Retirement and the 4% Rule

[bennkar]

I have read here (and other places) when in discussions for a Safe Withdrawl Rate (SWR) in retirement, and the usual numbers given are 3% as 100% safe, 4% as almost as safe (at least for a 30 year retirement), and then at 5% the odds of something bad happening increases. I understand how they came about with the numbers (Monte Carlo simulations).

But with all that said, there is something that always make wonder if I am missing something. There are so many company stocks out there that return close to 4% in dividends, and have been increasing their dividends yearly for decades. Given that, and if you were concerned about your money lasting, why wouldn't you invest in stocks that give high dividends (and usually increase them yearly), take the dividend (and maybe 1% or so extra each year if needed), and you should be golden.

I understand there is the risk of the dividend being slashed (see banking stocks), or the principal shrinking, but if the dividends don't shrink and you aren't looking to take down the principal, why wouldn't this be the way to go? For me, while I have my money invested in various funds in my 457 plan (and a lot in foreign and small cap funds), most of my Roth investments and my personal investments are in moderately high dividend large cap stocks (utilities and multi-nationals). To me this seems like the decent return - very low risk way to go with your retirement funds.

Anyhow, I'm just throwing this out there just for discussion. Is there something obvious I am missing?

[bjl584]

Funny you should bring that up. I'm currently structuring my ROTH IRA with dividend paying stocks and funds. Currently they are re-investing, but at retirement I plan to take monthly tax free cash payouts without ever having to touch the principal.

[Petunia 100]

Dividends are nice, but total return is what matters. If one stock pays a 2% dividend and goes up 3% in value, you have gained 5%. If another stock pays no dividend and goes up 5%, you have gained 5%. If you are drawing 5%, does it matter if it came from a dividend or from a capital gain?

Sometimes dividend paying stocks do much better than non-dividend paying stocks, sometimes the reverse is true. I think owning some of each is prudent.

If you own only dividend paying stocks and your dividends are not enough to fund your withdrawals, you must sell shares. The next quarter you will own fewer shares, receive less in dividends, and so must sell even more shares. You can't continue on like that indefinately, at some point you will run out of shares.

If you decide you will spend the dividends only, you face a different sort of risk. The risk that you did not spend as much as you might have and will die with your principal intact. Of course, some people won't mind this "risk". If that is your objective, then spending dividends only is a reasonable plan.

[bennkar]

Funny you should bring that up. I'm currently structuring my ROTH IRA with dividend paying stocks and funds. Currently they are re-investing, but at retirement I plan to take monthly tax free cash payouts without ever having to touch the principal.

Exactly. Although I will admit I currently have about 1/3 of my ROTH in mid cap and smaller. I figure as time goes by I will weight the allocation more towards large cap dividend payers in the ROTH. My plan is to draw down the taxable 457 funds slowly, and just pull out the Roth dividends for crazy money.

[Michael01]

Everyone should follow this rule so that they can get the benefits.

[jpg7n16]

I believe you're evaluating this idea solely on the basis of everything going right.

Obv if you can find a company paying an 8% dividend, and it continues to pay it indefinitely and nothing bad ever happens, you will be golden for the rest of your life. Just take 4% out, reinvest the other 4% and let your dividends steady grow forever.

There's a phrase: hope for the best, plan for the worst.

If you invested everything in just a couple high dividend stocks, you'll have little diversification and a lot of risk.

Take for instance GE: strong company, has been paying dividends like forever, in 2009 dividends were cut for the first time ever from .31 to .10.

How would you like your sole income stream to be cut by 67%?


My point is - yeah this sounds great when everything goes well, but what happens if it doesn't?