Retirement Savings

[KenBob]

The amount of savings and the withdrawal strategy for retirement is always an interesting topic.

For people shooting at early retirement, the options are relatively easy to determine. The long period of retirement dictates that the retiree live off of the dividend income. The amount of savings required is then determined from the desired retirement income and the average dividend yield of the portfolio. The dividend growth rate must at least equal the rate of inflation, but doesn't have to be higher during retirement. Utility stocks would match this criteria during retirement (rather than during the accumulation phase), since the yields are relatively high and the dividend growth rate tends to match the inflation rate.

I am probably more typical. I am about 10 years from retirement. My early career savings were good; however, a major career change and some interesting times with the latest financial crisis prevented appreciable retirement savings for many years. Saving the amount required to live off of dividends is not practical, so I must draw down capital during retirement.

I performed some interesting calculations to find the savings to annual spending ratio for a number of cases. I assumed 30 years of retirement (18 years is the current average), 3% inflation rate, and a 3% growth rate for the economy after inflation.

For the utility case (capital & dividend growth equal to the inflation rate and a 4.5% yield), the savings to spending ratio was 16.3.

For a mature dividend growth stock (capital and dividend growth rate equal the growth in the economy and a 3% yield), the savings to spending ratio is 14.0.

For a dividend growth stock with some international expansion (capital and dividend growth rate equal to 5% higher than inflation and 3% yield), the savings to spending ratio is 11.7.

For an index fund (capital and dividend growth rate equals growth in the economy and a 1.8% yield), the saving to spending ratio is 16.1.

I find it interesting that the financial press frequently states that a savings to spending ratio of 10 to 15 is required. With a large percentage of bonds in their typical portfolios, the required saving to spending ratio would be even higher than the index fund with my assumption. My assumptions may also be optimistic, since the retirement of the baby boom may appreciably impact the economy, capital, and dividend growth rates.

[Kerim]

Just to be clear, when you say savings to spending ratio, you mean the total portfolio size on the day of retirement divided by the annual amount of projected spending?

I've got no examples in mind, but I feel like when I read those "pop" retirement savings articles, they are discussing the need to save 10 to 15 times your annual salary, rather than 10 to 15 times your expected sending in retirement.

In any case, I think you are right that such guidance usually (necessarily?) is based on hugely oversimplified assumptions. Also, what might account for the discrepancy you note is that many financial writers who write such basic articles seem to use "historical" market average returns of 8 or 10 percent at face value. With rosy assumptions like that, it would be easy to arrive at a multiple of 10 to 15, even with a healthy allocation to bonds.

[fiveoh]

With a large allocation to bonds and if they are drawing down principal, they are going to be hurting when interest rates go up again. I don't know how anyone retires early without a pension or a very high income. I'm trying to do it but finding the amount of savings I need to be boggling on my middle class income. We would need about 60k annually to be comfortable, but I'd like to have a little more to travel, etc. I figure a 4% div yield on my portfolio at retirement means I need 1.5 mil to live off the div income. That's obviously in todays dollars not factoring in inflation.

[cannew]

(10-27-2013, 03:07 PM)fiveoh Wrote: With a large allocation to bonds and if they are drawing down principal, they are going to be hurting when interest rates go up again. I don't know how anyone retires early without a pension or a very high income. I'm trying to do it but finding the amount of savings I need to be boggling on my middle class income. We would need about 60k annually to be comfortable, but I'd like to have a little more to travel, etc. I figure a 4% div yield on my portfolio at retirement means I need 1.5 mil to live off the div income. That's obviously in todays dollars not factoring in inflation.

I'm not sure of your age, but that's the adv of the DG strategy. You should get a growing income from your investments so that the 4% figure (of the portfolio value) during retirement is meaningless.

Just concentrate on the income you can get from your investments. Re-invest the dividends and let them compound to grow even faster. Probably by the time you retire your income should be considerably higher than 4% they refer to because it's income only, not a value from selling part of your holdings.

[Kerim]

I've never really understood why so many people treat this as an either/or proposition. I'd love to develop a big enough income stream from dividends that I can enjoy a long and posh retirement without dipping into the capital, but that seems pretty unlikely to happen. More likely, the income stream that I develop will lessen the withdrawals required, allowing me to enjoy a comfortable retirement with a moderately sized nest egg.

[cannew]

(10-27-2013, 03:48 PM)Kerim Wrote: I've never really understood why so many people treat this as an either/or proposition. I'd love to develop a big enough income stream from dividends that I can enjoy a long and posh retirement without dipping into the capital, but that seems pretty unlikely to happen. More likely, the income stream that I develop will lessen the withdrawals required, allowing me to enjoy a comfortable retirement with a moderately sized nest egg.

