It’s everyone’s nightmare: watching retirement assets vanish in a bear market, especially in or just before retirement.
Many of you will remember the severe market downturn of 2000-2002, the Dot Com Bubble, when the Standard & Poor’s 500 Index fell 37%.
We’d be lying to say that this declining market didn’t affect us. Our finances dropped about the same as most others on a percentage basis. As retirees, with no regular paycheck coming in on Friday, this event could have spelled disaster for our future plans of maintaining our financial independence.
Then there was the 2007-2009 “Great Recession,” where the market fell by almost 50% lasting 17 months, testing our courage.
The 2020 Covid scare shook the market’s foundation, earning the title of the “shortest bear market” in the S&P 500 history, lasting only 33 days.
And now here we are again in 2023, where the market is in the grip of a bear. How much longer will this last? How low will we go?
What should we do? How do we cope?
First, we’ve learned from past bear markets the importance of some cash flow. Having aged a bit and now receiving Social Security we have adjusted our portfolio to a more balanced one adding DVY, iShares Select Dividend ETF as a dividend-producing asset as well as increasing our cash holdings.
Then, there are regular chats about our finances and the state they are in, in hopes of averting a possible worst-case meltdown. We have discussed the fiscal facts and tried to extrapolate them out into the future.
One obvious problem: No one can predict the future.
Friend asks “Billy, why are you investing now? You know the market is crashing, right?” Same friend 10 years later: “Hey Billy I heard you retired early. How did you do that?”
Using history as a guide
Researching bear markets, we take heart from the knowledge that past downturns always ended.
Retiring is definitely easier when markets are rising as compared to when they are falling. But how do you know if you are in a rising or falling market? That depends on your starting point and there has been no 20-year rolling negative returns.
Another question to ask – is this is a good time to buy equities? For every buyer there is a seller and they both think they are right. Maybe the cure for cancer will be announced tomorrow or the global economy will collapse. We just don’t know.
Indexers gasped and likely unsubscribed to my site!
Well, even though some considerable time has passed since that post my thinking and income goals remain the same – as least in part for semi-retirement planning:
I continue to believe “living off dividends” (and/or distributions) should work out well for us.
And I’m not alone.
For today’s post, I’m profiling a very successful investor …. who not only dreams of dividends but is living the dividend dream right now.
Living The Dividend Dream
Welcome to the site for this latest investor profile, The Dividend Dream.
Source: https://twitter.com/DreamDividend
I look forward to sharing this interesting new investor profile below but first up, a recap about why dividends and distributions continue to matter to me/us on our income journey.
Yes, my approach to live off dividends remains alive and well in 2023!
Here are some reasons why some investors couldn’t care less about dividends:
The trouble with any “live off the dividends” approach is that you’d need to save too much to generate your desired income. Fair.
Dividends are not magical – there is nothing special about them. Sure, of course they are not magical or free!
A dollar of dividends is = a one dollar increase in the stock price. True.
Stock picking (with dividend stocks) is fraught with under performance of the index long-term. I’m not convinced about that.
You can never possibly know long-term how dividends may or may not be paid by any company. Fair.
In many respects these investors are not wrong and/or are not pointing out some challenges with DIY stock investing.
You do need a bunch of capital to generate meaningful dividend income.
Dividends are part of total return.
Stock picking to some degree opens opportunities for market under performance.
However, my responses and approach to some of these items are as follows, since I believe dividend investing offers far more good than harm:
While market underperformance may occur (that is subjective and up to personal investment success, luck, and other factors that are very difficult to substantiate), dividend investing offers up some essential long-term investing discipline, for me at least, to stay the investing course, including when markets tank in any given year. If anything, I buy more!
This way of investing provides HUGE motivation and inspiration – to keep investing, in any market climate. The way I see it: money that makes money can make more money.
Dividend investing, seeing the tangible money flow into our accounts month-after-month, reinforces my belief that nobody cares more about my financial well-being than I do (except for my wife!). Ha.
All kidding aside…dividend investing and having a plan associated with building ever-growing income offers something that some other ways of investing just can’t readily offer: support for the emotional discipline to execute this strategy, come heck or high water, or even until the end of all capitalism as we know it!
But that’s just me and our plan.
Your mileage might vary and that’s OK.
There are many ways to invest and many reasons that folks invest in what they do.
That said, dividend investing is far from any local phenomena.
