Conventional financial planning suggests that you should sell down capital to fund your retirement. I don’t like this idea for a variety of reasons. More to the point though, with dividend investing, I don’t think you need to touch your capital at all in retirement. Certainly, my aim is to be able to achieve financial independence solely through dividend income.
Financial planners often suggest to retirees that they should assume selling down 3-4% of their capital base (sometimes more) in retirement. This idea is bad for a few reasons.
Markets Crash
As we saw in 2008-2009, markets aren’t always rational, and occasionally act like the world is coming to an end. A forced capital selling program can be potentially very negative to your retirement, because you are entirely at the whim of market pricing when you come to sell. A period like 2008-2009 is bad because you can decimate your capital base when you sell capital to cover your living expenses for the year.
This can have knock on effects for later in retirement, and create a need for you to scramble to rebuild your capital base to get you through your retirement horizon. Worse still, you’ve just broken one of the golden rules of investing, which is to buy low and sell high, and sold investments for much lower than what you could normally sell for.
You can read the rest of my article here on Seeking Alpha if you are interested.
You’ve really been cranking out some articles for SA. Hopefully you’re pulling in some decent cash from that. Keep the great articles coming.
Thanks JC! I’ve been pleasantly surprised by the response/interest in many of the articles. It looks like there is a real interest in dividend investing from the SA audience!
We are big on investing in stocks that have dividends. We typically reinvest them which just helps us get further ahead.
Dividend Reinvestment really helps accelerate overall returns over time Miss T. In fact dividend reinvestment in dividend growth companies in the S&P 500 returned almost 9.6% , well in excess of other non dividend paying companies in the S&P 500, and even above the S&P 500 index itself, according to Ned Davis Research.
The points you touch on here are exactly the reasons I too am a dividend investor with retirement in mind. It just doesn’t make sense to have to sell off some of your assets to cover expenses. At some point you have the possibility of running out of assets! Makes way better sense to accumulate assets that pay out income to cover your expenses so that hopefully you can live purely off the income and retain those assets forever!
I think the fear of selling low and decimating your retirement asset base is something that all retirees need to be aware of. Corrections and bear markets do happen on a regular basis, and you want to ensure your not beholden to them to fund your retirement by selling low, if you can at all avoid it.