Do dividends psychologically make retirement easier even if total return theory says they shouldn’t matter?

[pb4uski]

Here's an angle that I hadn't thought of until yesterday:
DW and I were very casually talking about if "something suddenly happened" to me.

After reviewing our income streams, she said "but the same dividends would still automatically come into the checking every month, right?" (Yes they would m'dear)

While she's fairly financially savy and knows where everything is and how it flows, the idea of regularly deciding which stocks to sell in a TR situation would be..."sub-optimal" and create a lot of stress for her, especially early-on at a most confusing and vulnerable time.

It doesn't need to be dividends only though. Many years ago I helped my BIL's mom get out of a Voya fixed annuity tax free and we put the funds into vanguard Wellesley (back when Vanguard provided good service. We then set up an automated monthly redeumption of $x that went to her checking account.

It was effectively a DIY annuity since the withdrawals were low enough to be very sustainable over her lifetime, with anything left over going to her kids who were named beneficiaries of the account.

About a decade later when she went to go into a nursing home, her dauguter called me and wanted to know about this Vanguard "annuity" and I had to explain to her that it wasn't an annuity but was just a plain old Vanguard mutual fund account with a monthly automatic redemption.

 

[dobig]

Pb4uski, can you expand a bit on the withdrawal you set up for Wellesley? We've held Wellesely and Wellington before in retirement accounts before we sort of soured on them seeing they weren't as safe as we thought (2022/2023). I would think the variable end of year capital gains distribution would make it difficult to come up with a reliable withdrawal schedule.


For us it seems it might be easier to construct a similar version of Wellesely with VCIT and VIG/? to more reliably figure distributions.

 

[pb4uski]

Sure. We set it up so all dividends and capital gains distributions were automatically reinvested. Then we set up a monthly automatic redemption for a fixed dollar amount that was transferred to her local checking account that she use to pay her bills. The fixed amount was low enough that it was sustainable for her life and we made her kids the beneficiaries on the account so they got whatever was left over.

In her instance, income taxes were not a concern since her only income sources were SS and dividends, capital gains distributions and gain/losses on the monthly redemptions.

 

[Onda]

A dividend arrives automatically. Selling shares requires a decision: when to sell, how much to sell, and whether markets happen to be weak at that moment.

For many people, especially after a major bear market, that difference seems to matter psychologically far more than theory suggests.

Perhaps reliable dividends are valued not because they are mathematically superior, but because they reduce the number of decisions required when emotions are highest.

That may explain why even some total-return investors still like having part of their income arrive without having to touch principal.

 

[Lorenzo]

A dividend arrives automatically. Selling shares requires a decision: when to sell, how much to sell, and whether markets happen to be weak at that moment.

For many people, especially after a major bear market, that difference seems to matter psychologically far more than theory suggests.

Perhaps reliable dividends are valued not because they are mathematically superior, but because they reduce the number of decisions required when emotions are highest.

That may explain why even some total-return investors still like having part of their income arrive without having to touch principal.

I really liked the comment above that dividends are essentially equivalent to the company or fund making the Sell decisions for you. I don't know if that's an advantage or disadvantage--depends on one's situation--but that way of thinking of it makes sense to me.

 

[dobig]

Previous two posts sums up why we're so heavily investing in dividend income etfs and probably the main reason for many others. It's like the old Mike Tyson adage. Everyone has a plan until you get punched in the mouth. I know exactly where I'd withdraw money if makets were chugging along but I don't want to fret about it and make bad decisions when markets are crashing down 30 - 40% and in a multi year bear market. I'm not smart enough to make those decisions so I'll take myself out of the equation.

I remember going back to read posts from '07 - '09. You have some pretty level headed and damn smart people that were flustered. If they were having a rough go of it watching markets go down 2 - 3% a day and were coming up on their yearly withdrawal window I can't imagine myself going thru it and making rational decisions. And there were 3 years of that crap. No thank you.

 

[Contrarian]

Previous two posts sums up why we're so heavily investing in dividend income etfs and probably the main reason for many others. It's like the old Mike Tyson adage. Everyone has a plan until you get punched in the mouth. I know exactly where I'd withdraw money if makets were chugging along but I don't want to fret about it and make bad decisions when markets are crashing down 30 - 40% and in a multi year bear market. I'm not smart enough to make those decisions so I'll take myself out of the equation.

I remember going back to read posts from '07 - '09. You have some pretty level headed and damn smart people that were flustered. If they were having a rough go of it watching markets go down 2 - 3% a day and were coming up on their yearly withdrawal window I can't imagine myself going thru it and making rational decisions. And there were 3 years of that crap. No thank you.

Bear and Bull Markets and the average investor. It helps to review the history of bear and bull markets, how frequent, depth or heights, how long they last. And then determining one's true risk tolerance which will change with age. I suspect a big problem for some investors is overestimating their risk tolerance and the resulting panic during a bear market. Though I don't particular like annuities, maybe partially annuitizing retirement income to supplement social security worthwhile for some.

