The Rule of 20-20

You need to save 20 times your desired retirement income. Worst case, your buying power will drop briefly by 20%.

Income Streams

The Great Mistake was to focus on capital appreciation during retirement. If we focus on income streams instead, we can easily lift our withdrawal rate to 5% of the original balance (plus inflation). It continues indefinitely.

One way to reach 5% is with a Dividend Blend. It consists of a high yielding investment portfolio (possibly with negative growth) and a lower yielding portfolio with rapid dividend growth. The high yielding portfolio supplies the needed income in the early years. The fast growing portfolio supplies the income in the later years. Excess funds during the first few years cover any shortfall during the intermediate years. You never sell any shares for income.

Dividends typically grow one or two percent per year faster than inflation. The worst drop ever in the S&P500 real dividend amount was 25%. It lasted briefly. We can expect a worst case drop of 20% that lasts only a few years. In recent decades, dividend amounts have grown consistently by 5% per year (nominal) before adjusting for inflation. Inflation can cause the buying power to vary wildly.

There we have it: a continuing 5% withdrawal rate (plus inflation) corresponds to saving 20 times the income stream. The worst case drop (when averaged over several years) is close to 20% of the dividend amount, a momentary drop of the withdrawal rate from 5% to 4%.

Have fun.

John Walter Russell
December 20, 2007
July 7, 2008

For additional discussion, read a related Letter to the Editor (updated).
November 20, 2007 Letters to the Editor