Relying On Stock Investments For Income After Retiring

davfor

This chart suggests that utilizing the income received from dividend paying stocks may be prudent during retirement for portfolios concentrated in stock investments if a somewhat consistent stream of income is important. Any thoughts on this?

The areas shaded gray show periods when the real value of the dividends from the S&P 500 decreased. Notice that they did not decrease much and decreased far less than the real index value. During those periods, a retirement strategy based on those dividends would have been far more successful than one based on total returns.

Relying On Income From Dividend Paying Stocks

WABAC

Taking dividends is a lot easier than figuring out total return. The money just shows up if you aren't reinvesting. No doubt there's lots of academic arguments over this.

Crash

Very straightforward and readable. Thanks, @davfor. Needless to say, no one should try to exactly mimic what someone else has done, but there are lessons to be learned. One thing of note: he expresses that he was forced by health issues to retire early. Regardless of the reason, anyone pushed into retirement early will have to do some re-thinking and re-jiggering of the portfolio. (Unless you're independently wealthy.)

"Any thoughts on this?" For one thing, the stocks I choose all must offer me at least a 3% dividend. I stole that rule from someone on a board I've been banned from. I can use some measurements and statistics to understand more than a novice, but I get lost in the weeds when I try to run with the Big Dogs who can look at complicated charts and very granular statistics and stuff.

So: "KISS" it. "Keep it simple, stupid."
I just discovered a tiny bank out of Richmond, Indiana. I like smid-banks. I won't give a penny to the Behemoth Banksters who all fleece the public. Some might be worse than others, but I just steer clear. If you have a mind to do it, take a look at RMBI. The dividend stands at over 5% right now. And its moneymaking thesis is utterly simple and straightforward. Nothing fancy or convoluted.

Like the writer, I hold REITS. Just a SINGLE REIT, so far, though. I suppose I will forever be growing my stuff, rather than relying on income-production via dividends. One must be ready to flex, but for the time being, my choices are made, and a single adjustment will happen sooner or later. Still keeping an eye on when to make that tactical move.

Midstream oil/gas? Yes, the GIANT one he does NOT own: ET. It's an LP. I suppose taxes will not be an issue if I just never sell it. Wifey will get the step-up basis.

MikeM

Most of my money is in tax deferred accounts, so the appeal for dividends has never been a driver for me over total return. To each their own.

PRESSmUP

Certainly can be done, and I'm a fan of doing precisely that. There's a wide variety of items (stocks, CEFs, OEFs, LPs, BDCs, REITs) that throw off distributions, both debt and equity. I have 35% of my portfolio with items targeted purely for growth and the rest is to throw off distributions. One of my regrets is that I should have planted the seeds for those distributions 20 years ago to take advantage of re-investment and the miracle of compounding.

davfor

Thanks for the comments. For about the first 15 years of retirement, I focused on total returns to help determine the withdrawal amounts from my investment portfolio . This method turned out to be somewhat complicated and stressful due to significant sequence-of-returns variations in the annual returns. The chart above suggests that basing withdrawals from a prudently developed dividend stock portfolio may well be a sustainable way to guide withdrawal decisions that can somewhat reduce annual volatility. And, as @WABAC says, the simplicity of the approach has appeal. My portfolio is 70% invested in stocks. That complicates things a little bit because part of my dividend income comes from investments that are not stocks -- almost all bonds and money market investments in my case. Part of that income should be retained in the portfolio each year to compensate for any CPI increase during the year. In my case, this can easily be done at the end of the year when my once a year distribution is determined and made. The CPI for the year just ending can be multiplied by the 30% non-stock portion of the beginning of the year portfolio balance. That amount can then deducted from the total annual dividend income received to determine a suggested withdrawal amount for the year just ending. That is essentially the procedure I am currently using......

yogibearbull

If one can live on portfolio income only, great.

But when that isn't enough, and one has to withdraw more than portfolio income on a consistent basis, that can lead to problems from the SOR issues, or if the entire portfolio is drastically changed just to support high income.

Stats such as SD, Sharpe Ratio, etc aren't helpful, and there is no good relation between the long-term TR and appropriate withdrawal rates. Simply taking LT average TR and subtracting, say, 4% to account for inflation or SOR can lead to premature portfolio exhaustion (believe it or not, that is what a famous radio/podcast host did recently).

Only stats such as PWR, SWR, SWRM, etc are helpful for assessing the withdrawal capacities of portfolios. Randomized Monte Carlo studies are an alternative. But those are based on backward looking historical data, and one has to have some faith that if something(s) worked for the worst past stretches, they may also be OK for the future.

davfor

@yogibearbull The suggested annual withdrawal as of 12/31/23 under the system I described above was 4.0%. That is similar to my typical annual withdrawal prior to making the decision to focus on dividends rather than total returns. But, the current process is easier for me to rely on as it is based only on the amount of dividends actually banked during the year. Also, going forward, the year to year fluctuations -- both up and down -- in the amount of banked dividends will likely be lower than the corresponding year to year fluctuations in the total returns. I suspect this will make make me more comfortable with continuing to rely on this system to determine a suggested annual withdrawal amount.

PRESSmUP

@davfor ...in an ideal world, the dividends/distributions generated in your IRA would sufficiently cover your RMDs as well.

yogibearbull

@PRESSmUP, relying on distribution for RMDs may be possible early on, but would be impossible later on. Here are the required RMD % (of the yearend balances) at selected ages:

72 3.65%
80 4.95%
85 6.25%
90 8.20%
95 11.23%
100 15.63%

Now, the IRS humor zone
110 28.57%
120 50.00%

PRESSmUP

@yogibearbull ...indeed. That approach won't work forever. Several studies have concluded that taking only RMDs would leave a boatload of money when we're less likely to enjoy it...which is why I began taking IRA distributions when I was 59.5.