I reached out to The Dividend Dream for her to share her reasons for investing in dividend paying stocks, including why dividends matter (or not!), and any considerations she has for any investors at any age on their investing journey. [Editor’s note: for now, “she” wishes to remain anonymous, as explained below; hence there is no photo-JC]
Living The Dividend Dream – Dividend Dream – welcome to the site!
Hey hey … thanks for having me. I appreciate the invite!
Before we dive into your investing thesis, why you own what you own, and much more – tell us a bit about yourself.
Well, what can I say. People call me The Dream, Dream Girl, aka Dreamer.
I’m anonymous for now as I’m still working a bit, although I entered into a “freestyle” work optional state this year (2023). I’m a businesswoman, living in the southern United States. My field is strategy and marketing, and I went to a top MBA school. I’m in my mid-40s and am married to a wonderful woman who is a professor. I am the breadwinner in the family – by far – so I feel financially responsible for our future. And yeah … that’s the skinny, essentially.
Interesting!
I feel personal finance is personal – a constant refrain on this site. What I mean by this is: everyone’s financial situation is different, and they have personal reasons to invest the way they do, to realize their individualized goals.
How did you get started with investing?
I actually have been thinking about “retirement” ever since I was a teenager. Really, it’s always been more about being financially secure and independent. My family fell on some hard times and it scared me. I didn’t really have any choice but to rely on myself. I held several jobs in high school and throughout college. So … long story short, after college I started like everyone else with a 401(k) at work, trying to max that out every year. But when I started getting into my 30s that’s when I started to really breakout out of the mold, rolling past 401(k)s into investment accounts where I had complete control and could pick to hold whatever assets I wanted, not just the choices provided by an employer.
Awesome. OK, let’s get into it. Why dividend investing? Why do you invest the way you do? Continue Reading…
Money management is arguably one of the most stressful things that most of us deal with on a regular basis. It never fails; just as soon as you feel like you’re doing well financially, something comes up — unexpected home repairs, vehicle maintenance, emergency medical bills, holiday gift purchases. Financial worries can sit in the back of your mind and weigh on you day in and day out.
For many, financial stresses are a concern, but not a debilitating one. However, some people develop financial anxiety — a condition where worry, fear, and unease about finances causes those suffering from it to behave differently. Behavior changes can show up in different ways such as extreme frugalness, avoiding finances, excessive overspending, or even physical changes such as high blood pressure.
Fortunately, if you are someone who suffers from financial anxiety, there are steps you can take to help address it and get your life back. The first one is finding some help, the next is gaining control. As you work through the process of dealing with your financial anxiety, you will inevitably learn a lot about yourself and how to manage your money the way you want to.
Finding Help
The root cause of financial anxiety can come from a number of different places. Maybe you have an extreme fear of being in debt because you grew up watching your parents struggle to make ends meet without sinking deeper and deeper into financial ruin. Or perhaps you were never really taught about personal finance management and now everything finance seems daunting. Or maybe you’ve just given up all hope of financial stability and choose not to address the financial concerns you know you should.
Either way, there is help out there and you are not alone. Talking with professionals about financial issues is a great place to start. Numerous different types of therapists can help you identify the root of your financial anxiety and work through the issues surrounding that cause. Likewise, financial advisors can be a great resource for helping you to understand your finances and get them back on track.
Of course, it might give you anxiety just to think about paying for a therapist to help you through your financial stresses.
Don’t worry! There are still options for you. The first might be to start by talking to a trusted friend that you believe manages their money well. Another option is to dive into the multitudes of cheap or free resources that are available online. These include affordable financial help guides or podcasts that dive into all sorts of topics, from how to build a budget you can stick to all the way to how to best invest your money.
Making a Plan
If getting help is the first step, developing a realistic plan is the second step. You might be thinking great, another budget that is bound to fail, but this isn’t necessarily the case. A workable plan can come in a variety of different forms. The right plan for you to address your financial anxiety might be different than what another person needs to feel financially stable.
For example, maybe the right plan for you involves building greater financial literacy by learning some of the terminology and tools available. Perhaps your plan is to read one financial news article a day. Or maybe your plan is to build up a rainy day fund that will ease your concerns about going into debt. Or to focus more on building more meaningful relationships and focus less on having the fanciest home goods.
