in the OP will actually suffer this fate is unclear. It's good that total expenses are currently less than interest and dividend income, but that alone doesn't guarantee success. IMHO, the only way to estimate long term success is to model this using Firecalc, or some similar tool. Probably not the answer OP was looking for, but it's better than offering false reassurances that you're safe as long as you're not spending principal.

 

[Willers]

But does your very complex spreadsheet account for future variability in sequence of returns? That's one of the vexing complications that leads to the 4% "rule" in order to stay inside the envelope of spending that doesn't exhaust the portfolio.

+1

I have a spreadsheet that I developed way back when as my first attempt at a calculator. I had conservative assumptions (1-1 1/2% real returns) and I was amazed how good it looked. The problem was that it assumed a nice steady return year after year. If only that was predictable!

 

[Davis65]

+1

I have a spreadsheet that I developed way back when as my first attempt at a calculator. I had conservative assumptions (1-1 1/2% real returns) and I was amazed how good it looked. The problem was that it assumed a nice steady return year after year. If only that was predictable!

I don't have variability of return since I have invested directly in good quality dividend-paying stocks and real estate income trusts. My spreadsheet takes into account dividends and REIT distributions at current rates, but ignores capital gains, which are impossible to predict.

So there is some risk here: dividends and distributions could be reduced, although the companies I've bought haven't done so, even in 2008. They are more likely to go up, and some have either corporate policies to increase their dividends (like Brookfield renewable BEP.un) or have a track record of doing so like AT&T.

I am controlling for risk of capital losses by building a cash cushion of CDs/GICs so that I can go two years without selling any shares -- this way I don't have to sell during a downturn. If this happens, I will replenish the cash cushion when the market has recovered, so I should get capital gains, which are not factored into the plan -- they are just a bonus.

 

[Davis65]

This article from the New York Times provided me some reassurance that I needn't stress too much about ignoring the 4% rule-of-thumb (because it isn't a "real rule").

 

[robertf57]

I don't have variability of return since I have invested directly in good quality dividend-paying stocks and real estate income trusts.

Dividend returns without volatility!!! Oh that it were so...


This is the S&P 500 dividend history since the 19th century. graph/

Current Yield: 1.92% +0.43 bps
4:09 pm EDT, Fri May 22
Mean: 4.41%
Median: 4.35%
Min: 1.11% (Aug 2000)
Max: 13.84% (Jun 1932)

And this is the whole index, not individual issues which have greater volatility. And don't get me started on REITs! Real estate doesn't have volatility and changing yields?!

Fine to live off the dividends. Probably not fine to delude ourselves that this is somehow risk free.

There is no free lunch ( or breakfast , or dinner for that matter)

 

[haha]

Dividend returns without volatility!!! Oh that it were so...


This is the S&P 500 dividend history since the 19th century. graph/

Current Yield: 1.92% +0.43 bps
4:09 pm EDT, Fri May 22
Mean: 4.41%
Median: 4.35%
Min: 1.11% (Aug 2000)
Max: 13.84% (Jun 1932)

And this is the whole index, not individual issues which have greater volatility. And don't get me started on REITs! Real estate doesn't have volatility and changing yields?!

Fine to live off the dividends. Probably not fine to delude ourselves that this is somehow risk free.

There is no free lunch ( or breakfast , or dinner for that matter)

This doesn't address what he said. He didn't say that the capital value of his account was constant, only that the income was. In fact, dividend income does vary, but not nearly as much as quoted values of the securities.

From my POV, the main risk to a dividend oriented single stock investor is concentration, and perhaps becoming biased toward high yields.


Ha

 

[robertf57]

This doesn't address what he said. He didn't say that the capital value of his account was constant, only that the income was. In fact, dividend income does vary, but not nearly as much as quoted values of the securities.

From my POV, the main risk to a dividend oriented single stock investor is concentration, and perhaps becoming biased toward high yields.


Ha

Dividend income does of course changes. The % yield is the easiest representative figure to pull although it is dependent on per-share value as well as the declared dividend stream. The OP mentioned AT&T. One needs only go to 2002 and 2003 to find significantly lower per-share dividends

I am not interested in quibbling over the best depiction of the fallacy of absolute safety in dividend income. Only to underscore that those who blindly ascribe to this notion are deluding themselves. I personally have been whacked in the pocketbook by changing REIT yields...

 

[Davis65]

Dividend income does of course changes. The % yield is the easiest representative figure to pull although it is dependent on per-share value as well as the declared dividend stream. The OP mentioned AT&T. One needs only go to 2002 and 2003 to find significantly lower per-share dividends

Actually, AT&T's dividend increased in each of those years, and there were 25 cent/share in special dividends in 2003.

You have to go to 1987, 1993 and 1998 to find times when AT&T's dividend was cut, but in each case it was because of share splits, so an investor's dividends received would have remained the same or increased.

So while this was not a good example, the general point is still valid: companies can and do cut their dividends from time to time. This is why it is important to be diversified. Husband and I hold three REITs, 10 companies, and four mutual funds (in his defined contribution pension plan).

When he leaves his company and we can invest the pension plan in real investments, I should increase the total holdings from 13 to 15 to spread things out a it more so that we are not hit too hard if one or two companies/trusts cut their dividends/distributions.

Over time, the trend is upward.

I am not interested in quibbling over the best depiction of the fallacy of absolute safety in dividend income. Only to underscore that those who blindly ascribe to this notion are deluding themselves. I personally have been whacked in the pocketbook by changing REIT yields...

I am not sure where you got the idea that someone here was suggesting that there is absolute safety in dividend income. It wasn't from me.

So there is some risk here: dividends and distributions could be reduced, although the companies I've bought haven't done so, even in 2008. They are more likely to go up, and some have either corporate policies to increase their dividends (like Brookfield renewable BEP.un) or have a track record of doing so like AT&T.