Strategy for a (substantially) higher withdrawal

H

hankjoy

Dryer sheet wannabe
Joined
May 16, 2004
Messages
20
Hi guys : I am new here, so pardon my youth and naivete. If the long term average annual return from stocks is 10%, then why can we only withdraw 4-5% per year in retirement? There has to be a better way to invest. What if you shifted your paradigm from buying to sell a stock (hoping it went up), to buying to live off a rising stream of dividends without ever planning to sell? Wouldn't this free us from worrying about volatility of share prices going up or down? What would it matter if the market or your particular stocks or funds were down if you aren't going to sell but just cash your 8-12% dividend checks? Volatility should not matter then, the sustainability of the dividend and it's growing at least at the rate of inflation should be what we would watch for. A diversified portfolio of high yield stocks with a history of high yield with dividend growth should enable safe 8-12% withdrawal. What do you guys think? By the way what's a dryer sheet? :) Hank
 
Re: Strategy for a (substantially) higher withdraw

10-12% dividend yields...perhaps you can give us a list of companies that are paying 10-12% guranteed dividends for the rest of my life, and then maybe I'll change my mind.... :)

I doubt there are many companies with a multi-decade history of paying double digit dividends...but then again, I could be wrong...
 
Re: Strategy for a (substantially) higher withdraw

What if you shifted your paradigm from buying to sell a stock (hoping it went up), to buying to live off a rising stream of dividends without ever planning to sell?
Click to expand...

This is a good strategy, if you are willing to live on the 1.6% dividend yield of the S&P. High yield stocks tend to be high risk stocks, that have a tendency to go bankrupt. If you buy a few high risk stocks, be sure to allow for the probablility that many, if not most, of them will go bankrupt in the years to come. This will reduce your dividend income over time.
 
Re: Strategy for a (substantially) higher withdraw

Hi Hankjoy,

Time will take care of the youth problem, but you
need to read a good book on investing, like
Bernstein's "4 Pillars of Investing", to cure the
naiveté problem. Michael's advise is good. Please
read and heed.

Cheers,

Charlie
 
Re: Strategy for a (substantially) higher withdraw

I think the short answer is that after inflation and investing expenses, that 10% becomes a lot closer to 6-7% (on a good day, wind blowing in the right direction, downhill both ways, dryer sheet sails including the spinnaker deployed). After taxes and whatnot, if you have 4% left over, you're lucky. Keeping yourself at that 4% level pretty much keeps you on the good side of going bankrupt, at least historically.

I also want to know where you can get a reasonable risk based 10-12% dividend. I'm working from the "live on the dividends" model and I'm seeing roughly 4% out of my stash, although I'm working with a relatively low risk/volatility taxable portfolio. My IRA is another matter...

I could up that by a percent or two by allocating some dollars to GNMA's or a high yield corporate fund, but I'd be taken to the cleaners by the interest rate hikes that we should start seeing (next month?). I'd rather wait until we get 150 basis points tacked on, then make a move once the yields are kicked up a little.

I'd consider going the other way and increasing my stock holdings, if I could see ANY stock sectors that looked value-priced. Everything looks a bit spendy to me and the variety of folks saying that we're only 4 years into a 15 year secular bear market keeps me leery...
 
Re: Strategy for a (substantially) higher withdraw

Keeping yourself at that 4% level pretty much keeps you on the good side of going bankrupt, at least historically.

Also, valuation levels have gone higher in recent years and dividend pay-out levels have gone lower. If you adjust for those factors (and changes in valuation levels affect long-term returns as a matter of "mathematical certainty," in the view of well-recognized investing experts like William Bernstein), you find that it is not reasonable to count on a 4 percent withdrawal from a high-stock portfolio for retirements beginning today. For retirements beginning today, the safe withdrawal rate for a high-stock portfolio appears to be something in the neighborhood of 2 percent. To pull your overall safe withdrawal rate up to 4 percent, you would need to bring your stock allocation below the percentages that provided a 4 percent safe withdrawal at the lower valuation levels and higher dividend pay-out levels that applied for investors who retired in some earlier time-periods.
 