@bee had generated a post several years back with an attachment from Kitces with a spreadsheet to determine the most efficient withdrawal strategy, and I've adopted it to this day.

MikeM

https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-March-2012-20-Years-Of-Safe-Withdrawal-Rate-Research.pdf

I remember that too, @PRESSmUP. Is this the link-report you are referring to?

yogibearbull

There are 2 separate issues.

I was commenting on the infeasibility relying only on distributions for meeting RMDs.

But with larger IRA accounts, the RMDs are large, and may be sufficient to meet retirement expenses. Then, there is no worry about SWRs. Or, the RMDs may only need small supplements from the portfolio. So, that becomes a valid retirement withdrawal strategy. However, for many, the RMDs aren't enough for expenses.

PRESSmUP

MikeM said:

https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-March-2012-20-Years-Of-Safe-Withdrawal-Rate-Research.pdf

I remember that too, @PRESSmUP. Is this the link-report you are referring to?

Thanks @MikeM ...yes, I believe that article was a part of the conversation. I found the worksheet I had mention which calculates the optimal withdrawal amounts and their source. Not Kitces, but related.

https://www.i-orp.com/Plans/index.html

davfor

PRESSmUP said:

@davfor ...in an ideal world, the dividends/distributions generated in your IRA would sufficiently cover your RMDs as well.

I'll take you word for it. But, I don't face any RMD requirements. So, that's an uncharted world to me. About 90% of my investment $'s are invested in a taxable account. That account is the focus of my annual withdrawal ruminations. During most of my working years, available cash was funneled into a weekend real estate investing hobby. The limited $'s that were set aside in a tax deferred retirement account were withdrawn in annual steps from the age of 55 when I retired until the age of 62 when I began to collect social security.

Sven

At least you have income from social security and pension (?) and the rest of balance from taxable account.

We switched to Roth 401(k) when it became available. The market has been kind to us, so we are facing RMD with our traditional tax-deferred accounts like everyone else. Will do Roth conversion from now till 72 while staying below the threshold for higher Medicare premiums.

davfor

@Sven Yes. Current Income Sources: defined benefit pensions = 45%, taxable investment account = 30%, social security = 25%. (Also have two smaller Roths that are not being tapped.) Taxable investment account has grown substantially since retirement. Exhausting it is not a significant concern (wife and I also have good long term care policies taken out during pre-retirement planning phase). Just don't appreciate fluctuations in account balance in years account balance does not end at new high. Restricting annual withdrawals to some or all of the dividend income already sitting in the account at end of year helps keep those fluctuations in perspective. It also simplifies the year end review.

sma3

One way, popularized by AAII is to hold x number of years expenses in cash ( you pick the number… at least 5)

In years where SP500 or Wiltshire or ur index of choice is within 5% of all time high, withdraw living expenses from equities. When index below 5% take money out of cash. Refill cash bucket over 2 to 3 years. This way u never sell equities at bottom

Sven

Excellent suggestion. The cash bucket can cover yearly withdrawal for several years without worry the ups and downs of the equity bucket. And there are good options with T bill ladder, CDs, and high yield money market as the cash equivalent.

bee

Thanks should go out to @davidmoran for that link… it’s a good one!

https://i-orp.com/Plans/index.html

davidrmoran

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davfor

@sma3 & @Sven I agree that having a cash bucket makes sense. Mine is held outside the investment accounts described above. It currently equals about 13% of the total held in those accounts. It is intended to temporarily provide funds to mitigate the effects of a prolonged downturn in investment portfolio returns and to temporarily help fund significant required expenditures like replacing a leaking roof. It is also intended to provide transition funds to cover the waiting period before long term care benefits become available if my wife or I suffer from a rapid decline in health status. The buffering benefits of exclusively using dividends to fund investment account releases potentially helps limit the necessary size of that bucket. But, perhaps it would be prudent for me to increase it to at least 15%. Thanks for your comments.

@bee Yes. And a link to Portfolio Visualizer's Monte Carlo portfolio simulator may be useful too.

https://www.portfoliovisualizer.com/monte-carlo-simulation

Sven

In term of cash flow, the cash bucket is secured based on your annual living expense minus social security and pension $ for say 3-5 years. Emergency house/car repair can be factored into that cash bucket and back fill that over several years.

Some people have a second bucket in between consisting of bonds and balanced funds to dampen the market volatility and the possibility of prolong drawdown. Dividend growth funds can be part of this strategy. You can decide the % that you feel comfortable to fill the cash bucket every year. Personally, I use both balanced funds and dividend growth funds.

The third bucket is consisting of stocks/stock funds for capital growth.

davfor

@Swen Thanks for that clarification. The self-developed system I use is based on an investment account spreadsheet and a separate household budget spreadsheet. Maintaining a formal wall between my investing account and household account helps me to keep the two activities separated as does relying once a year release from the investment account. $'s released from the investment account annually at the end of the year are simply transferred into the household account and included as an income source in the annual household budget for the new year as it begins.

WABAC

If you get dividends on a mutual fund more often than yearly, it might work for you to reinvest the dividends and realize the cap gains, and sock those away for things like roofs, cars, heat pumps.

YMMV.

Could have posted this in the bucket thread too.

FD1000

WABAC said:

Taking dividends is a lot easier than figuring out total return. The money just shows up if you aren't reinvesting. No doubt there's lots of academic arguments over this.

Not really.
Example: you can use a simple index = SP500 = FXAIX at Fidelity to sell shares every month for a specific amount ($2-4K) on a certain day and let it run for years, problem solved and you know exactly how much you get every month.
The only thing that matters is total returns which include the distributions.