 

[audreyh1]

I do

A dividend arrives automatically. Selling shares requires a decision: when to sell, how much to sell, and whether markets happen to be weak at that moment.

For many people, especially after a major bear market, that difference seems to matter psychologically far more than theory suggests.

Perhaps reliable dividends are valued not because they are mathematically superior, but because they reduce the number of decisions required when emotions are highest.

That may explain why even some total-return investors still like having part of their income arrive without having to touch principal.

If you are generally withdrawing and rebalancing, particularly at the start of the year, you don’t need to worry about when to sell, what to sell, or whether markets are weak at the moment. It’s pretty much formulaic.

 

[Contrarian]

@audreyh1
Absolutely. It starts with the overall portfolio, what percent is fixed, what percent is equity. For fixed use safe stuff, like high grade individual bonds. For equity, low or high beta mixture as long as the prospective risk adjusted returns, typically based on long term historical (after tax) returns, is acceptable. (Soothsayers notwithstanding). Is it within one's true risk tolerance or will panic ensue with a simple correction yet alone a bear market? Perodic withdrawals if/as needed, periodic rebalancing. Really not that hard and still many choices and flexibility within these parameters.

What in my mind seems most questionable is heavily relying upon volatile very high yield debt investments, especially leveraged, for any significant part of the fixed portion of one's portfolio. They tend btw to also have high correlations with equity too, though some have market prices/nav chronically drifting lower. But have come to conclusion some are simply addicted to it. Listening only to supportive views (confirmation bias) or perhaps too clever by one half, seeking quick and easy answer to their needs. And then no matter what happens it is, 'wow look at that yield now'. Ties back into the psychology. Nice thread but warrants spin off threads.

 

[TickTock]

You don't need to worry, but you (the generic 'you') might worry and panic and not stay the course. To the extent that dividends keep an investor from panicking and making ill-considered decisions, then those dividends are an overall positive for that investor.

The whole thread is psychology vs. numbers. A bunch of posts are simply talking past each other, concentrating only on one of the two aspects.

 

[Diogenes]

Likewise, in the stock market, the wise investor should believe that they cannot time the market. However, if they believe that they have met their investment goals they need to ask themselves why they are still aggressively running the race? And ... if that's still appropriate, or ... should they change their investment risk profile? Sometimes it is, sometimes it isn't.

What are these "goals"? A certain amount of annual spending? OK, use Firecalc or whatnot, and decide on an asset-mix and minimum portfolio starting-amount to suit.

But if one's goal is itself to be a successful investor, meaning the achievement of a good lifetime CAGR, then one can't cease to "aggressively run the race". Aggressive running is the whole point! Then the question becomes, "Does some kind of income-prioritization strategy increase my CAGR"? If it does, then one follows it. If not, not.

 

[Tommyboy]

1. I don't think there are any wrong answers. Both methods work and as long as the owner is comfortable with the math that's all that matters.
2. I might agree total return, foot on the pedal could be better mathematically however, I remember the lost decade and how the QQQ took 15 years to get back to 5000 from the dot com crash...
3. I vote for a hybrid model in that I keep 2 years in SGOV, then have a sleeve for dividend, interest income ranging from MYGA, Period certain SPIA, to SCHD to PDI. Lastly, I have the all growth sleeve that I can trim or let grow as needed.
4. For me, I feel comfortable in that all bills will be paid even if the market does a Dot Com blow out.
5. Id bet though its probably "mathematically" better to just go all in all the time. I no longer have that risk tolerance.

my 2 cents

 

[Diogenes]

4. For me, I feel comfortable in that all bills will be paid even if the market does a Dot Com blow out.

A question, if I may... not specifically regarding your approach, but since you gave such a succinct summary, it's fitting to pose it here...

If, in the counterfactual, you never withdrew any funds - I mean literally never, as opposed just some small amount here and there - would your investment approach be different?

 

[RobLJ]

A question, if I may... not specifically regarding your approach, but since you gave such a succinct summary, it's fitting to pose it here...

If, in the counterfactual, you never withdrew any funds - I mean literally never, as opposed just some small amount here and there - would your investment approach be different?

Of course the approach should and does differ, dramatically, as we see on this thread and others from posters who, because of high pensions and SS and other sources, don't need to withdraw from their IRAs or 401k or who withdraw 2% or less, and those who only have SS and are withdrawing more than 3% (like myself).
100% in the S&P for those in the latter category, like myself, after the tech crash would have been to put it mildly distressing; luckily I was 15 years from semi-retirement and I was diversified.

