When one reads typical retirement advice, they’re often told that beginning in retirement they should start withdrawing about 4% of their portfolio for living expenses each year. The 4% rule is standard retirement advice that gets cited all the time since it’s considered a safe withdrawal rate for the average retiree. However, the downside of this plan is that the retiree will be funding his or her retirement by spending down their portfolio’s principle.
Now don’t get me wrong, there’s nothing terrible about following this advice. A retiree who adheres to this plan has a great chance their portfolio will last the remainder of their life. But isn’t there a better option? One where the retiree needn’t worry about outliving their nest egg? Luckily, there is a better plan. Instead of drawing down one’s portfolio, a retiree can simply live off the dividends and interest their nest egg produces. Following this method guarantees that one never runs out of money. It is also easy to stick to, and will eventually leave one’s heirs with a tidy inheritance. The one caveat of living off dividends and interest alone is that it usually requires significantly larger retirement savings.
This issue is discussed in further detail here: Retiring on Investment Interest: Can It Be Done?
“A true interest-only strategy can work only for those with excess capital. If you retire with $1 million but only need $55,000 per year of supplemental income, keeping with our 6% assumption, you will need $917,000 to produce your income. That will leave you with $83,000 that could be used for emergencies or irregular expenditures.”
“Be thorough and careful when working out the numbers. Interest-only portfolios can work, but if you assume that one will work for you without working out the details, you may find yourself without adequate retirement funds.”
Due to the larger capital requirements needed for a dividends and interest only plan it may not be feasible for individuals who are
currently nearing retirement. However, I believe this plan is perfectly achievable and a worthy goal for young investors. There is no reason why someone with a long time horizon and a decent career can’t accumulate enough capital to implement this great plan come retirement.
Not a bad thought. I’ve given some thought to how I want to finance my retirement, and living off dividends and interest is one particularly promising method. The problem, as you mentioned, is getting enough capital built up to enable your interest income to cover your needs. Ah, well, I guess it’s back to growth investing in my youth and dividend investing when I’m nearing retirement.