Re: Strategy for a (substantially) higher withdraw

Mergents' Handbook of Dividend Achievers or new this year BDV a closed end fund designed to buy Mergents type stocks with ten years of rising dividends. I have several of those stocks yielding 10% on original money - BUT it took ten years of rising dividends to get there - ie they needed a run at it - AND from 1994-2004 the spin -off/merger/buyout and business risk exacted a heavy toll. I lost many along the way.

Marked to market, my hobby stocks yield about 4% in a utility, closed end, drug, oil, bank laden portfolio.

The other 80% balanced index yields a little above 2%.

In ten years 1993-2003 the balanced index has slightly outperformed the hobby stocks including dividends sans tax effects.

Read the previous posts carefully - you can use the dividend approach - probably at much lower starting yield - and it takes more effort - that's why I call them hobby stocks. Tune back in the second ten years - if my 20% overhelms my 80% balanced index, I'll drop the hobby moniker. Dividends are about 27% of my taxable income(pension + dividends) no IRA or SS yet.
 
Re: Strategy for a (substantially) higher withdraw

*****, I have roughly 35%-40% in the stock market (~20% of that in international). I also have about ~30% in TIPS that will mature in 25 years, and the rest in a mix of CDs, Vanguard ST Bond Fund, and ST TIPS. I'm planning to buy into the Vanguard REIT fund (about 5%) at some point - I'm still thinking on that one. I'd be interested in knowing your current allocation.
 
Re: Strategy for a (substantially) higher withdraw

*****....I'd be interested in knowing your current allocation.

By way of preface, I think it might be helpful for me to note that I had pretty much everything (which wasn't much at the time) in stocks prior to the time (1996) when I developed the data-based SWR concept. It was the findings I came up with when doing work on the data-based SWR tool that persuaded me to move into alternate asset classes.

Also, I do not at all say that others should follow the path I have taken. The data I looked at indicated that the SWR varies from investor to investor, depending on the particular investor's life goals and financial circumstances. Investor A might obtain the highest SWR available to him with Stock Allocation X while Investor B would obtain a higher SWR by going with Stock Allocation B.

I have zero percent in stocks today. I hope to get that up to 50 percent in the not-too-distant future. My Retire Early plan calls for an overall SWR of 4 percent, and there is little slack in my plan. Thus, I personally am not able to afford to invest too highly in stocks at the SWR that applies for stocks today. As the SWR for stocks goes up, I intend to be bringing my stock allocation percentage up.

If you count the value of a personal residence, that is my biggest allocation, since I own my home in full. Most on these boards do not count that, as you know.

Outside of the house, my money is invested in three asset classes: (1) TIPS that pay a 3.5 percent real return; (2) ibonds that pay a 3.4 percent real return; and (3) CDs that pay varying returns. The CDs were paying real returns of greater than 4 percent when purchased. They cannot be renewed to pay real returns that high today. So my intent is to move the CD money into stocks first.

My plan calls for an overall withdrawal rate of 4 percent. It is important to understand that the plan does not require a 4 percent real return from each asset class each year. Research that has been posted at the SWR Research Group board indicates that stocks are likely in the not too distant future to be providing an SWR in excess of 4 percent. It is OK for me to obtain an SWR for a portion of my portfolio of a little less than 4 percent for a few years so long as I can obtain an SWR of greater than 4 percent from that portion of my assets in subsequent years.

The TIPs money and the ibonds money is paying an SWR of greater than 4 percent because the 3.5 percent or 3.4 percent payout does not deplete the principle (the conventional studies call for complete depletion of the principle invested at the end of 30 years). We did a calculation at the SWR board showing that TIPS paying a 4.1 percent real return (the rate they were paying at the top of the recent bubble in stock prices) translates into an SWR of 5.85 percent. So I am doing fine on those amounts.

