There is a raging little argument going on over at Millennial Revolution. It’s over living off yield vs living off growth. Wanderer loves his “yield shield” and “cash cushion” and Big ERN is a growther through and through and claims living off yield is a mirage. I’m with ERN on the yield argument but I think there is merit to a tweaked cash cushion approach as well. My cushion tweak is to use an efficient frontier tangent portfolio instead of cash, so it grows in growth years efficiently but does it’s job in down years of protecting the portfolio against early SORR. My tweak also is once the tangent is out of money do not refill it just move to start living off the higher risk portfolio.
Here is 30 years of S&P 500 returns starting in 1988, 5.1% plus 2.245% yield for a net reinvested inflation adjusted 7.35% annualized return!
Here is 20 years of S&P starting in 1998 1.7% growth, 1.9% yield for a total of 3.626/yr total return.
here is a 2008 to 2018 look see, 9.366 growth and 2.281% yield for a whopping 10 year reinvested growth of 11.647% Reinvested yield is a supercharger! $1,000,000 at 11.647 becomes OVER $3,000,000 in 10 years. $1,000,000 at 9.366 becomes $2,440,000 in 10 years plus
281K of compounded dividend interest for a net 2,721,000. If you lived off the yield you would have on the average 28K/yr to live on. If you lived off the growth 3M-2.4M = 600K over 10 years = 60K/yr. Both portfolios after 10 years would be 2.4M
In the 20 year case 1M would grow to 2.04M over 20 years @ 3.636. If you lived off the yield you would live on 23,000/yr and the end portfolio value would be 1.18M. If the reinvest guy winds up with a 1.18M portfolio after spending some WR he could could live on 43K/yr. Both portfolio’s after 20 years are worth 1.18M . If the reinvest guy lived on 23K/yr he would have a portfolio worth 1.38M , 200 grand more than the yield living dude.
It is what it is. Reinvesting the yield is like a dollar cost averaging a yearly cash infusion. The good thing about yield is it tends to be non correlated with S&P growth, so you DCA pretty much the same amount each year whether the S&P is high or low, so some years you buy low, some high but you’re always buying and allowing that dividend money to be exposed to growth. On really good years your growth on the dividend way out performs your WR so only some % of the dividend is extracted and the rest just continues to grow, and grow and grow. In the down year you would prefer not to sell so have some low risk tangent frontier portfolio around to sell instead. I once was enamored with dividend stock scenarios till I did the math. You can goose yourself into using “high dividend stocks” but those can be dangerous and tend to be in concentrated sectors. GE paid a good yield till it didn’t. In the meantime it lost nearly ALL of it’s value. A yield shield doesn’t shield anything of the company goes into negative growth.
I’m with Big ERN except I include the ability to use tangent funds on years the market is down (YTD less than zero) to live on, and still reinvest the dividends when the stock price is low. Do that for a few down years especially in the first half of retirement an u gone b a winner!