I try to keep in mind who is posting and based on posts, what kind of withdrawer they are, as a context; and within the context (which is a guess) a lot of comments make sense.
But SORR is a real thing for those retiring early and withdrawing....vigorously. I rely more on bonds and CEFs for withdrawal income rather than dividend funds, but I do own some of the dividend funds, and then a sleeve of aggressive growth funds/S&P index (which in essence is a technology fund as it was in 1998). In general, foreign funds pay a lot more in dividends and have been very attractively valued, but then you have to consider currency risk or purchase currency hedged funds. I sold a chunk of these last month, however, so I am looking at replacement income, but we are in a good place, since currently dividends/income plus my SS pays 40% more than our basic expenses. I do not use the S&P or Nasdaq as a comparison, which would be inappropriate--for me. If you don't need to withdraw, then by all means you should shoot for matching or beating those indexes.
Now as I am past SS age, the risk of screwing up has dramatically lessened, so it doesn't matter a lot, even less in a few more years. I'll probably increase the stock percentage when DW claims SS in 4 years or so.

 

[Chuckanut]

Don’t you remember hearing about Joseph Kennedy Sr.’s comment about the shoe shine boy giving him stock tips in 1929?

I remember Will Rogers advice regarding his stock purchases. “I only buy stocks that go up. If they don’t go up, I don’t buy them.”

 

[joejetski]

Of course the approach should and does differ, dramatically, as we see on this thread and others from posters who, because of high pensions and SS and other sources, don't need to withdraw from their IRAs or 401k or who withdraw 2% or less, and those who only have SS and are withdrawing more than 3% (like myself).
100% in the S&P for those in the latter category, like myself, after the tech crash would have been to put it mildly distressing; luckily I was 15 years from semi-retirement and I was diversified.

I try to keep in mind who is posting and based on posts, what kind of withdrawer they are, as a context; and within the context (which is a guess) a lot of comments make sense.
But SORR is a real thing for those retiring early and withdrawing....vigorously. I rely more on bonds and CEFs for withdrawal income rather than dividend funds, but I do own some of the dividend funds, and then a sleeve of aggressive growth funds/S&P index (which in essence is a technology fund as it was in 1998). In general, foreign funds pay a lot more in dividends and have been very attractively valued, but then you have to consider currency risk or purchase currency hedged funds. I sold a chunk of these last month, however, so I am looking at replacement income, but we are in a good place, since currently dividends/income plus my SS pays 40% more than our basic expenses. I do not use the S&P or Nasdaq as a comparison, which would be inappropriate--for me. If you don't need to withdraw, then by all means you should shoot for matching or beating those indexes.
Now as I am past SS age, the risk of screwing up has dramatically lessened, so it doesn't matter a lot, even less in a few more years. I'll probably increase the stock percentage when DW claims SS in 4 years or so.

I think that SORR is a concern for most people transitioning to retirement who are not uber wealthy, particularly if you only have SS and your portfolio to rely on.

 

[Tommyboy]

A question, if I may... not specifically regarding your approach, but since you gave such a succinct summary, it's fitting to pose it here...

If, in the counterfactual, you never withdrew any funds - I mean literally never, as opposed just some small amount here and there - would your investment approach be different?

If I Never withdrew funds.. meaning I live entirely on an external source like social security or pension and had zero need for investments? If so, yes I'd invest differently. Or maybe Id spend more time on a private yacht off the coast of Malta. lol

 

[audreyh1]

I think that SORR is a concern for most people transitioning to retirement who are not uber wealthy, particularly if you only have SS and your portfolio to rely on.

Or your portfolio alone!

 

[Tommyboy]

If I Never withdrew funds.. meaning I live entirely on an external source like social security or pension and had zero need for investments? If so, yes I'd invest differently. Or maybe Id spend more time on a private yacht off the coast of Malta. lol

in my case.. I couldn't live on social security alone and have no pension.

 

[Lorenzo]

Or your portfolio alone!

Let's hope it doesn't come to that. SS is critical to my plan's success.

 

[joejetski]

Or your portfolio alone!

Odd that you would only have a portfolio, and not a pension if you didn’t qualify for SS. I would appreciate an example of a job where that may occur.

 

[Al18]

Someone who didn't work in the US

 

[rjsos5]

Per AI- Jobs that do not pay into Social Security (non-covered employment) typically include certain state/local government roles, federal jobs hired before 1984, railroad workers, and specifically exempt positions like foreign government work, students working for their universities, or low-earning household employment.

Edit-I imagine some of above may have own retirement benefits. Another popped into mind, is low earner who inherits portfolio.

 

[audreyh1]

Odd that you would only have a portfolio, and not a pension if you didn’t qualify for SS. I would appreciate an example of a job where that may occur.

If you retire ~25+ years before collecting SS then it’s so far in the future you don’t count on it for your retirement planning. No pension either. So you are living off only investments for quite a while.

 

[joejetski]

Per AI- Jobs that do not pay into Social Security (non-covered employment) typically include certain state/local government roles, federal jobs hired before 1984, railroad workers, and specifically exempt positions like foreign government work, students working for their universities, or low-earning household employment.

Edit-I imagine some of above may have own retirement benefits. Another popped into mind, is low earner who inherits portfolio.

I was wondering as my brother and sister in law, railroad engineer and teacher, both retired, both have pensions, both have paid healthcare through the railroad, neither have SS, and they ave a smallish portfolio. I am guiding him on diversification and investing in taxable while staying in the 12% bracket, at least while the BBB benefits persist.