All of this isn’t to say that a budget isn’t sometimes a great tool. In fact, budgets can be one of the most powerful tools for getting yourself out of debt or achieving a financial goal. The crux is creating a realistic budget that you can actually live with. Cutting out all of your excess expenditures might help you save money, but sooner or later you’ll crack. Smaller changes that you can really stick to are much more valuable over the long run.
Taking Control
The final step is to enact the plan and adjust as needed to make sure you’re doing something that is really making a positive difference. Take time once a month to evaluate where you’re at with your financial anxiety. Are you making progress? Are you achieving your financial and financial mental health goals? Continue Reading…
Some time ago on this site I wrote one of the biggest retirement questions is: how much is enough?
What might be our income sources, needs and wants be in retirement?
The answer to such questions are usually: it depends.
This updated post will share those details and outline how such needs and wants might be funded in our upcoming semi-retirement days – planned for sometime in 2024.
Read on and let me know your thoughts, questions or comments!
What are your income needs and wants in retirement?
It largely depends on what you’ll spend in retirement.
That’s always been step #1 in our book.
Whether you’re 35, 45 or 55, I believe it’s essential to figure out what retirement might look like to you.
Here are a few questions we’ve been working through:
1. When do we want to retire or semi-retire?
Math is helpful but I also believe we want to retire to something.
Both of my parents stopped all form of work around age 60. That may or may not work for me – literally. I like to be busy and instead of stopping work cold-turkey per se I would rather glide into semi-retirement/work on own terms and then slowly ease off the gas pedal per se whenever I want. At least that is my thinking now …
Sure, math helps: the later you retire from full time work, the longer you have to accumulate that retirement nest egg. But I believe there is also the work-optional option of part-time work in our 50s when the debt is gone and most of the assets needed for full-on retirement spending have already been accumulated.
Your mileage may vary. :-)
2. Where do we want to live in retirement or semi-retirement?
Likely Ottawa, as a home base still.
Our family is here. Most of our good friends are here or in the immediate area.
We don’t aspire to own a second home in the sunny south – too many liabilities.
We do however want to travel more/live some time abroad.
Our thinking could always change but it will be nice to have our condo bought and paid for without any debt on the books very soon and maintain it as a home base.
This means all income we do intend to make, including during semi-retirement, is for us to spend as we please.
3. What will our expenses be?
The general wisdom is that you will need somewhere between 70-80% of your current salary for living expensses in retirement. That means, if you make $100,000 combined per year, you should plan to have $70,000 to $80,000 in combined retirement income spending, as an example.
This general wisdom includes the logic that you are likely to spend less as a retiree – since you’re not commuting to work, you might have downsized your home, and/or you’re not supporting dependents.
I think these rules of thumb (like the 4% safe withdrawal rate/rule while valuable to a point) don’t make much sense when you dig further into your personal details, needs and wants. Rules of thumb are a starting point – only.
I far prefer to calculate what our fixed expenses will continue to be, during retirement, including inflationary spending, adding in some variable spending needs and wants as well.
Here is a snapshot on the former:
Key expenses
Monthly
Annually
Semi-retirement comments ~ end of 2024???
Mortgage
$2,240
$26,880
We anticipate the mortgage “dead” before the end of 2024.
Groceries/food
$800
$9,600
Although can vary month-to-month!
Dining/takeout
$100
$1,200
Home maintenance/expenses
$700
$8,400
Represents 1% home value per year, increasing by inflation.
Home property taxes
$500
$6,000
Ottawa is not cheap, increasing by inflation or more.
Home utilities + internet/TV/cell phones, subscriptions, etc.
$400
$4,800
Transportation – x1 car (gas, maintenance, licensing)
$150
$1,800
May or may not own a car long-term!
Insurance, including term life
$250
$3,000
Term life ends in 2030, will self-insure after that without life insurance.
Totals with Mortgage
$5,140
$61,680
Totals without Mortgage
$2,900
$34,800
As you can see, once the debt is gone, we’ll be in a much better place for financial independence!
Add in other spending/miscellaneous spending to the tune of $1,000 per month and that’s our base budget. Continue Reading…
When we started our financial independence journey back in 2011, we didn’t set a specific FI date or number. In our minds, we do not doubt whether we could become financially independent or not. We knew we’d become financially independent in the future. It was just a question of time. We simply needed to have patience and let our investments compound over time.
A few years into our FI journey, our FI plan started to evolve. Rather than having a specific liquid net worth and utilizing the 4% safe withdrawal rule, we decided to have enough dividend income to cover our expenses. Looking at the calendar, we randomly set a target of reaching this milestone by 2025 or earlier.
