Living off Capital vs Living off Dividends

Discussion in 'Share Investing Strategies, Theories & Education' started by Nodrog, 29th Sep, 2019.

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Which method do you use to fund your retirement?

  1. Live off (i.e., consume) capital

    21 vote(s)
    18.6%
  2. Live off dividends

    71 vote(s)
    62.8%
  3. Live off other income

    21 vote(s)
    18.6%
  1. ChrisP73

    ChrisP73 Well-Known Member

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    I think @Nodrog'$ already conceeded the question could have been stated more clearly.

    Personally I don't find it non-sensensical, but rather, thought provoking. It alludes to a different mindset, one of an asset owner rather than a pure investor.

    Property or business owners don't think in terms of living off capital. They think interms of free cash or dividends from their assets. No one can say this is right or wrong. It's an individual thing.
     
    Last edited: 30th Sep, 2019
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  2. Heinz57

    Heinz57 Well-Known Member

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    The proof of the pudding, as they say, is in the eating. And the person posing the question is retired, unlike some of us still working out how to get there. It's a really good sidebar to the long threads on this forum. I have been in the draw down capital camp but do wonder how that actually feels once we get there. Hence the reluctance to take the leap.
     
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  3. Redwing

    Redwing Well-Known Member

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    I'm enjoying the read and different viewpoints/input

    [​IMG]

    Every interaction is an opportunity to learn
     
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  4. SatayKing

    SatayKing Well-Known Member

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    Tis OK. I guessed you would be able to work it out through the link.

    Being over 65 and no longer working kills off my access to further contributing to superannuation. Waiting for any review of the arrangements to start questioning why a person such as myself is permitted to be able to continue to retain funds in a concessionally taxed environment.

    Sorry for the thread drift folks.
     
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  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I thought of a strategy
    Invest in something that pays bonus shares and have no income on retirement other than selling off $40,000 worth of shares per person per year. a couple could have a tax free income of $80k pa - or potentially more.
     
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  6. SatayKing

    SatayKing Well-Known Member

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    A possibility for sure.

    Usual downside if it can be called that, no income so no deduction of interest under a gearing strategy. Also it is always possible there is no growth but the reverse.
     
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Interest could still be 'deductible' against capital gains though, and even with no growth there could still be bonus shares issued. Also possible to eat into capital.

    I wonder if there is an EFT which pays a very small dividend and then retains most of the income to grow capital. that would be ideal as you still get the claim the interest yet most of the returns are in capital appreciation.
     
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  8. SatayKing

    SatayKing Well-Known Member

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    That would be neat. Probably fall foul of the tax and flow through aspects of the present ETFs we have here though I'm guessing.
     
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  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It might have to be a LIC
     
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  10. Snowball

    Snowball Well-Known Member

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    The LICs which offer Bonus Share Plans pass on franking credits too, which are foregone when using the BSP.

    So under your scenario a couple will have a higher income if they instead receive the income plus franking credits and pay tax (resulting in franking refunds) rather than selling off Bonus shares and foregoing franking credits. There’d be no out of pocket tax to pay up to about 95k ff dividends per person.

    Unless I’m misunderstanding your idea?
     
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  11. ChrisP73

    ChrisP73 Well-Known Member

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    @Terry_w possibly. Cons would likely be a concentrated portfolio and/or single manager risk. I would think a diversified portfolio of ASX stocks paying FF dividends would be safer, and provide approx $190k pa per couple tax payed.

    Edit: what @Snowball said...
     
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  12. ChrisP73

    ChrisP73 Well-Known Member

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    Something like NDX?
     
  13. SatayKing

    SatayKing Well-Known Member

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    Not sufficiently risky. Throw caution to the wind and go for SQQQ.

    Answer is a big fat NO.:D
     
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  14. Marg4000

    Marg4000 Well-Known Member

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    We would love to contribute to super, but we can’t unless we meet the work test.
     
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  15. truong

    truong Well-Known Member

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    Personally I think the difference is more in your head than in $ terms.

    If you’re capital focused you’re bound to keep a close watch on prices and be sucked
    into the daily fluctuations and news cycle. You feel you have more decisions to make and you're unsure if they’ll be to your advantage.

    In contrast, by being dividend focused you’re a bit detached from all the happenings and feel more anchored. It helps with your mental well-being and happy aging... Yep, you've guessed which approach I'm using :).
     
  16. Travelbug

    Travelbug Well-Known Member

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    I'm a combination-mostly cashflow from property. Some dividends and Super.
     
  17. Nodrog

    Nodrog Well-Known Member

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    Thanks @truong. Yes one of those very important behavioural benefits that can’t be stressed enough. That’s also what I was trying to get at but very poorly explained that in retirement this can be even more important. That is, with employment income no longer there the potential impact / stress mentally is greatly magnified if one is more focused on the capital value of the portfolio.

    Personally making this mindshift change from focusing on capital to income was the best thing that ever happened to me many many years ago. As a generally nervy, risk averse and conservative person I can’t emphasise enough how important this was.

    There’s something about focusing on capital gains (losses even more so) that can brings out the worse in people. That can contribute to devastatingly bad decisions especially when retired.
     
    Last edited: 30th Sep, 2019
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  18. Lacrim

    Lacrim Well-Known Member

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    3-4 % pa on average. Nothing stellar but tracks inflation (if not very slightly more).
     
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  19. PKFFW

    PKFFW Well-Known Member

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    I think you have summed up what will be the reality for most people. Most will not accumulate enough capital for the natural yield of the portfolio to cover all their expenses and will therefore need to sell down the capital base over time. For those that do accumulate enough capital, there is no reason to sell down capital.

    I agree with @dunno and @blob2004 in that dividends are part of the total return. Since I took the plunge and started investing I've been focusing on total return. However, I intend to build a big enough capital base that I can comfortably live on the dividends from the portfolio. So again I agree with @blob2004 in that I would call myself a"total return" investor rather than strictly speaking a "dividend" investor.
     
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  20. Nodrog

    Nodrog Well-Known Member

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    LIC MFF has for many years met that criterea. Very low dividend (1.1% fully franked) and has way outperformed the index for many years. And as of recently the fee is now quite low (0.30% from memory?). Could of course be luck.

    MFF:
    85F30E87-930D-4899-B553-FA57A8354EE5.jpeg
     
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