The CD money was also paying more than a 4 percent SWR for the first five years or so I owned them. Those now coming up for renewal cannot be renewed at terribly attractive rates. But so long as that money can be moved into an alternate asset class (stocks purchased at lower valuation levels than now apply) that pays a long-term SWR of greater than 4 percent, I will be fine on that portion of my portfolio too.

I hope that all makes a reasonable amount of sense. In time, I would like to put forward a formalized presentation of the various strategies that can be used to obtain an attractive SWR via use of the data-based SWR tool. We have not had a chance to get to that sort of discussion yet. But I hope to be putting some posts of that nature forward later this year.

For those with access to Motley Fool, the "My Plan" post over there goes into the make-up of my portfolio in a good bit more detail.
 
Re: Strategy for a (substantially) higher withdraw

Outside of the house, my money is invested in three asset classes: (1) TIPS that pay a 3.5 percent real return; (2) ibonds that pay a 3.4 percent real return; and (3) CDs that pay varying returns. The CDs were paying real returns of greater than 4 percent when purchased. They cannot be renewed to pay real returns that high today. So my intent is to move the CD money into stocks first.
Click to expand...

I don't understand how you could know what the real return of your CDs or non-indexed bonds will be until you either sell or redeem them. Only then will you know the unknowns in the equation-- the greatest of which is the overall depreciation in the USD during your hold time.

You were clever to grab those TIPs early on. That was truly a free lunch. I did it too; but unwisely sold them for capital gains.

Mikey
 
Re: Strategy for a (substantially) higher withdraw

I don't understand how you could know what the real return of your CDs or non-indexed bonds will be until you either sell or redeem them. Only then will you know the unknowns in the equation-- the greatest of which is the overall depreciation in the USD during your hold time.

The TIPS and the ibonds are both indexed for inflation. So the ultimate returns from those two asset classes are highly predictable.

You are right that it is not possible to know what real return you will ultimately get from a CD; it depends on the rate of inflation that applies during the term of the certificate. The ones that I purchased with a 7 percent payout at a time when inflation was about 2 percent I felt good about. You can't get a payout that much higher than the current rate of inflation today. So I a less enthusiastic about CDs today.

You were clever to grab those TIPs early on. That was truly a free lunch. I did it too; but unwisely sold them for capital gains.

I appreciate the compliment, Mikey. You probably know from my earlier posts, however, that when it comes to investing stuff I am far from the cleverest of posters. What I am is someone who is intense about learning how to achieve financial independence as early in life as is humanly possible. What I did was, I calculated SWRs and I did what the darn calculations told me to do. I didn't feel real comfortable going against the advice I heard from every personal finance magazine I picked up. Ultimately, however, feeling comfortable wasn't my top priority. Early retirement was. So I did what the historical data told me I should do. And it worked.

I thought that the 4.1 percent TIPS--which translates into a 5.85 percent SWR--were the deal of a lifetime for those seeking early retirement. My research indicated that it is hard to get that sort of SWR from an asset offering such a high degree of predictability. I wish that I could have shared with the community how good a deal those TIPS were at the time they were still available for purchase. I tried a few times and those efforts were shut down (I am not going to go into detail on this, so please don't ask). There are a lot more people today who appreciate the value proposition represented by TIPS paying a 4.1 percent real rate of return. Unfortunately, they are no longer available for purchase.

I am concerned that there is going to come a time when stocks are going to be available paying SWRs of 4 percent or 5 percent or 6 percent, and that the same sort of unfortunate situation is going to play out before us yet again. It doesn't do our community much good when people come to appreciate a value proposition only at a time when it is no longer available to tap into. To get the high SWRs from stock purchases that are likely to be available to us in a few years, we need to be thinking strategically today. The bottom line is that, if you invest less in stocks when their SWR is low, you are more likely to have the assets needed to invest heavily in stocks when their SWR is high.
 
