What is the best approach to draw down on our retirement nest egg?

I will retire in the Spring of 2018 (by then I will have turned 65). My wife is a teacher and will retire in June of 2018. When we chose 2018 as our retirement date, we paid off our house. At the same time we replaced one of our older cars with a new one and paid cash. We have no debt. We will begin drawing down on our investments shortly after my wife retires. Also we both plan to wait until we are 66 to draw on Social Security. Our current nest egg is divided 50/50 in retirement accounts and regular brokerage accounts. About 60% are in equities and mutual funds. The rest is in bonds and cash. I've read about the 4% rule, adjusting annually up depending on inflation, expenses and market performance. As of today, based on our retirement budget, we can generate enough cash only using our dividends to live on. In our case this approach would have us taking interest and dividends from all accounts, including IRA, 457 B and 403 B before we are 70 years old. Seems that this approach would make it easier to deal with market volatility, yet it does not seem to be favored by the experts.

Retirement, Retirement Savings, Social Security
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You are spot on in your analysis. Understand that if everyone did what you are planning - live off of dividends, there would be no need for "investment experts" and about 50% of the investment industry. Most products and strategies are designed to make the fund companies and brokerage firms rich, not you.

In over 30 years of investing experience, researching the market, writing a book and receiving awards for my research, I will not accept a client unless they understand and are willing to live off of our dividend strategy throughout retirement. Here are some considerations:

  1. Dividend stocks still need to be managed. The highest yielders can be "dividend traps" - great yields but negative overall returns. The Dividend aristocrats are stocks that have increased their dividends for 25 consecutive years, or more. This is a good place to start.
  2. Yields are low now as prices are high, don't force the issue and buy bad stocks. You have a long time, be patient.
  3. Don't worry about benchmarking to the market. This is the biggest reason IMO that more people don't use a dividend strategy. One "bad" year compared to the S&P 500 and they bail out.
  4. But stocks that paid their dividends and increased them through both the Tech wreck and the financial crisis. Despite current turmoil, look at PG as an example. Their stock dropped 30% in market value during the financial crisis, but they increased their dividend payout each year. While your fellow retirees were getting crushed in their buy and hold asset allocation strategies, a P&G investor got a rise every year! And of course the stocks price did go on to recover.

If the above amount of manement is within your expertise you can do fine. If not find an advisor that focusses on a dividend strategy. Feel free to send me an email, of course I'd love to work with you directly, but I can also give you some great resources online to help you out if you prefer to do it on your own.

And one last suggestion - consider waiting until age 70 for social security, it is significantly higher if you wait.

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