10-27-2013, 09:03 AM
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.
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.