Ramping Up The Dividend Income Retirement Past The 4% Rule (Part 1 of 2)

By: ispeculatornew
Date posted: 05.03.2012 (5:00 am) | Write a Comment  (4 Comments)

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A few weeks ago, I had written a post about how the 4% dividend rule applied to dividend investors where I attempted to show how a dividend investor could get (way!) ahead of someone that is simply using the 4% rule with a standard portfolio. One of the big criticisms that I received regarded my inflation assumptions, which were deemed by many to be too low. I did an analysis and found that while they were a bit low (I had assumed 2% inflation), they were fairly close to what we could reasonably expect.

“I Don’t Have A Million Dollars”

The second big criticism was that it gave the impression that you needed a million dollars to be able to live off of a dividend portfolio. I’ve been very vocal in my belief of holding long term sustainable dividend stocks that can pay out decent dividends and increase their payouts over 20 or 30 years. That is how I ended up modeling my Ultimate Sustainable Dividend Portfolio which I continue to update every month.

There Is Another Way

Clearly, as much as I’d like to think that everyone will be able to save $1,000,000 for their retirement, it’s not the case. For many, getting half of that will be a major achievement. To think that without a million dollars, there is no hope would be foolish. There are many different alternatives. Clearly, I still think that a dividend portfolio would do better than alternatives such as annuities.

Back To Our Scenarios

If you remember, I had 2 main scenarios. One change that I will make for now is adjusting the inflation rate being used from 2% to 2.37%. I will also increase the returns by that amount (generally correlated).

Finally, one fair point was to start both with a similar withdrawl point. So I updated the long term dividend porrtfolio to reflect a 4% initial withdrawal (so for the first few years, more is being withdrawn thaan made through dividends). Seems fair right? Here is the updated result:


Adding A Higher Yield Dividend Portfolio

In the case of someone who wishes to use a higher risk, higher dividend yield portfolio, there is certainly something to be done. The goal here would be to get a dividend portfolio that will:

-Have a higher dividend yield 5% target instead of 3.5%
-Have a slightly higher expected return 6.25% instead of 5.87% (due to the fact that the companies are a bit more volatile)
-Have a lower dividend growth of 2.25% (usually, we must choose between high dividend yield and high dividend growth)

Clearly, this portfolio does not allow the investor to withdraw as much. However, as many pointed out, it is very possible to reduce expenses significantly at retirement, once the mortgage is paid, kids are out of school and in general, it’s reasonable to be able to live off of much less than was required in our working years. Anyway, back to the numbers, here are the results for this new scenario:

Tomorrow, I will give a sample portfolio that could represent this kind of dividend/return/risk profile. I do think this is a great solution for someone who saved half as much.

I’d love thoughts on this!

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  1. Comment by Dave McPhee — May 3, 2012 @ 6:24 am

    I was wondering what the results would be if you also cut the timeline in half, assuming most folks will be hitting their targets of 1M or .5M at the age of 67.

  2. Comment by Rob Thompson — May 3, 2012 @ 11:35 am

    I might have missed it but why in the second example did you start with a $500,000 portfolio instead of the first one at $1 million?

    Also this is straight line return not a Monte Carlo simulation.

    Excellent educational tool however.

  3. Comment by IS — May 3, 2012 @ 6:47 pm

    @Rob – Thanks for the feedback. Sorry, I did not clarify but I got quite a few comments regarding strategies for those starting with less assets, so 500K was a nice experience..!

    @Dave – Good point yes, I do think that the current tables would hold up well if you looked at the first 20 or 30 years for example

  4. […] Ramping Up The Dividend Income Retirement Past The 4% Rule (Part 1 of 2) […]

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