Dividend yield minus 1%

Research on Safe Withdrawal Rates

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JWR1945
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Dividend yield minus 1%

Post by JWR1945 »

I was reading my original post about the New Tool:
A New Tool: Overview from Wed, Apr 28, 2004 at 4:26 pm CDT
http://nofeeboards.com/boards/viewtopic.php?t=2426

I am now using the phrase conditional Calculated Rates for what I had previously called the conditional Safe Withdrawal Rates. I refer to the lower 90% confidence limit relative to a conditional Calculated Rate as the conditional Safe Withdrawal Rate.

I used the New Tool to tell us the extent that previously reported Historical Database Rates (i.e., the maximum withdrawal rate for a portfolio that would have lasted for a specified number of years) were the result of a lucky sequence of returns. What I calculated was not the safe rate but the most likely rate. To guarantee safety, it is necessary to drop down to the lower confidence limit.
I wrote:4) For 1966, the conditional Safe Withdrawal Rate with 80% stocks was 3.24%. The value of HDBR80 turned out to be 3.9%.

The standard deviation at 14 years and 80% stocks is 0.67%. The 90% confidence limits are plus and minus 1.07% (i.e., plus and minus 1.6 times the standard deviation).
In 1966 with an 80% stock portfolio, the conditional Calculated Rate was 3.24%. To guarantee safety we would have needed to subtract 1.07%. The conditional Safe Withdrawal rate was 2.17%. [The actual outcome for 1966 was much better (3.9%) but below the upper confidence limit (4.31%).]

In 1966 the dividend yield of the S&P500 was 2.94%. The (conditional) Safe Withdrawal Rate was 2.17%. For the privilege of selling stocks while insisting on a very high level of safety over 30 years, we had to reduce our withdrawals to 0.77% below the initial dividend yield.

My rule of thumb no longer holds up. The 30-year Safe Withdrawal Rate is not approximated by the dividend yield plus 1%. If you insist upon the privilege of selling stocks regardless of price, the 30-year Safe Withdrawal Rate is just a little bit higher than the dividend yield minus 1%.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

This may explain the strange result: real dividends decreased substantially throughout most of the 1966-1996 time frame. It is only nominal dividends that kept on growing (with only a minor hiccup in 1970-1974).

Withdrawals that started with the initial dividend and then grew at a rate that matched inflation required substantial stock sales.

Here are the January dividends from Professor Robert Shiller's site.
http://www.econ.yale.edu/~shiller/

Real Dividends (January)

Code: Select all

1966  14.544403
1967  14.776413
1968  14.50393
1969  14.604045
1970  14.126193
1971  13.274975
1972  12.608662
1973  12.50812
1974  12.31588
1975  11.739311
1976  11.182484
1977  11.820819
1978  12.729762
1979  12.637337
1980  12.367095
1981  12.029425
1982  11.921612
1983  11.880431
1984  11.794465
1985  12.117328
1986  12.228759
1987  12.228759
1988  12.921399
1989  13.678696
1990  14.760063
1991  15.182845
1992  14.960985
1993  14.694004
1994  14.574645
1995  14.802289
1996  15.189048
Nominal Dividends (January)

Code: Select all

1966  2.74 
1967  2.88
1968  2.93
1969  3.08
1970  3.16333
1971  3.13
1972  3.07
1973  3.15667
1974  3.4
1975  3.62333
1976  3.68333
1977  4.09667
1978  4.71333
1979  5.11333
1980  5.7
1981  6.2
1982  6.66
1983  6.88333
1984  7.12
1985  7.57333
1986  7.94
1987  8.3
1988  8.85667
1989  9.81333
1990  11.14
1991  12.1067
1992  12.24
1993  12.4133
1994  12.6233
1995  13.18
1996  13.8933
Have fun.

John R.
Mike
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Post by Mike »

If you insist upon the privilege of selling stocks regardless of price, the 30-year Safe Withdrawal Rate is just a little bit higher than the dividend yield minus 1%.
By this calculation, today's SWR is then about .7%, a bit higher with switching. To achieve Social Security's recommended $24,000 annual income for financial independence, a person would need $3,428,571.43, a bit more if a person wanted luxuries. Faced with these numbers, many people would just give up (low savings rate). Inflation has destroyed fixed income retirements, and the subsequent rush to equities for inflation protection has made the yield too low to live on for most. Fixed defined benefit pensions will be destroyed by inflation. TIPS are helpful, but they don't work in a taxable account, and the CPI does not really keep up with such items as medical inflation. Inflation and the tax code have destroyed retirement for many of the baby boomers. Social Security is likely to be cut back, and most are not saving enough to compensate.
JWR1945
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Post by JWR1945 »

Remember that you can still withdraw your entire dividend amount plus about 1% each year.

This is what you cannot do: Start with your initial dividend amount and increase your withdrawals to match inflation.

I have been wrong when I have stated that real dividend amounts have matched inflation or done better. You can see from the data that real dividends have declined for extended periods of time, up to 20 to 25 years.

Nominal dividend amounts have increased steadily with only a few short-term exceptions.

The 1966 sequence ran directly into the stagflation of the 1970s.

I doubt that you would have to drop a planned withdrawal rate from 1.7% to 0.7%. It is just that you are not assured that dividends will continue to have their initial buying power.

OTOH, we are in the early stages of a boom. Inflation has been subdued so far because there has been slack in employment (largely due to dramatic improvements in productivity). The recent oil price hikes should have an effect similar to having the Federal Reserve increase short-term interest rates. That is, the oil suppliers have done the Federal Reserve's job for them. [The Federal Reserve is reluctant to increase rates until they are totally convinced that they will not be retarding job creation.]

Have fun.

John R.
Mike
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Joined: Sun Jul 06, 2003 4:00 am

Post by Mike »

...increase your withdrawals to match inflation.
Inflation is what destroys retirements, especially medical inflation. People have been told to flock to equity for inflation protection, but today's super low dividend yield shows that after tax corporate profits are not sufficient to support the majority of retirees. Those who started investing in equity years ago have benefitted greatly from multiple expansion. Those starting now may not have such a rosy outcome. If a person has not already amassed enough to retire on, future equity returns may not bail them out. TIPS are not generally available in 401k plans, and don't work in taxable accounts, which leave no good options for many. Inflation will gradually destroy people's hopes. Retirees would be better off without it, but the fed will never permit a stable currency. I suspect that most people will end up depending mostly upon Social Security, and suffer from future cuts. A small number of people will be able to switch to relatively under valued asset classes, but they are not large enough for the majority. Even the S&P is not large enough for the majority. The feds destruction of fixed income asset classes by its constant inflation policy has doomed the majority.
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