r/investing • u/[deleted] • May 16 '24
So how exactly do you "use" your money that's being invested and still maintain gains?
[deleted]
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u/Superior_Munk 28d ago
In this scenario, has the OP stopped contributing? Despite the growth, the shares are finite. No matter how much they increase in value, you will eventually sell them all. One way around this is to cash out dividends and distributions. Doing so maintains the number of shares
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u/AzureDreamer 29d ago
If you buy something you have the thing but not the money.
If you sell a thing you have the money not the thing.
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u/NaturalFlux 29d ago
Everyone has touched on bonds, sequence of returns risk, 4%, etc... But at the end of your life, you will possibly still die broke. So I will offer a completely different take. Have an overwhelming amount of capital. Instead of 1 million and taking 4% out. have 10 million of take out only what you need, say 50k. A 5% return on 10 million is 500k, and you take 10% of that and there is your 50k. Over time this kind of strategy will make sure your capital keeps growing AND still pays for your living expenses. But it is more difficult to pull off since it requires you to get to a very large retirement savings number.
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u/AbbreviationsSalt246 29d ago
So many posts here about the 4% rule which doesn’t seem like what you’re asking about. There’s a few ways to get cash without selling any stock.
Get a line of credit through your broker. You can generally get a loan for around 70% of your equity and it’s generally a much better rate than a personal loan if you have $1MM+ in equity (was recently offered a 6% loan). There is no time limit on this, you only have to pay the interest every month (could possibly do that with dividends from the stock but not many offer dividends that high). You can not use this money to for investments such as stocks and bonds.
Margin. You can borrow up to about 60% of your equity value to do whatever you want. Interest rate is usually a little higher than the line of credit but you can reinvest this money if you wanted.
Sell covered calls. If you had $1MM invested in Amazon you could sell LEAPs that expire 2 years out. Those specific ATM LEAPs are currently going for about 25% premium so that’s $250k. If the stock drops below the current value (or whatever strike price) at the expiration date, you keep the stocks and don’t pay taxes on the $250k until when that contract expires (so essentially 3 years after you got it meaning long term cap gains). If the stock rises above the price you can either get assigned, meaning you sell the stock at the strike price plus still keep the premium. You would then pay long term capital gains on selling the stock plus long term capital gains on the contract. At any point you could buy to close the option for whatever the price is at that point. That could be more or less than you bought it for depending on the current underlying asset price and how far away the expiration date is. Taxes will be paid for the contract the year you bought to close which will either be short or long term capital gains, depending on how long you held the stock.
Day trading on margin. You can use day trading on margin, which generally offers at least 100% of interest free money. That means if I have $1MM in equity I would have at least $1MM of intraday buying power (more complex but keeping it simple). I could simply do one trade a day that gained 0.05% to make $500/day cash (about $120k/yr). For context that’s a 3.15 cent change on the TQQQ ETF, which happens at least once every 5 minutes. This is of course the most risky option and the least passive.
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u/Jchicago19 May 18 '24
Go to your broker for a stock loan so you won’t have to touch any of your investment but using the loan to do whatever you would like. Of course you need to pay the interests on the loan
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u/emily_mastaler May 18 '24 edited May 18 '24
A good long term idea would be to focus your investments into high dividend paying stocks.
This is called income investing.
Your large amount of investments pay high dividends quarterly, enough so that you can supplement your yearly income.
This way your account balance will maintain and continue to see the same gains.
:)
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u/fuckaliscious May 18 '24
This is why experts recommend only a 3% or 4% safe withdrawal rate.
So the gains on the portfolio will last and you most likely will never run out of funds.
Withdrawing more than 4% greatly increases one's chance of running out of money over 30+ years.
A $1 million portfolio would yield a $40,000 (4%) annual income.
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u/Crimson_chin08 May 17 '24
You shouldn’t take money out until a certain age. It’s a long term investment plan, but if you’re curious. What you’re talking about is called SWR (safe withdrawal rate) and allows u to take out an amount per year (rule of thumb is 4%) and still have your investments grow.
You don’t want to sell anything you’ve owned for less than a year or you’ll incur short term capital gains taxes which are much less favorable than long term
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u/LOUDPACKHAMBONE May 17 '24
While you’re working, you shouldn’t really be using any money that’s invested in the market. That’ll be for retirement + very large and distant purchases such as a house. If you need money any sooner, you shouldn’t be investing in any individual stocks.
When you retire, a safe withdrawal rate is generally agreed to be around 4%. With this, you should have a fairly consistent stream of money from the date you retire to the date of your death.
