So the holy grail of dividend growth investing is growing your dividend stream to the point that it covers all of your expenses, allowing a comfortable retirement without having to sell stocks or otherwise tap into your principal. Dividend growth in retirement offsets (or beats) inflation, and your standard of living is not compromised as the year roll by.
I love that goal and find it inspiring – I truly hope that I am able to make it to that point. But I am also a realist, and I understand that I and many others may never get there. In my own case, I save and invest diligently, but my monthly expenses are quite high, and unlikely to shrink any time soon. To truly live off the income alone, my dividend growth portfolio would have to get pretty darned large indeed.
But I’ve never really understood the feud between the “never touch the principle” dividend growth people and the “growth is all that matters” people who look forward to living their retirements by drawing down the principal (according to the “4 percent withdrawal” rule or some variation thereon). In all likelihood, many of us will be forced to adopt a hybrid of the two approaches, because if you don’t start early enough or if you simply aren’t able to put away enough every month, then you may never accumulate a pile large enough to live off the dividends alone. As I’ve said elsewhere, if I can generate enough dividend income to cover a large chunk of my expenses, and have to sell of 1 or 2 percent of my portfolio each year to cover the gap, I should still be all right throughout retirement.
But a related thought gets much less attention than I think it deserves in the dividend growth community: If you are willing to touch the principle, you can retire on a smaller nest egg. I think some DG’ers get so focused on living off the income stream that they overlook this fact. This idea has been clear in my head for a long time, but I finally sat down and came up with a very simple illustration:
Assuming a 4 percent yield, if you are unwilling to touch the principle, you’ll need a nest egg of $1,250,000 to fund 40 years of retirement at $50,000 per year. If you are willing to burn up the principle, you’ll only need $1,000,000. Of course this is very simplified. It ignores taxes, as well as inflation and dividend growth (though for back-of-the-envelope purposes, I am comfortable assuming that inflation and dividend growth offset each other). While these illustrations show retirement at 60 in both cases, needing less to start could instead mean an earlier retirement. It could take several (or more) years to save that last $250,000.
Of course, your goals must reflect your individual values. If it is important to you to leave huge sums of money to your heirs or charity, then it may be worth it to you to work until you can achieve Scenario A. If you want to retire as early as possible, it may be worth running the numbers on something like Scenario B. And note, by the way, that in some sense the numbers in Scenario B are conservative – if you only live to 95, you’d still be leaving a good chunk of money behind.
Thoughts?
I love that goal and find it inspiring – I truly hope that I am able to make it to that point. But I am also a realist, and I understand that I and many others may never get there. In my own case, I save and invest diligently, but my monthly expenses are quite high, and unlikely to shrink any time soon. To truly live off the income alone, my dividend growth portfolio would have to get pretty darned large indeed.
But I’ve never really understood the feud between the “never touch the principle” dividend growth people and the “growth is all that matters” people who look forward to living their retirements by drawing down the principal (according to the “4 percent withdrawal” rule or some variation thereon). In all likelihood, many of us will be forced to adopt a hybrid of the two approaches, because if you don’t start early enough or if you simply aren’t able to put away enough every month, then you may never accumulate a pile large enough to live off the dividends alone. As I’ve said elsewhere, if I can generate enough dividend income to cover a large chunk of my expenses, and have to sell of 1 or 2 percent of my portfolio each year to cover the gap, I should still be all right throughout retirement.
But a related thought gets much less attention than I think it deserves in the dividend growth community: If you are willing to touch the principle, you can retire on a smaller nest egg. I think some DG’ers get so focused on living off the income stream that they overlook this fact. This idea has been clear in my head for a long time, but I finally sat down and came up with a very simple illustration:
Assuming a 4 percent yield, if you are unwilling to touch the principle, you’ll need a nest egg of $1,250,000 to fund 40 years of retirement at $50,000 per year. If you are willing to burn up the principle, you’ll only need $1,000,000. Of course this is very simplified. It ignores taxes, as well as inflation and dividend growth (though for back-of-the-envelope purposes, I am comfortable assuming that inflation and dividend growth offset each other). While these illustrations show retirement at 60 in both cases, needing less to start could instead mean an earlier retirement. It could take several (or more) years to save that last $250,000.
Of course, your goals must reflect your individual values. If it is important to you to leave huge sums of money to your heirs or charity, then it may be worth it to you to work until you can achieve Scenario A. If you want to retire as early as possible, it may be worth running the numbers on something like Scenario B. And note, by the way, that in some sense the numbers in Scenario B are conservative – if you only live to 95, you’d still be leaving a good chunk of money behind.
Thoughts?