Re: Strategy for a (substantially) higher withdraw

>>If you count the value of a personal residence, that is my biggest allocation, since I own my home in full. Most on these boards do not count that, as you know.


I have often wondered about that...do you, or don't you count the house in the equation?? I don't when figuring my 4% SWR (more or less), but if I did, I could essentially double my withdrawal since my house is probably worth more than all my liquid assets (and its paid for)...

I am probably not going to count it, but wondering what others do...
 
Re: Strategy for a (substantially) higher withdraw

farmer,

I don't count my residence for my ER planning. But I do recognize that it is an ace in the hole, with possiblities of a reverse mortage or downsizing if need be. :(
 
Re: Strategy for a (substantially) higher withdraw

*****, if I could put every penny into 3.5% TIPS, I'd do it today. Congratulations! I wish I had been paying closer attention at the time.

On the question about "counting" home equity - I don't. I am in an area where a fairly decent home can be purchased for $70,000. It's not a big asset for me. If I were living in an area where I had to pay half a million for a house, I wouldn't be retired today.
 
Re: Strategy for a (substantially) higher withdraw

Our fish camp/house is about 5-6% of our ER net worth if that much -so in our case a nit. Plenty of ER's do well in real estate and house's provide options for many. Ala 'location,location,location - we are 100% uninsurable and over water(liability excepted).
 
Re: Strategy for a (substantially) higher withdraw

I don't count my residence for my ER planning. But I do recognize that it is an ace in the hole, with possiblities of a reverse mortage or downsizing if need be. :(
Click to expand...

Exactly, unless you are willing to sell and downsize then you can't include it in your assets for SWR calculations.  Besides, even if you do include it what return and volatility numbers will you use for modelling?  You can't use the housing market average.  What you've got in one house in one sub-market is like a single small cap stock.

The idea of your home as a final fallback is probably the best.  If things turn out badly when you are 80 then it could be used to finance the rest of your retirement or a possible move into assisted care.
 
Re: Strategy for a (substantially) higher withdraw

I am afraid that if I included my house value in the
SWR calculation, it might create a self fulfilling
proficy... that is, I would be withdrawing
at a rate that might force me to liquidate the
house! Horrors!! I prefer to use the house as
a back-up, if needed.

Cheers,

Charlie
 
Re: Strategy for a (substantially) higher withdraw

hankjoy,

Guess you got your money's worth in opinions. Read the books. Check the historical data. Pick your investments like your life depended on it... 'nuf said? ;)

BUM
 
Re: Strategy for a (substantially) higher withdraw

okay I am back after reading many replies. Interesting that I stated 8-12% and people challenge me to prove 10-12%. Okay here is a list of companies YOU CAN BUY AT THE MARKET IN THE LAST FEW DAYS paying 8-12%. (These are stock symbols) SBR, FR, NBP, PCC, MTR, DOM, PBT, MSB, ALD, CLP, SPH, RAS, ACAS, NLY, NHP, SFF, SGU, LRT, ERF, NAT, TRU, WTU, GLB, PAA, SJT, GRT, CEI, AIV, HGT, AHR, PGH, HCN, NHR, APU, USV, VLCCF, TMA, AVNNF, VETMF,... there are more but I think you get the point. I own about half of them. I bought them with limit orders for a lower price (and a higher yield) than they closed at in the last week, but to prove a point you could have bought them in the last week and would have " captured a yield" of at least 8% and many pay 10-15%. If you diversify by industry and geographical location, you can reduce risk of dividend reduction, remember our paradigm shift, we don't care if the price goes down because we don't plan to sell, just cash dividend checks.

Here are a few that I bought in the last 2 years with limit orders and captured them at a yield of higher than 8%ETP, GTM, HCP, KMP, VNO,
again there are more than this that I bought but you get the idea. This is not theory here I actually bought them with real money.

