Retiring in Australia and Spending Dividends Only

Big ERN has a new blogpost about the safe rate of withdrawal in retirement. He takes on people who say that you can avoid the problem of selling assets when their price is low by investing in high-yielding assets and only spending the dividends or interest. The highest yielding portfolio he looks at has yielded an average of 3.6% p.a. and it looks like it ends up selling capital in the great recession of 2008-9.

Australian shares have a high dividend yield. They yielded 4.25% last year not counting franking credits. If as ERN assumes you withdraw 4% of the portfolio in the first year and then increase that withdrawal by the rate of inflation can you avoid selling shares? The short answer is: yes!

These are my assumptions: We invest in the ASX 200 index without fees (could be replicated by a portfolio of 20 stocks maybe?) and we don't pay taxes (it's a superannuation account in pension phase) and so we get the grossed up value of the dividends (Labor plans to eliminate these refunds if they win the next election). I start with $900k in shares and $100k in cash and get the Reserve Bank interest rate as interest on the cash. Then all dividends and interest are paid into the cash account.

My first simulation assumes we retire at the end of March 2000. This was not a good time to retire as it was just before the dotcom/tech crash. But the ASX200 index started in April 2000 and so data before then is not very reliable. This is what happens:

Starting in 2000 we would now have almost $1.7 million in shares and $900k in cash. If we'd reinvested some of the dividends we probably would have been even better off.

To stress test the model, I also do a simulation that assumes you retire at the end of December 2007 just before the great recession/global financial crisis. This is what happens then:

Obviously, it's not as good and you would have $970k now, more than 10 years later. In real terms the value of the portfolio will have fallen substantially. But so far, you won't have had to sell a single share with $138k in cash currently. Over the last couple of decades this strategy has worked well.

This suggests that investing in stocks in countries with traditionally high dividend yields like Australia and only spending the dividends is a viable investment strategy. If you need to pay taxes on withdrawals as in the case of a U.S. 401k account then you will need to start with more money invested to fund the same level of spending.

Today's Moves

I bought more corporate bonds. This time in Royal Bank of Canada and Welltower. These were the highest yielding investment grade bonds that I could actually buy that mature in April. $US25k in one and $US35k in the other. Not ideal, as the commission is higher for the first $10k but those were the amounts on offer. I was looking to buy bonds of Siam Bank Corporation, but the minimum purchase turned out to be $US200k for some reason. I also tried to buy Glencore bonds, but when I put my bid in the market, the offer disappeared from the screen. I waited a while and I didn't get the bonds. Very weird. Probably it makes sense to wait until I have enough cash to buy $US100k and buy Treasury bills unless there is a sufficient amount of corporate bond with a high enough yield to make it worthwhile. After commissions these two purchases probably end up breakeven with a Treasury bill. As I begin to buy bonds at longer maturities though, the commission will be spread out over a longer period. I use the bond scanner provided by Interactive Brokers to find available bonds with the right characteristics.

I also am looking at shifting our allocation in the PSS(AP) superannuation fund from 50/50 "balanced" and "aggressive" to 100% balanced as part of our general de-risking. I am again reminded of how shocking the lack of transparency about investments is for Australian funds compared to US funds. All the information they provide in the annual report is the percentage of the fund allocated to "equities", "alternatives" etc. with no further details. PSS(AP) actually used to provide more, but not a lot more, information than this. An interesting fact from the annual report is that employer contributions totaled $A1.154 billion and employee contributions $A55 million in the 2017-18 financial year. Not many people are making additional contributions or they are not making very large contributions. This makes sense as the employer (the Public Service) contributes 15.4% on top of the official salary to the fund. It's only interesting because for the defined benefit fund at Australian universities – not part of the public service, though they are in the public sector – employees are required to contribute 7% on top of the employer 17% in order to get full benefits. I opted out of the defined benefit fund. Our employee contributions at PSS(AP) are actually as big as the employer contribution at the moment.