Your probably further ahead than the majority. When one is young or even middle aged the possibility of saving a large enough pile seems unrealistic. However, if one recognizes the advantage and need of saving for retirement at a reasonable age, then you very likely will reach the unattainable.

I'll bet by the time you are in your 50's you'll be adding double, triple or more per year to your retirement fund.

DG will increase the odds considerably and probably your income will be more than enough to meet your basic needs.

[fiveoh]

(10-27-2013, 03:48 PM)Kerim Wrote: I've never really understood why so many people treat this as an either/or proposition. I'd love to develop a big enough income stream from dividends that I can enjoy a long and posh retirement without dipping into the capital, but that seems pretty unlikely to happen. More likely, the income stream that I develop will lessen the withdrawals required, allowing me to enjoy a comfortable retirement with a moderately sized nest egg.

For me its the safety of never having to dip into my principal, thus(hopefully) it will never run out.

[Dividend Watcher]

Wow. Some pretty humble admissions here. Much better than admitted over on Seeking Alpha. Either that or the majority of people are exceedingly well off.

12 years ago, I quit a job paying upper middle class wages with a bevy of benefits to go into business for myself. Stupid, I know, but I was tired of going the extra mile for a corporation that didn't care whether I tried to improve the efficiency of the business nor that I spent many hours of my own time improving my own knowledge and skills in the field. This was shortly after my wife had bought her own business in a case of being in the right place at the right time and fulfilling a dream of hers since she was in high school.

Needless to say, between the two of us and the economy, we went through a large chunk of our retirement savings and me ending in bankruptcy before things stabilized. Right now, we are slowly working our way back and hope to be able to retire in our late 60s.

That being said, I've never thought about having a certain saving to spending ratio. Even more so now that I feel I have a strategy in dividend growth investing. My entire focus is quality companies generating a certain growing revenue stream to augment our Social Security to cover my estimates of spending in retirement. Right now, we've got estimated property taxes, heat and lights covered plus variables like dinner out every once in a while, trips to see grandkids, a movie here and there, etc. The house was paid for over 10 years ago and we raise a lot of our own food with room to expand production.

I take odd jobs here and there and fully expect and want (really need for my sanity) a part time gig when I am retired. I've already got ideas, and no, it's not a Walmart greeter job, lined up in my head.

I too don't want to dip into principal until I hit my 80s, if needed. We'll see how things work out.

[rnsmth]

One thing that rarely gets discussed is the role of Social Security and pensions. In 2008, 20% of US workers were covered by defined benefit pensions - not a huge amount, but still a significant proportion.

David Van Knapp wrote an article about Bogle being in favor of conceptually capitalizing one's Social Security payment and favoring dividends here:

Bogle On Favoring Dividends And Capitalizing Social Security

For those who have not read it, there is a good and somewhat lengthy comment thread too.

I know we all have differences in how we approach retirement. Me and the iWife have defined benefit pensions. We also get SS, my first check will arrive in a couple of weeks and Kathy started getting her disability check this month (she is legally blind, which made it problematic to continue working as a graphic designer, but she held out as long as she could).

In addition, we have IRAs that have been added to via rollovers from 401k's and the defined contribution part of our hybrid retirement systems at the colleges where we worked in Oregon. I call it the many small pots of money and we probably won't starve retirement plan.

As a result, income from our investments is not as important as it is for some folks and we may be able to continue reinvesting dividends until required minimum withdrawals hit me in 8 years.

The point is, though, from the article, that if you will receive Social Security or a defined benefit pension, that can be viewed as the fixed income portion of your retirement, allowing one to invest more of their IRA/401k/457 plan money into dividend paying equities.

We own no bonds or bond funds and, unless yields increase materially, do not plan to.

[Geezer]

RN "WOW" Thanks for bringing this out and laying it on the table for all to see, and consider. A lso thanks for the link to David Van K's article.

Sure confirms to me "How much I don't know about what I don't know about!"
KeithK

[Kerim]

Hello Geezer and welcome aboard! Glad to have you join us.

[CritMass]

Good Saturday everyone. I just found this forum a few days ago and been enjoying reading through it. Been reading SA for a couple of years and am drinking the kool aid as they say. When I read the DVK article on SA about John Bogle's thoughts about SS and pensions, it opened my eyes. I'm 6 months away from a Fla retirement system pension and one week after I go off payroll will be 62. The wife says take the SS, but I want to keep working just for something to do (she works two more years then also retires from Fla state government). Anyway, I am transitioning into a DGI style portfolio, and am considering the pension I'll receive and the SS when I get ready to tap,it as my " bond" fund. That's a very interesting concept in the D. van Knapp article about "capitalizing" the pension and SS. Thanks for the interesting posts.