So, now that you know this can really be done, (because I did it), what are the risks that I am missing here? (Remember we don't care about share price volatility because we aren't going to sell, just cash dividend checks. Our worry is will the portfolio as a whole (on average) continue to grow the dividend to at least keep up with inflation?
We know that any one of the individual stocks could reduce, or stop the dividend or worse go backrupt. It is the average yield of the portfolio (based on original price) and the growth of that yield to match or beat inflation that matters. okay guys what am I missing? Hank
 
Re: Strategy for a (substantially) higher withdraw

>>So, now that you know this can really be done, (because I did it), what are the risks that I am missing here?

What you are mising is the very obvious risk that none of these companies can guarantee(or even be likely) to continue to pay you 10-12% for the rest of your life (unless you plan on dying real soon).

To look at the short-term performance of a few stocks paying an unsustainable dividend, and spend accordingly then you are almost guaranteed to fail with your ER strategy.

I for one wouldn't want to take myself out of the labor market...allow my skills and marketability to wither, and then in 15 years find that I have run out of money at the age of 55 or so....but thats just me.

To me, if your ER plan *requires* you to make 8-12% on your investments to be workable, then you are either spending too much money, or have to little to consider retiring yet. My advice, work until you can save enough, or else lower your expense levels.

Sounds to me like you have already decided on a plan, and now just want to convince yourself that it will work, and are looking for others here to validate your decision...my guess based onthe almost *unanimous* tone of this thread is you will find very few people here that think your plan is workable....but nobody here is going to stop you....

But, if it was me, and a whole bunch of smart people, all of which were savy enough to ER(some at very young age), all have doubts about your plan, then that should give you some cause for reflection.
 
Re: Strategy for a (substantially) higher withdraw

hank,

Your approach is among my favorites (I also like selling naked puts in a bull market). But for retirement income I need secure, simple investments that:

Don't risk principal beyond my tolerance level
Provide regular, predictable returns
Don't require my constant attention

In January I gave up those strategies and shifted the funds to vanguard where they still sit in a money fund waiting for me to make my fund picks. In the meantime the Dow lost 700 points.


I really dislike the motley fool stuff but they recently ran a pretty good commentary on high yield investments. Its a fun debate. On one side you can say "this is where your principal goes to die" on the other (as you point out) "At these rates,who cares?" Hey, look at who owns some of these royalty trusts...BANKS! Conservative banks like Citi, BONY, Wachovia, etc.


http://www.fool.com/news/commentary...lnk303100&logvisit=y&npu=y&bounce=y&bounce2=y


Bottom Line - For me; Annual portfolio balancing... Daily fishing and woodworking. :D


BUM
 
Re: Strategy for a (substantially) higher withdraw

While I wholly support the advice/comments that have been given, I did notice that Hank indicated HCP in his list of stocks, a healthcare REIT. I do allocate ~ 10% of my portfolio to preferred stocks/REITS that tend to pay > 7% dividends just to spice up the yield of the overall portfolio. Most of the stocks in this category do not exceed 8% div, and I don't feel they are overly risky, but going into stocks that are paying out >10%, risk certainly moves up proportionately. Once I start drawing from my stash in a few years, I don't plan on exceeding more than a 3-4% WR.

Doug
 
Re: Strategy for a (substantially) higher withdraw

Hank

What you are missing is dividend growth - invest 45 bucks or so in Mergents Handbook of Dividend Achievers. You want a growth kicker to go with current dividend. Also since I don't spend all my dividends - I buy dividend stocks that have DRIP plans via Moneypaper.

Again, I do this as a hobby in lieu of golf or fishing. When it beats my balanced index(hasn't in the last ten years) - Then I'll turn pro. Or if becomes 'work' in my mind - I will quit and go back to fishing, never was any good at golf.
 
Re: Strategy for a (substantially) higher withdraw

I'm with unclemick. This is a great time to fatten up or jump in to those large cap balanced funds.

BUM
 
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