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The Internet is full of stories that said the 4% rule is now the 3% rule. Most of us middle class retired folks who didn't save millions and have no pension can't survive on 3%.
As long as the Stock and Bond Markets don't completely crash even worse than the great depression due to something like a natural or political disaster beyond what has happened in the last hundred years, I am 99% sure that we "4 percenters" will do just fine in the next 30-40 years.
Here is why:
I can easily find an ETF or Mutual Fund portfolio with a current 3% dividend yield. These ETF's are very diverse and have tons of Fortune 500 -very successful companies- in a wide variety of industries. Companies that have increased their dividend 3-10 percent a year for up to fifty years. If I pull out the 3% dividend and put it in my cash account, I only need to access (sell) 1% of the assets of my stocks per year.
Yes, the stock and bond market goes up and down year to year, but if Wall Street does not increase an average of 1% over and above dividends in value over the next thirty years, our country, and the rest of the world, is in real serious trouble. I just need one percent average in my mutual funds and IRA per year- above and beyond dividends. And 2% average increase in dividends or total return to cover inflation.
If Wall Street can't offer this to investors over a thirty year period, when I turn 94, and likely will pass on, then we are in trouble. (Pension plans and other financial instruments that everyone is depending on.)
sequence risk makes the whole thing not perform that way as well as the dividend reset . .
each dividend reduces your dollars left invested by the same amount as you got. just to over come the dividend you need a 3 % gain to just get even again plus another 1% to break even . but that does not include inflation adjusting . ..
it is no different than having a portfolio of non dividend payers and you drawing off 4% but the stocks only went up 1% in value which is what your example would be like . some years are at losses . you get a 3% dividend and your stock falls the 3% from the dividend plus another 5% because of the bear market and you are down 8% and pulling 4% .
to pull 4% inflation adjusted you need at least a 2% real return over the first 15 years of a 30 year retirement . that will let the income last but no guarantee you will have anything left over .
Yes, I expected Mathjak to school us on sequence risk, total return and how dividends are just taken out of the stock price.
But I still maintain that if the market will not give me 1% a year over the dividends in broad S&P 500 Mutual Funds, over the next 30 years our country is in serious trouble.
no you can not because your investment dollars left will be reduced by each payment .
the money would be depleted trying to draw 3% out while getting 1% . that 3% is not on top of principal . you are only switching pockets with what you had .before the div was paid . there is no gain there .
plus what about inflation adjusting . dividends do not track inflation . dividends are a number the board decides to pay whether the company shows a profit or not .
a dividend is neutral in itself . to just stay even you need a 4% total return . if a stock pays 3% it needs to gain 3% to stay even .otherwise you now have 3% less than you had before the payment invested .
the math needed to support 4% inflation adjusted is just what i said above .
I can easily find an ETF or Mutual Fund portfolio with a current 3% dividend yield. These ETF's are very diverse and have tons of Fortune 500 -very successful companies- in a wide variety of industries. Companies that have increased their dividend 3-10 percent a year for up to fifty years.
Dividends and capital gains are NOT independent of the overall economy. Rather, they are a reflection of the overall economy. The more your portfolio looks like the Total Market, the more your portfolio's return looks like overall GDP.
So... what is your forecast for GDP growth for the next 5, 10, 20, 30 years?
My personal forecast is GDP growth in the future will be lower than it has been in the past. But that's just me. Your personal forecast will differ from mine.
Do a google search using the terms "us gdp growth rate forecast" and variations on that and you'll find many forecasts. Pick your favorite, or average them all together.
the dividend on the s& p is 2% so if you are spending 4% you need 4% in gains just to have the same amount compounding for you as you had before the dividends .
the math will not work drawing 4% inflation adjusted while getting only 1% gains in share price . that will not even recover the dividend nor last 30 years . .
The problem is if you have to sell off a lot of your investments at the beginning of your retirement. If you do your income will go down and your assets may not benefit enough from a recovery for the latter years.
Remember the 4% rule was the worst case. Having a cash fund to help you through a down market will help.
Pick your percent then evaluate each year. Don't just go on autopilot. Using the IRS's RMD table for your age may work better than picking a forever percent.
Dividends and capital gains are NOT independent of the overall economy. Rather, they are a reflection of the overall economy. The more your portfolio looks like the Total Market, the more your portfolio's return looks like overall GDP.
So... what is your forecast for GDP growth for the next 5, 10, 20, 30 years?
My personal forecast is GDP growth in the future will be lower than it has been in the past. But that's just me. Your personal forecast will differ from mine.
Do a google search using the terms "us gdp growth rate forecast" and variations on that and you'll find many forecasts. Pick your favorite, or average them all together.
There are a number of long-term factors at play here - population growth is one of them. Also a portfolio with a large long-bond allocation will suffer when rates go up.
The problem is if you have to sell off a lot of your investments at the beginning of your retirement. If you do your income will go down and your assets may not benefit enough from a recovery for the latter years.
Remember the 4% rule was the worst case. Having a cash fund to help you through a down market will help.
Pick your percent then evaluate each year. Don't just go on autopilot. Using the IRS's RMD table for your age may work better than picking a forever percent.
drawing 4% while getting a 3% dividend and 1% appreciation in an average of 3% inflation will run out of money in 20 years . remember a 3% dividend and only 1% appreciation while drawing 4% is a loss every year .
The misunderstanding of what dividends are and how they are accounted for is mind blowing
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