P.S.
Basec on reading the Unisuper report, employee contributions might only include non-concessional or "after tax" contributions and not salary-sacrificed or "pre-tax" contributions. This is because the stated contributions tax in the report is 15% of the employer contributions. By contrast with PSSAP though, Unisuper defined contribution members make massive non-concessional contributions (see p52 of the report), even though the employer makes 17% contributions to the fund.

Do You Feel You are in a Lower Wealth Percentile Than What the Official Data Say?

People tend to think they are less relatively wealthy than they are. You can check out your perceptions against reality for a number of countries here. I'm not surprised. According to the official statistics we are in the top 4% of households in Australia by wealth. But looking around, it certainly doesn't feel like that could be true. Our house is only valued a few percent above the median for our city. Our car is a 15 year old Ford when it feels like the roads are full of luxury vehicles. But it's not like we are saving like crazy. In 2018, we spent almost all of what we earned from salaries. Apparently, a lot of people feel the same way.

January 2019 Report

In January stock markets rebounded but because the Australian Dollar rose, we didn't gain a lot in Australian Dollar terms. The Australian Dollar rose from USD 0.7049 to USD 0.7274 The MSCI World Index rose 7.93% and the S&P 500 8.01%. The ASX 200 rose 3.87%. All these are total returns including dividends. We gained 0.49% in Australian Dollar terms and 3.79% in US Dollar terms. So, we underperformed the markets. This is not surprising given the weight of cash and bonds in our portfolio. Our currency neutral rate of return was 1.89%. I estimate that the target portfolio gained 1.57% in Australian Dollar terms.


Here again is a detailed report on the performance of all investments:

The table also shows the shares of these investments in net worth. At the bottom of the table I also included the Australian Dollars return from foreign currency movements and other net investment gains and losses - net interest and fees. The loss on the apartment is the estimated sale costs.

Things that worked very well this month:

• The China Fund - the fund has announced a tender for 30% of outstanding shares at 99% of NAV. The share price is rising towards NAV as a result. I tendered my shares into the buyback. At least it will probably realise a small capital loss.
• Pershing Square Holdings. This bounced back nicely from December losses and we are now up in this investment.  
• Unisuper. This is after a steep fall in previous months. I continue to be surprised how much higher the beta of Unisuper is compared to PSS(AP). Both are public sector superannuation funds and we supposedly have a similarly aggressive stance in each.

What really didn't work:

• US Dollars - The Australian Dollar rose, especially after the statement from Jerome Powell.
• Cadence Capital - It continues to lose money and is now our third worst investment ever in terms of dollars lost. The fund manager explained that they focus heavily on value stocks and those got trashed.
• Yellowbrickroad...

We moved towards the new long-run asset allocation:*

The main driver is continued movement of cash from my US bank account to Interactive Brokers where I am buying bonds before eventually transferring some of the money to our Australian bank accounts when the broker allows. Also, we sold the apartment we inherited.

On a regular basis, we also invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. Other moves this month:

• I moved AUD 30k from the CFS Geared Share Fund back to the CFS Conservative Fund in my CFS superannuation account. I originally moved this money in October to CFS Geared Share Fund. I made a small profit on the roundtrip trade, but the main motivation for closing the trade was to reduce risk.
• I bought 1558 shares in OCP.AX at AUD 2.07 a share just because they were being offered so low.
• I sold 15,000 shares in PMC.AX and bought 5000 shares in PIXX.AX as the PMC premium to NAV was still high.
• I bought AUD 24k during the "flash crash" and sold them after the Australian Dollar recovered a few cents.
• I bought 1000 shares of PERLS XI as I can't move the Australian Dollars I bought in December to our Australian bank account yet.
• I bought USD 100k of treasury bills maturing in February.
• I bought USD 100k of Santander UK bonds maturing in March. 
• I bought 1000 shares of the gold ETF, IAU.

* Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds.