Adding a Dividend-Only Extension: Follow On

In my original investigation, I answered the following using portfolio HDBR50, which has 50% stocks:

What happens if you live only on dividends during the first decade of your retirement? Answer: you extend your portfolio's lifetime by ten years.

Not so obvious: this is true even if your portfolio balance declines during the first decade.

This time, I looked at HDBR80, which has 80% stocks. The answer remains the same.

Another Quick Survey

I withdrew all dividend amounts for the first ten years. I withdrew a constant percentage of the 10-year balance (plus inflation) for the following 30 years.

Details

I brought up my Deluxe Calculator V1.1A08.

I set it to 80% stocks and 20% commercial paper with 0.20% expenses. I set the withdrawal rate equal to zero. I set the dividend reinvestments equal to zero.

I set the initial balance equal to $100000. I determined the real balances at year 10.

I multiplied the balances at year 10 by the 30-Year Historical Surviving Withdrawal Rates of the portfolio. [I refer to this portfolio as HDBR80.] This lets you know the maximum amount that you could have withdrawn historically in years 10 through 40.

This results in a portfolio survival lifetime of exactly 40 years.

Data Analysis

I plotted the withdrawal amounts versus the percentage earnings yield 100E10/P at the beginning of the sequence and at the ten-year mark. My best plots covered retirements starting in 1923-1970.

Initial Valuations

The regression equation using the initial percentage earnings yield 100E10/P for x is y = 904.6x + 1344.7, where y is in real dollars (plus and minus $1200) and R-squared is 0.7448. [This assumes an initial balance of $100000.]

Judging from R-squared, this is a tight relationship.

The lowest level of y is $4431, corresponding to 1929.

The next lowest level of y is $4502, corresponding to 1966.
The next lowest level of y is $4693, corresponding to 1965.
The next lowest level of y is $4808, corresponding to 1968.
The next lowest level of y is $4905, corresponding to 1969.

All other levels of y are greater than $5000.

Valuations at Year 10

The regression equation using the year 10 percentage earnings yield 100E10/P for x is y = -186.85x + 9203.6, where y is in real dollars (plus $5000 and minus $4000) and R-squared is 0.0278. [This assumes an initial balance of $100000.]

This is a loose relationship.

[Do not be concerned about the negative slope. It shows up because dividend amounts are tightly related to the ten-year average of earnings E10.]

Interim Portfolio Balances

The portfolio balances at year ten were below the original $100000 balance in the sequences beginning in 1928-1931 ($79120 minimum in the 1929 sequence), 1934 ($86427), 1936-1941 ($60148 minimum in the 1937 sequence) and 1964-1970 ($59812 minimum in the 1969 sequence).

Observations

Withdrawing all of the dividends for a decade did NOT impair portfolio survival.

Once again, doing so extended the portfolio's lifetime comfortably. It either allowed the portfolio to grow before switching to the conventional withdrawal algorithm or it brought the portfolio into a more favorable condition for making withdrawals.

Remarks

The sensitivity of the withdrawal amount to the initial percentage earnings yield is much greater with HDBR80 (with 80% stocks) than with HDBR50 (with 50% stocks). The slope is twice as large (904.6 versus 416.22 in the equations).

HDBR80 withdrawal amounts are greater during the first decade. The only source of income during the first decade is from dividends.

[NOTE: HDBR50 and HSWR50 are the same portfolios. HDBR80 and HSWR80 are the same portfolios.]

Conclusion

This should reassure those who decide to start out by living off their dividends.

Have fun.

John Walter Russell
November 1, 2005