During retirement it’s expected that you’ll be decreasing the amount of money in your retirement accounts. Every year your gains will be lessened, but all it really needs to do is last you the rest of your life, not for the rest of eternity.
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u/Marna1234 May 17 '24
You want to try and have enough money that you can live on less than what it earns you in a year.
If you have 1M in an account generating a roughly 10% annual return and you can live off 80k a year for example then you have a nice 20k buffer.
Of course to earn 10% you probably need that money in the market which has its ups and downs.
Right now you can earn 5% just from cash in the bank and that interest accrues monthly so it’s very easy to see what you have to spend. But it’s also not a great long term strategy to sit on cash.
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u/fuckaliscious May 18 '24
Anything higher than an initial 4% safe withdrawal rate comes with ever increasing chance of running out of money over the long term.
An 8% withdrawal rate has a 26% chance of running out of money in 15 years and a 50% chance of running out of money in 25 years.
Most people aren't comfortable with such high chances of running out of money.
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u/Marna1234 May 18 '24
I didn’t know that, good to know 👍
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u/fuckaliscious May 18 '24
It's based on the Trinity study. Ultimately, it means we need to save more and have relatively low withdrawal rate to be able to handle prolonged market downturns.
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u/Doubledown00 May 17 '24
Also, your scenario is why people with that kind of savings are smart to transition to dividends not long before they retire thus setting up a situation where they can get cash out of their investments without having to sell anything.
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u/Doubledown00 May 17 '24
I have three million invested in a Schwab account. My advisor setup a line of credit account that basically uses the invested monies as collateral. Schwab approved 1.5 for the LOC but I capped it at $500,000. Over the past couple years I have used it to buy a few pieces of property and then paid back the LOC with dividends received from the investments.
In about a year we're going to use the LOC as bridge financing to build a lake house. Once the building is complete we'll pay some of it off via cashflow, and whatever is left we'll roll over into a traditional mortgage.
So yea, if you have the cheese and a good relationship with a Private Client advisor, there are way to utilize the principle without having to sell or cut into your investments.
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u/ppith May 17 '24
You shouldn't touch your money until you stop working and are ready to retire. The reason is selling (hopefully at a profit meaning long term capital gains) will add to your taxable income for that year. When you're not working, it's your only income. Married filing jointly this year you can pay 0% on long term capital gains up to $94K and then 15% afterwards until you sell enough to pay 20%.
People retired will do a combination of Roth ladder, long term capital gains in a taxable brokerage, and maybe a little withdrawal from Roth to manage expenses.
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u/ApeRidingLittleRed May 17 '24
Stocks don't always go up: they can go down, real fast and side-ways too, in fact also random-walk if there is too much high-freqency trading/ zero day option trading and what not.
So, the "use" of money lying around is to avoid being crushed by bad timing/something unexpected, for e.g. who had Ru-Uk on their radar right after Corona...
Lying around and doing home-work to be able to select where one should put in theri hard-earned money
If you listen to professionals like recently Stan Duckenmiller: he took excellent profits from NVIDIA and now is taking a break. "The time to buy is when there is blood in the streets" who said that?
So, lying around money was used to invest at beginning of corona, when market fell like a rock, be patient and don't overstay.
Good Luck
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u/Canadasaver May 17 '24
Three years retired and I live on dividends and only sell the stocks and ETFs when I am balancing or taking advantage of a drop in price of something I want.
I am in Canada and have about half of my income coming from dividends from my TFSA (tax free savings account) so I am not taxed on it. My main income is from my RRSP (registered retirement savings account) and everything I take from that is taxed. I take the dividends from the RRSP and I transfer stocks from my RRSP to my TFSA as contribution room allows. Eventually, approximately 75% my income will be untaxed dividends in my TFSA as I slowly move my investments over to it.
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u/Smattiaccio May 17 '24
I invest and when it plateaus I sell, take my profits and leave the rest ready to fight another day
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u/AncientPublic6329 May 17 '24
You could sell a portion. You could invest in stocks that pay dividends and just use the dividends. You could get a loan and use your investments as collateral.
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u/__redruM May 17 '24
Google about the 4% rule. Basically there’s a safe amount of money you can withdraw each year, and even if the stock market crashes, you’ll have enough money going forward. VOO Grows about 10% each year. So you’d think with a million you could take 100k out at the end of each year to live on. But if you did that, inflation would ruin you in a decade, so 7% then. But that has risk associated with an extended crash.
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u/throwawayinvestacct May 17 '24
But then by this logic, eventually I'll keep selling to recieve the gains and have no more money in the market once once my I own nothing in the market...and then what?
