Living off the Dividends

Research on Safe Withdrawal Rates

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JWR1945
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Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Living off the Dividends

Post by JWR1945 »

Living off the Dividends

JanSz has come up with an approach that has one withdraw 2% of a portfolio's current balance plus one-half of the capital gains that have taken place over the previous six years. If there are no gains, the withdrawal remains at 2%.

Reflecting upon JanSz's approach, his algorithm sounds very much like living off one's dividends plus a percentage of long-term capital gains. The S&P 500 index yields less than 2% these days. Our own research points strongly to the dangers of withdrawing much more than the initial dividend yield when valuations are high.

The traditional time-tested approach to retirement finances is to live off of one's dividends, leaving the principal untouched. therealchips advocates this approach. It has served him well.

These modifications allow you to enter the percentage of the stock dividends that are reinvested. If you enter 100%, you exclude all dividends from stock calculations. All of the other features of the calculators remain the same.

This blends JanSz's approach with therealchips's approach. I have identified my own calculators as JanSz-Chips Special Versions.

I have added a line at the very bottom of the calculator that shows you the dividend yield for each year. This may help you interpret your results. I have not summarized the dividend amounts within historical sequences. That would require a high level of effort, almost as time consuming as implementing the JanSz algorithms.

I have implemented these changes on my own calculators that use the JanSz algorithm. They may be made to the Retire Early Safe Withdrawal [Rate] Calculator, Version 1.61 of 7 November 2002, and/or all of my modified versions. If you are just starting out and/or if you do not need the long-term capital gains feature, you can create a capable calculator without too much difficulty.

Detailed Instructions

Bring up the original of a calculator that you want to modify. Make a copy. (Click the gray cell above the 1 and to the left of A as a spreadsheet version of Select All. Click Edit, then Copy. Bring up a new spreadsheet. Click Edit and then Paste. Then click on an empty cell.) Work on the copy. (You may wish to close the original. You will want to click a cell first to remove the highlight.)

Highlight (i.e., click) cell E1. Write the name of your spreadsheet in the formula area. I wrote JanSz-Chips Special V1.0 for my version that uses commercial paper when switching stock allocations. Click the check mark. Highlight cell A22. Write Dividend Reinvestments in the formula area. Click the check mark. Highlight cell B22. Click Format at the very top. Then click cells.... Select the Numbers tab. Select Percentage and set the number of decimal places to zero. Click OK. Then click the check mark or press enter.

Scroll down to cell B185. Highlight it. You should see this in the formula area: =IF(B175>0,+B175,+B176). Click at the end of the formula and change it to =IF(B175>0,+B175,+B176)*$B$22. This multiplies the dividend amount by the percentage that you put into cell B22.

Locate the fill handle on the lower right hand corner of cell B185. Position your mouse cursor over it. Click down when the fat plus sign has changed to narrow cross hairs. Drag the fill handle to the right to the end of the row (at cell EK185). Release the button. Click on any cell. (I usually click on the last cell in the highlighted area.) You may drag the formula in several steps. Just go back to the last cell that you have highlighted and continue the process.

Be sure to include the $ signs in $B$22. Otherwise, when you drag the fill handle, the formula will reference different cells (i.e., cell C22, then D22, the E22, etc.).

Scroll down to cell A2560. You can get there fast by pressing F5, writing a2560 (or A2560) and clicking OK. Write Dividend Yield and click the check mark or press enter. Highlight cell B2560. Write =IF(B175>0,+B175,+B176)/B184 into the formula area. Click the check mark. Click Format at the very top. Click cells.... Select the Number tab. Select Percentage and set the number of decimal places to 2. Click OK. Locate the fill handle on the lower right hand corner. When the mouse cursor has changed from a fat plus sign to a set of narrow cross hairs, click and hold the mouse button. Drag the formula all the way to cell EK2560. Release the mouse button. Finally, click on any cell.

Repeat this process for each new calculator that you wish to modify.

Additional Comments

The Data Summary tables allow you to learn about your portfolio balances easily. If you have implemented the summary that identifies balances for the year 2000, you will be able to make in depth studies using the summary information alone.

What is not easy is figuring out how much your withdrawals are. You have to read out both withdrawals for each year of each sequence. Having the dividend yields in row 2560 should help you get a general idea.

The final calculators are extremely powerful. You can withdraw amounts (or make deposits) that increase (or decrease) to match inflation based upon a percentage of your initial balance. You can withdraw (or deposit) a constant percentage of the current balance by adding it to your normal investment expenses. You can withdraw any percentage of the amount that your current balance exceeds that of six years ago. And now, you can decide what percentage of each year's dividend amounts that you include when calculating stock gains.

These calculators allow you to change allocations of stocks and commercial paper or TIPS or ibonds based upon two P/E10 thresholds.

You can read portfolio survival summaries that isolate the effects of a specific range of (retirement) start years.

You can build up your calculator capabilities gradually. You do not have to implement everything at the same time. Most, if not all, of my modifications can be made independently.

Rejoice. It is the Christmas season.

Have fun.

John R.
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BenSolar
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Joined: Mon Nov 25, 2002 5:46 am
Location: Western NC

Post by BenSolar »

Wow, John!

You are really building up the capabilities of those spreadsheets. Very nice! :) :great:
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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