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I see this all the time, trying to live off dividends or low returns off something like $1m or so. The thing is if you retire early in 30 years time you’ve spen

I see this all the time, trying to live off dividends or low returns off something like $1m or so. The thing is if you retire early in 30 years time you’ve spent all of your returns and now inflation has eroded your principal. I don’t see why you wouldn’t just keep working in a low stress easy job, part time or something, and continue to build savings.

JMTQp8lwXL 7y ago
The withdrawal rate isn't a fixed $40k. It's $40k, adjusted for inflation, annually. Year 1 is $40k, Year 2 is $41.2k (assuming 3% inflation). Purchasing power stays constant over time. Though I didn't specify the portfolio composition, most of my holding are US Large Cap, which are the 2nd best performing asset class below small cap: https://www.compoundvalue.com/wp-content/uploads/2013/10/IR_1.jpg https://www.compoundvalue.com/wp-content/uploads/2013/10/IR_..., but both classes are significantly above the others (Bonds & T bills), so I'm not sure what's meant by low returns. If you mean sequence of returns risk, most people use a bond tent to mitigate the risk.
- alecbenzer 7y ago
  Taking out more than $40k/year erodes your principal though, I thought that was pertymcpert's point? Like, if you've got $800k and can reliably earn 5%, as long as you're withdrawing only $40k you're good. But if you withdraw $41k one year, your principal is now only $799k. Next year if you need $42k, the return from your $799k is only $39,950, so your principal goes down to $796,950, etc. From a quick spreadsheet, if inflation is 2% annually and you can get 5% on your principal, you deplete your $800k in ~32 years. Doesn't seem too hard to fix with some supplemental income here and there?
  - w-ll 7y ago
    Not taking a piss, could you share your spreadsheet?
    - alecbenzer 7y ago
      https://docs.google.com/spreadsheets/d/1RTa0rnMdk8VSPpK7qgklfUEEuLMcWnrFkIafOYQVjeQ/edit?usp=sharing https://docs.google.com/spreadsheets/d/1RTa0rnMdk8VSPpK7qgkl...
  - josalhor 7y ago
    He is not trying to live off the dividend (as far as I understand), he is trying to live off the principal and the dividend. At the end of the day, if his expected life span is something like 85 years and he accounts for 110 years in savings he would be left with very little principal, but who cares at that point. It is true however that getting that right may be very tricky, because if you miscalculate you have no savings left.
    - alecbenzer 7y ago
      Yeah I guess this is fine as long as you account for it. Starting with $800k, $40k expenses, 2% inflation and 5% return, retiring at 35 you end deplete your money at 67, but starting with $1M takes you to 83.
PopeDotNinja 7y ago
One thing to keep in mind is the cost of healthcare dramatically outpaces inflation, too. It's not ridiculous to think that healthcare premiums alone could eat up most of the principal. And this is assuming that taxes stay low & good health.

JMTQp8lwXL 7y ago

The withdrawal rate isn't a fixed $40k. It's $40k, adjusted for inflation, annually. Year 1 is $40k, Year 2 is $41.2k (assuming 3% inflation). Purchasing power stays constant over time. Though I didn't specify the portfolio composition, most of my holding are US Large Cap, which are the 2nd best performing asset class below small cap: https://www.compoundvalue.com/wp-content/uploads/2013/10/IR_1.jpg https://www.compoundvalue.com/wp-content/uploads/2013/10/IR_..., but both classes are significantly above the others (Bonds & T bills), so I'm not sure what's meant by low returns. If you mean sequence of returns risk, most people use a bond tent to mitigate the risk.

alecbenzer 7y ago
Taking out more than $40k/year erodes your principal though, I thought that was pertymcpert's point? Like, if you've got $800k and can reliably earn 5%, as long as you're withdrawing only $40k you're good. But if you withdraw $41k one year, your principal is now only $799k. Next year if you need $42k, the return from your $799k is only $39,950, so your principal goes down to $796,950, etc. From a quick spreadsheet, if inflation is 2% annually and you can get 5% on your principal, you deplete your $800k in ~32 years. Doesn't seem too hard to fix with some supplemental income here and there?
- w-ll 7y ago
  Not taking a piss, could you share your spreadsheet?
  - alecbenzer 7y ago
    https://docs.google.com/spreadsheets/d/1RTa0rnMdk8VSPpK7qgklfUEEuLMcWnrFkIafOYQVjeQ/edit?usp=sharing https://docs.google.com/spreadsheets/d/1RTa0rnMdk8VSPpK7qgkl...
- josalhor 7y ago
  He is not trying to live off the dividend (as far as I understand), he is trying to live off the principal and the dividend. At the end of the day, if his expected life span is something like 85 years and he accounts for 110 years in savings he would be left with very little principal, but who cares at that point. It is true however that getting that right may be very tricky, because if you miscalculate you have no savings left.
  - alecbenzer 7y ago
    Yeah I guess this is fine as long as you account for it. Starting with $800k, $40k expenses, 2% inflation and 5% return, retiring at 35 you end deplete your money at 67, but starting with $1M takes you to 83.

PopeDotNinja 7y ago

One thing to keep in mind is the cost of healthcare dramatically outpaces inflation, too. It's not ridiculous to think that healthcare premiums alone could eat up most of the principal. And this is assuming that taxes stay low & good health.