Thursday, February 14, 2019

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.


Financial Independence said...

I was following that strategy when had higher income. The biggest risk I see in it is the assumptions:
- If one of the 20 stocks portfolio fails to deliver dividends it is 5% cut.
- You are not investing in the growth, i.e. hypothetically the dividends may not raise with the inflation (especially with the high dividend socks) and over a period of 10-20 years you will get lower income.

mOOm said...

OK, maybe 20 stocks isn't enough. I was trying to avoid saying use an ETF so I didn't need to take into account the ETF's management fee, which in Australia I thought is probably not so low. But I see when I checked now that iShares ASX200 ETF is down to 0.15% so that is probably the way to go. The key here is that it is not a strategy of selecting high dividend stocks but investing across the broad market in a country that traditionally has high dividends. The UK currently has 4.4% so that is good though not as good as Australia where there are tax credits on top of the nominal divdend.