Preserve Principal or draw it down?

[pb4uski]

.....Along these same lines, shouldn't a dividend investor think of "principal" as the number of shares of dividend-paying stock, rather than the value of those shares? It's the shares (not their value) that throw off dividend income each year. If he sells a share (regardless of whether it has quadrupled in value or been cut in half) he has eaten into his principal. No?....

No, he has not eaten into his "principal" because his expectation is that his return will come from both dividends and appreciation rather than just interest.

Using your framework if an investor invests $100 in a CD that grows to $105 and takes $5 out then he has not invaded principal, but if the same investor buys 100 shares of stock for $10 that appreciates to $105 and he sells $5 worth of stock then he has invaded principal. That just doesn't make sense. Under my construct, neither investor would invade principal until they take cash out that reduces their balance to below $100.

As a total return investor, I'm indifferent as to whether my return is in dividends or appreciation - especially since they are both taxed at preferential rates (0% in my case).

 

[Bikerdude]

I spend dividends and interest only....except when I don't.

 

[rayvt]

I saved it to be able to spend it in retirement. I've already told our kids (who we provided paid college education for) that if there is anything left that it is estimating error.

Not totally true, but I like the idea.

+1

We've already told our kids that they shouldn't expect an inheritance other than a BMW convertible that is wrapped around a tree.

 

[Lisa99]

We'll definitely spend principal. In the way it's modeled right now, we'll exhaust our after tax investment account about 10 years into retirement. But there is no choice since we have one tiny pension and will be living off of our investments for a decade before drawing social security. If something is left for our son that would be nice but its not a factor in our planning.

 

[Animorph]

But what if the share price is down 10% and you have to sell 6% of the shares to clear the same amount of cash? As I have said above, I am a poor judge of this because of my background. But IMO, if you have to sell something to generate cash money, you are eating into the principal. Perhaps not so much in good time. But definitely in bad times.

When the dividend payer gives you 6%, their share price will go down 6%, plus down hopefully something less than 10% on its growth prospects. If the total return is the same for both stocks, you get the same amount of cash and have the same value in shares in either case.

 

[UserRequested]

When the dividend payer gives you 6%, their share price will go down 6% ...

That's assuming the company has no real growth potential. Investing in a company like that will result in your principal being eroded over time.

 

[Independent]

I'm thinking that our real net worth will be lower when the last one of us dies than it was when we retired.

It's possible that our nominal net worth will be about the same.

Both of those statements depend on a lot of unknowables.

 

[W2R]

Hmmm.... The unmentionable:
Whaddya do if the market tanks and the DJIA goes to $6000? Ride it down... gracefully? Get out before it happens, like 100% of all investors? Wait it out?

Hey! that was a joke....

Didn't we just do this a few years ago? I think we all managed OK.

 

[FIREd]

Didn't we just do this a few years ago? I think we all managed OK.

Just say the wh**** word and let's see how we fare this time around...

 

[W2R]

Just say the wh**** word and let's see how we fare this time around...

Hey, I already did, a few days ago, but it didn't seem to work. The market just keeps climbing and climbing. Maybe we each have only one effective "Wheee!!!" in our lives.

 

[haha]

Maybe we each have only one effective "Wheee!!!" in our lives.

No, I think you are good for more. Nothing wrong with a little lag.

Ha

 

[Stanley]

I guess it depends on what the sources of income are. I suspect that many ER folks have just one source of income early in their ER - saved/invested money. Later they may get a pension or may not. And most of us will get SS, but that amount can vary greatly depending upon employment and earning history. So, one person's answer is probably only good for that person. It is nice to get ideas from others, but ultimately, each of us must his his own decision and be ready to live with it. Or change it if that is possible.

 

[jimnjana]

We had planned to tap the principal in DW TSP account first then draw from her ROTH. Dancing around the tax rates though so we might draw a small amount from her ROTH first to allow me to convert my TSP to a ROTH IRA over the next 5 years or so.