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.
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.