Living off Capital vs Living off Dividends

Out of curiosity I was wondering how many “retirees” here are taking a total return “capital drawdown” approach as opposed to “living off dividends” to fund retirement?

 

Not a retiree and know nothing but I've always just seen it as more of a natural outcome of how much you're able to accumulate before reaching the point of no longer wanting or able to do things that generate income outside passive wealth creation. Likely more to it though, lifestyle requirements and chosen/comfortable asset selection etc

 

Again, not yet a retiree, focus on current passive income vs passive income goal as the main metric.
Spoke with a recent retiree last week who gave 2 pieces of advice:
- Do not leave it too long till you retire.
- You will make the numbers work.
Still contextualising the advice.

 

I don't understand the question?

Are you talking about taking a total return approach OR consuming your capital in retirement? They are not necessarily the same thing.

A total return approach might see you re-investing part of your dividend return!

We live off investments using a total return mindset – Our capital is still growing - So am not sure if I should answer affirmative to total return "capital drawdown" option

Certainly can't answer yes to the "living off dividends" option as there is no way I am leaving our spending capacity decisions in the hands of company boards who don’t consider me when they make their investment vs distribution deliberations and decide a payout ratio – and neither they should, investment opportunity government tax and fiscal settings etc etc… should be what they are thinking about and those things change over time. The spending capacity from our capital may be more or it may be less than dividends at any particular time depending on what directors decide is best for the company in relation to payout vs investment opportunity.

Directors make decesions in light of the best use of the comapnies capital.
I make decesions in light of the best use of my capital.
Dividends are imaterial - they are just one part of the whole return.

Setting your spending according to dividend deliberations by others who are not concerned with your sustainable spending levels as part of their deliberations is risky in my view. Yes LIC's as an intermediary investment may consider your spending in their deliberations but directors of their underlying holdings don't. If there was a paradigm shift in Australian company payout ratios, LIC smoothing would only go so far.

 

Consuming the capital is the approach taken for super - a mandatory % to be withdrawn each year (in the early years, your balance could still be increasing but will hit the top of the curve when drawings must exceed returns).

 

I would guess that the total return approach would involve some selling of portfolio to supplement the dividends generated to sustain retirement...

The former approach is usually (tho not always) associated with a smaller portfolio size in order to hasten an earlier retirement; in contrast to the dividend approach which purely relies on ONLY living off the dividend generated and would thus require a bigger portfolio..

I myself use the latter approach..

 

Having no children to pass anything along to, I hope to spend my last dollar of capital buying a beer to drink as I lay on my death bed and die.

Seriously though, in a few years time when my wife and I retire, we will have enough capital that historic payout ratios providing around a 4% yield should cover our annual expenses quite comfortably with some left over. However, I'll happily be selling off chunks of capital occasionally to fund the occasional big holiday or purchase. Our Superannuation will be icing that we will also use to fund whatever floats our boat. (hhmm, maybe a boat would be nice! hahaha)

 

Good plan @PKFFW !

It'll be nice to get to the point where our capital can comfortably continue to grow in real terms and sustain our lifestyle.

 

Thanks for your reply @dunno. Sorry for not being clearer. Consuming capital is the correct wording.

What I was trying to say is that in our case (nearly all equities dominated by ASX) total return has never really come into our investing decisions albeit I tried to avoid falling victim to the yield trap. Investing for dividends has always been the driving force.

Maybe it’s old school thinking but the plan was always to replace employment income with passive income. And by passive income I mean not having to sell / consume capital. Simply invest, set and forget then enjoy the dividends that magically appear in one’s bank account. Essentially the Thornhill approach.

Of course most here would know I’m well aware of the theory and pros / cons relating to this topic. But reading Barefoot’s Idiot Grandson Portfolio Report recently and thinking about the likes of Thornhill, ourselves, @SatayKing, younger FIRE retirees like @Snowball and others I’ve known over the years the common theme has been investing mostly in Australian shares with a focus on a growing dividend stream. Importantly we’re all retired so this is real not a perceived approach that accumulators are “intending” to do when they retire.

Psychologically it’s a vastly different situation when there’s no longer remaining human capital / employment income and one’s only source of income is from investments. What seemed like the logical / comfortable approach before entering retirement might be very uncomfortable once in retirement. You never really know what you’ll feel until actually retired.

Those of us who have invested for dividends in some circles are considered clueless and derided for not seeking out maximum total return and “creating our own dividend” by consuming capital to fund retirement. Easily said but when one actually finds them self in retirement and in the midst of a sharemarket crash how will they react then?

Of course in theory investing heavily in ASX with a dividend focus breaks many of the diversification and risk management rules of Modern Portfolio Theory etc. Yet many have become very well off by simply investing in ASX shares for dividends.

In Australia’s case as a young country, with strong immigration, great regulatory environment / rule of law and blessed with plentiful natural Resources is home country risk / bias being blown out of proportion?

Are the likes of Thornhill and those of us who have taken a similar approach really that crazy? It served us well resulting in a very nice retirement. Are we doomed by having too much home country bias in a country the envy of most or have investors at large become too obsessed with investing academics / theorists?

I have no intention of retreating to a fully Australian share portfolio but the reality is we only really began in earnest to diversify globally once we’d achieved our retirement dividend goal through investing in the Australian sharemarket.

 

Are you able to switch this post to a poll?

Much easier to get numbers that way.

Cheers
Oracle

 

No idea about setting it up as a Poll. Actually I wasn’t even intending for it to become a separate thread let alone a poll. Simply one of my usual off topic spur of the moment thoughts that I imagined would attract very little attention and fizzle out quickly. Essentially I suffer from agoraphobia where I’m likely to have a panic attack if I leave the confines of the LIC thread. Hence all my thought bubbles happen in that safe environment.

If moderators are able to switch it to a Poll then by all means go for it.

 

I think I am a mini @dunno .

We aim to use dividends to fund lifestyle but use the dividend balance (what is is left) and capital growth to increase our Net Worth (at least for a few more years yet).

 

We are retired, living off our investment income.
So far our capital is increasing.

 

The amount you must withdraw increases with age, but you don’t have to spend it all. Nothing to stop anyone putting part into direct investments.

 

True, it just moves it out of a tax-free super environment.

 

I know people say it's about a growing dividend stream, but pretty sure overseas dividends grow at a faster rate due to higher retained earnings (don't have data on this on hand). Hard to argue it isn't the higher yield and franking refunds that are the key drivers.

I think a distinction needs to be made between a good/bad decision and a good/bad outcome.

Thornhill approach was probably a good decision +15 years ago (given lack of indexing/ETFs). It also resulted in a good outcome.

But is it a good decision? With ETFs and new data widely available... it's not a bad decision, but probably not the best for most people.

 

Off topic, but in this scenario, can anyone tell me if you haven't yet exceeded the super transfer balance cap, whether it is permissible to recontribute, either to an accumulation account and then to tax free pension account or directly to a tax free pension account?

 

Retired, living off dividends, capital growing. Did not start to diversify away from Australian direct shares until after retirement. Now have direct shares, LICs, ETFs. Will probably limit international to 20%. Have been investors for more than 30 years so have seen both good and bad times

 

You might need to also consider your total superannuation balance.
Note you can't contribute directly to a pension account.

 

AFAIK you can only contribute to an accumulation account if you meet the work test (eg transition to retirement).