ben wrote: I am also not certain that waiting for a decade will ensure that the dividends get to 5-6%? What do I do if no real change in valuations or divs? Wait out another 10 years burning through TIPs?
Like petey and Bill Gross I also believe the official nos are of with about 1%. How does that affect my real ending nos living of TIPs?
But JWR; maybe we can run some nos on TIPs today combined with DVY in a 50/50% portfolio? I am guessing at a FSWR of a bit less than 4% but not much.
Cheers!
I wish to keep away from arguments about inflation. There is another side to the argument, I am aware of it, but you will seldom hear it. Almost all of the time, a person who argues in favor of lowering the reported CPI is arguing in favor of cutting his own income. There are a few economists who are willing to do so. But most people are uncomfortable trying to convince you that they are being paid too much.
There is no need to stick to a single strategy during retirement. It helps our analysis when we keep things simple. Otherwise, you have considerable flexibility. At times, we find that a person is best off theoretically by treating everything as a single portfolio. The story can be different when it comes to the real world.
You can make a good analogy by looking at corporate budgets. Ideally, there is a best combination. In reality, if you don't keep budget items separate, budget discipline vanishes.
DVY has gone straight up. It was selling at a small 0.13% premium when I looked. It has a current yield of 3.0%.
I think that it is reasonable to expect DVY to deliver its yield indefinitely. It will fluctuate. But in terms of purchases that you make today, I think that you will continue to receive a dividend amount that matches inflation or does better than inflation (although somewhat erratically). In terms of selling DVY shares in the future, I do not have a good basis for estimating prices.
In terms of 1.6% TIPS (as with a TIPS ladder consisting of 10 and 20 year TIPS, possibly with ibonds), the mortgage formula tells us that you could withdraw 4.22% for 30 years or 3.40% for 40 years or 2.92% for 50 years (assuming that you can continue to buy 1.6% TIPS in the future).
Comparing the two investments, both deliver close to 3% plus inflation for a very long time. With TIPS, you run out of money around 50 years. But you can count on having an inflation adjustment every year. With DVY, you are likely to do a little bit better than 3% plus inflation and still have your original principal at 50 years. But dividend growth can be erratic. You could fall behind inflation for 5 to 10 years before catching up. But I would expect you to catch up.
If you use both strategies, you will have to assume some risk. But it does not have to be excessive risk.
So far, I have spoken in terms of 4.0% withdrawals. How about something closer to 3.5% from your combined portfolio? The DVY portion would deliver 3.0% indefinitely, but erratically. If you withdraw 4.0% from TIPS (at 1.6% interest), they would last 32 years. The question now becomes how well you expect DVY and stocks in general to do over three decades. I suspect that you would be able to fill in the void caused by the
short 32-year lifetime of your TIPS ladder.
Checking yesterday's calculations, I find that I used an interest rate of 1.7%, not 1.6%. The principal remaining after ten years with 1.6% TIPS would be 69.9% of the original amount (not 74%) plus inflation. After 20 years it would be down to 35.6% with 1.6% TIPS.
An all-TIPS alternative would be to withdraw 3.5% instead of 4%. You could continue doing this for 38 years. Your principal remaining would be 80% (with 1.6% TIPS) at year 10 and 56% at year 20 (and 27% at year 30). I would hope that you would find at least one buying opportunity in two decades.
That takes care of two strategies. The third is switching. It starts out a TIPS-only portfolio. You start adding a little bit of stock when P/E10 comes down around 24. (You might decide to adjust this threshold slightly.) That approach leads to a more gradual transition. You will not stay away from stocks forever.
Finally, consider Ben Graham's advice, which would have worked well in the late 1990s. He restricted both of his stock and bond allocations to 25% to 75% regardless of circumstance. There is always the possibility that a new super bubble will follow the bubble.
Have fun.
John Russell