It’s funny how ten years seemed to have gone by in the blink of an eye. At the same time, a lot has happened in our lives…
Getting engaged and married
Having two kids
Moving from an apartment in Vancouver to a house in the suburb
Me having different job titles, going from engineering to project managing to product marketing to engineering
Starting my photography business ( I’ve been on a bit of break the last few years)
Starting this blog, writing articles, learning new things, and connecting with other like-minded people
One thing I’ve realized is that life is never static. It’s always dynamic. Although we can do as many projections and make as many plans as we possibly can, projections and plans do and will change. Therefore, with three years to go before 2025, I thought it would be a good time to re-examine our financial independence plans and see if we need to make any adjustments.
Our FI numbers
Since starting our FI journey, we have tracked our expenses meticulously. Here are our annual expenses since 2012:
Total Necessities
Total Annual Spending
2012
$26,210.52
$44,603.76
2013
$26,343.00
$45,260.88
2014
$29,058.96
$47,391.96
2015
$31,256.88
$47,270.16
2016
$29,831.40
$47,566.96
2017
$33,887.68
$51,144.77
2018
$31,840.75
$57,231.99
2019
$33,199.98
$54,906.02
2020
$35,511.60
$48,908.74
2021
$38,950.66
$71,852.02
Necessities cover core expenses like food, insurance, housing, clothing, utilities, car, etc. Other expenses are considered as non-core expenses which include things like dining out, skiing, camping, travel, charitable donations, gifts, etc.
The last two years have been abnormal in terms of spending. Due to the pandemic, our spending was much lower than usual in 2020. Then last year we had unplanned expenses of around $16,500 on our cat and our house. If we take this amount out, it’d put our 2021 annual spending to around $55,000.
Based on our historical spending trend, I would estimate that we need somewhere between $50,000 to $60,000 in dividend income annually to cover our expenses. To be on the safe side, I’d use $60,000 annual spending for any FI plans because we need to have inherent built-in flexibility on variables outside of our control, like major purchases, emergencies, etc.
The $60k annual spending estimate, of course, assumes that we continue to live in Vancouver and do not have many significant changes in our spending habits.
One thing to keep in mind is our spending can drastically come down if we decide to geo-arbitrage by moving to a smaller Canadian town or somewhere in South East Asia with a lower cost of living than Vancouver. On the flip side, the spending number can increase if we move to Denmark and live there for a few years (I’m ignoring the tax consequences for now).
How much do we need in our dividend portfolio?
How much do we need in our dividend portfolio to generate $60,000 in dividend income? Let’s do a quick math exercise, shall we?
For $60,000 dividend income per year, at 3% dividend yield, we’d need a dividend portfolio worth $2 million; at 4% dividend yield, we’d need a dividend portfolio worth $1.5 million. In other words, we need a portfolio valued between $1.5 million to $2 million. That’s certainly not a small chunk of change.
Now, if we take a middle-of-the-road approach and use a portfolio dividend yield of 3.5%, that means a portfolio value of around $1.714 million.
One thing is clear – we need to continue to save and invest money in our dividend portfolio. We also need to find the right mix between high-yield low-dividend growth stocks and low-yield high-dividend growth stocks.
With three years remaining in our FI timeline, it might be tempting to start buying more very-high-yield dividend stocks to make sure we can reach our FI target. But it is very important to make sure our dividend income is safe and remains sustainable over time. We definitely don’t want to hit $60,000 in dividend income one year only to see that amount slashed by 20% or more the next year.
The stability of our dividend income is extremely vital.
We also want to make sure the portfolio value continues to appreciate over time. The rationale is simple – total returns matter. Having a stable and safe dividend income and a portfolio that increases value over time will give us more options.
By 2025, both Mrs. T and I will be in our early 40s. With decades ahead of us, we need to ensure our dividend income can grow organically over time and inflation doesn’t eat into our dividend income’s buying power. It will be necessary to have some low-yield high-dividend growth stocks in our portfolio to allow for organic dividend growth.
The plan of living off dividends
Living off dividends is an amazing idea. Based on my dividend income projection, we should receive $51,000 in dividend income in 2025. However, when we compare that number with the $60,000 annual spending target, it doesn’t take a rocket scientist to realize that we are short by several thousand dollars. Continue Reading…
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