As you might already be aware, a short while ago on My Own Advisor I wrote a controversial post about the intent to live off dividends and distributions form our portfolio. Some investors don’t agree with this approach:
“The trouble with a “live off the dividends” approach is that I’d have to save too much in order to create my desired retirement income. For example, I’d need to save between $2.5M and $3M in order to generate $90,000 per year in dividend income. Alternatively, I could get the same $90,000 per year by simply withdrawing from a portfolio of $1.45M (assuming 5% annual growth and the portfolio lasts 30 years).”
Personally, I don’t think you need a nest egg of $3M to retire on. This of course depends on your expensive retirement tastes and how much you think inflation will kill your portfolio value over time.
For me, “living off dividends” is very much a mindset:
- There are simply too many unknowns about the future. This means keeping our capital intact should give us more financial options.
- If we are able to keep our capital intact we don’t need to worry as much about when to sell shares or ETF units. Consequently there will be less transaction costs and portfolio manipulation.
- Saving and investing this way is my form of forced savings – there is motivation.
If you’ve been following this series on my blog, you know I reached out to a few dividend investors to ask them some questions about their financial freedom journey, including any plans to “live off dividends and distributions”.
You can read what Dividend Growth Investor mentioned here.
You can read what Tawcan thought here.
You can read what The Dividend Guy thinks here.
As part of this series, here is what Dividend Earner told me.
My nom de plume is Dividend Earner. I blog on this site but I also provide a dividend data product at Dividend Snapshot. I have been solely focused on dividend investing since 2009 but started investing in my early 20’s.
What is your investing goal? Do you really intend to live off dividends or distributions?
Let me first highlight that my parents are living off dividends and have been doing so for 30 years now. Living off dividends in retirement requires a slightly different strategy than dividend investing during the accumulation years. When I started investing, I was focused on yield but very little growth. I changed my strategy to focus on dividend growth for the asset accumulation years but the same portfolio will be adjusted when I near retirement. I’ll be focused on strong income as opposed to strong growth stocks.
The RESP account I have for my kids’ education is a retirement-like portfolio as opposed to an accumulation portfolio and 25% of my dividend comes from this account while it only represent 15% of my overall portfolio. It’s like a practice account for the retirement years.
I am targeting living off dividends to avoid the following:
- Depleting my portfolio via withdrawals due to longer life
- I don’t believe in the 4% withdrawal rule anymore
- I don’t believe in the estimated rate of return of mutual funds and ETFs.
Financial services do their best to put together systems and processes but it’s all based on two things:
- Your risk profile. Everyone is pretty conservative and then they find out they need so much savings that they adjust their risk profile to match their goals.
- Forward estimation based on historical data, so it’s just a guess. Life expectancy has not been adjusted at the same rate as life in my opinion.
Why does this approach work for you?
Dividend income to me seems like the only sustainable method to manage retirement expenses. You should feel relieved that if you have dividend income for retirement, or other sources of income (real estate or small business), you don’t have to focus on when you are going to die but how to live.
Mathematically speaking, someone may outline that you need more savings to reach sustainable dividend income retirement but is that wrong? All you have to do is aim for it and if you are not quite there, you can always switch to index investing approach with a cash wedge. You’ll probably have more money by attempting to live off dividends than if you had targeted index investing as your strategy – at least I feel this way. I believe you should strive to save as much as you can and learn to compromise a little bit in terms of your day-to-day items.
So far, I have grown my dividend portfolio to just over $300,000 and I earn $10,000 per year in dividends. I know I can switch my portfolio to some higher yields but overall growth would be sacrificed which is not what I want in my asset accumulation years.
Will you eventually “eat” your capital and if so, how?
I would like not to and that will depends on a number of reasons. First, I need the kids out of the house and it seems they stay home longer these days! 🙂 Second, when I reach a time in life when I need support, I will not worry about starting to eat into the capital as long as we have a plan for being looked after. It may be that we help one of our kids build a bigger house with a suite for the parents! Planning in retirement has two aspects in my opinion; the good years, the slow years. They both need to be planned for. The bad years require more planning and we only can learn from our parents and others – you get one shot at it.
How close are you to realizing your retirement goal? What are your assumptions about your savings rate, your portfolio value and your rates of return needed?
I would like to earn a minimum of $50,000 per year before I call it “Goal Achieved”! It’s a little more complicated than that because I have another indexed portfolio through my company’s defined contribution pension plan. Extrapolating from that indexed portfolio I would earn just over $16,000 from that plan today. I would need about 3 times that income level to reach my $50,000 income goal. My target is retire or at least reach financial independence in 10 years from now.
My savings are accelerated now. I pay a small amount on my mortgage and invest the rest. I easily invest 30% of my gross income and I’m aiming for more.
Any last words you wish to share about your approach?
Dividend investing requires hands on portfolio management and may not be for everyone. While the income is passive, the stock selection and portfolio management needs some attention but I think you should always pay attention to your portfolio – it’s your money. You need a process to manage your portfolio and you can visit my site to learn more about what I do. Regardless of the strategy you take, my advice is to get engaged and learn as much as you can because anyone who helps you at one point in time may not be there for one reason or another to help you in the future.
Thanks to Dividend Earner who participated in this dialogue and shared his thoughts. The goal of living off dividends (or distributions) can be a prudent strategy but it’s not for everyone and dividend investing also has risks. Only you can decide what is right for you. I encourage you to consult a financial professional in the form of a fee-only advisor if you need help with your financial plan.