Don’t Play by the Rules of Others !
The 4% Rule states that in order to make your savings last you should not withdraw more than 4% of the total amount saved. But for Dividend Income Investors does this rule apply? Dividend Income Investors don’t let someones silly and arbitrary rules interfere with our financial lives !
Let’s say you earn just over $100,000 per year in income and you have saved $1,000,000 dollars for your retirement – under the 4% rule you will be allowed to withdraw a yearly income of $40,000 from your savings account to live on. So when you add the average Social Security payment of $14,000( $28,000 for a couple) to it this gives you a total retirement income of $54,000 ($68,000 for a couple) . Not bad but really not a great amount, especially for an individual or couple that was used to bringing in over $100,000 per year in income pre-retirement. This means you have to reduce your living expense by $32,000 to $46,000 per year to make ends meet. Having been talked into investing into a mix of Bonds, Index Funds, International stocks for their “safety” you are lucky if your total return even keeps up with the 4% rule over the course of your retirement. This would be the subject of another article but these investment vehicles serve the person that sold them to you more than serving you.
The Dividend Income Investor (DII) on the other hand wants a little more out of life. As a DII investor you know you can beat this 4% rule by investing in income generating stocks of 6-10% giving you a higher income and still allowing for growth of your portfolio to keep up and even exceed inflation levels.
In our example the Dividend Income Investor has the same parameters as the average 4% rule person above. That is , He or she currently earns about $100,000 per year in income, and will get the identical amounts of Social Security. He or she has amassed $1,000,000 in savings but the difference is because they have applied the Dividend Income Investors principles to investing they know they are currently generating over 8% in dividends per year ( I am personally just under 10% in my own accounts so yes it is a reasonable assumption).
This leads me to the rate of withdrawal I plan to take personally which is 6%. An why not? I am earning well over the 6% in Dividends each year. In fact not only can I take the 6% but my style of Income Investing still allows a portfolio growth of almost the entire 4% rule ! At $1,000,000 you could safely withdraw $60,000 per year and when added to the Social Security gives you a combined income of $74,000 (Single) to $88,000 (Couple). A much more reasonable amount to cut expenses back in retirement so that you do not have to drastically change your lifestyle.
But wait, there’s more ! Remember, you are not withdrawing your entire yield so your portfolio is still growing and compounding on the almost 4% of Dividend yields you are not withdrawing. This allows you to not only grow your portfolio but allows you to increase the amount of withdrawals to keep up with inflation. Your retirement will not decrease your lifestyle but will enhance it over the course of your lifetime. Using the example above your portfolio your nest egg should grow to $1,040,000 the first year and to over $1,080,000 the second year so as you can see there is a built in “adjustment” for inflation. That extra $80,000 would produce $600 per month more based on the 9% yield.This is just in two years. This would help ensure you can adjust your income to cover potential inflation over the years.
The moral here is to not let someone Else’s rules dictate your life. We have to take charge of our on lives and our own finances because only we know the direction we want to take in life.
Thoughts or Comments? Please share your own personal experiences with us !