Can someone help me understand the missing piece here?
The missing piece is what you go on to say:
I was under the assumption that in a perfect world, you would always have money in the market that you can pull from but the gains you get is greater than the amount that you're pulling.
Yes, you withdraw less than your gains. More than that, you withdraw significantly less than your gains, to shore yourself up for potential actually-down years in the future. If you do that correctly, you (should) never get drawn to zero. E.g., if you make 10% a year and withdraw only 2%, it won't grow as much as if you left it all in, growing at 10%, but you also won't go to zero / "have no more money in the market". Two steps forward, one step back, kinda thing.
Take this incredibly oversimplified example, where you make withdrawals January 1 and see 10% annual returns on December 31.
- Start with $100
- 1/1 Year 1: Withdraw 2% (now $98 invested)
- 12/31 Year 1: Gain 10% (now $107.80 invested)
- 1/1 Year 2: Withdraw 2% (now $105.64 invested)
- 12/31 Year 2: Gain 10% (now $116.21 invested)
Etc, etc. In that example, you're withdrawing 2% of your portfolio each year to "use", yet it's continuing to grow.
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u/chronicitis69 May 17 '24
The idea is to hang onto your money spend the banks money while your money is earning more in interest than you are paying in interest on the bank note
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u/big_deal May 17 '24
Whether you sell shares or use dividends, if you want to spend money you have to withdraw it from the account. There are various strategies for determining a safe withdrawal rate that will allow the portfolio to grow under typical returns and at least sustain withdrawals under worse-case returns. Obviously this requires a withdrawal rate that is less than the average expected return, usually on the order of 3-4% of portfolio value per year.
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u/Relevant_Ad1494 May 17 '24 edited May 17 '24
Your next to last paragraph has it correctly except that you are not pulling principal you are pulling gains. I retired a few years ago —-the market and my accounts lost 40% of all value—- brokerage and rental and residence! All terrible— instead of 100% I had 60% of my wealth. I reinvested a year and 5 months later and that grew to 300% of what I originally had. I still have not drawn principal—- I only draw a portion of my gains. And with the gains of the current bull market I plant to convert all to something like SGOV—- which is paying 5.13 currently and there is no time commitment and no state tax and very low risk(3month us treasuries)
Advice seems to be drawdown at the rate of 4%—- however you don’t have to draw principal—- it helps if you can get your stash to 1-2 m!!!!!
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u/Ambitious_Ad_5836 May 17 '24
You can borrow on margin. Negotiate a favorable rate. Better than paying short term capital gains gains at a high tax rate and you can deduct margin interest if you itemize your deductions.
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u/poopspeedstream May 17 '24
Itemize doesn't make sense until you have almost $10,000 a year of margin interest, unfortunately
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u/Enormous_Horn May 17 '24
Not sure about other countries but in Australia I’d investigate a line of credit using your holdings as collateral, use the money for whatever you want (hint: buy more assets), then use the dividends to pay down the debt. No tax on funds received from a loan. Can do the same with real estate once you have a large enough portfolio of rental properties. Structured properly the interest payments could even be a tax write off. 25 year veteran banker here but not the financial advising kind, so would strongly suggest getting an accountant to guide you if serious.
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u/Idaho1964 May 17 '24
You are in an era of 5.4% short rates. 10% of $1m -->$100K. @-- 5.4% > $5,400. 10% -- $10,800. Rest of portfolio, maybe 50% does not play. The other 30-40%, you are in and out for travel, gifts, etc. try to match losses with gains, etc.
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u/phooonix May 17 '24
The reason to keep your money invested isn't to maintain gains, it's to avoid taxes.
Whether you sell or take out a loan for spending money ultimately doesn't matter as it's a value judgement. Avoiding capital gains tax is monumentally huge compared to the average yearly gain, or loan interest rate.
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u/Cactus1986 May 17 '24
You could take a securities loan. Not to be confused with margin. Borrow against your portfolio so it can keep grown and pay back the loan with interest.
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u/LadderAny7421 May 17 '24
Take out a loan against your cash. Invest the loan and use the cash. Pocket the difference.
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u/sicborg May 17 '24
You could sell some out of the money covered calls against the shares you own.. that’s one way to receive capital back without selling the shares.. just gotta make sure if you don’t want the call exercised against you just do due diligence research to see the potential upside and if they pay divvys…
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u/Desaui3567 May 17 '24
when you sell some stocks to use the money, you're indeed reducing your investment in the market. But here's the trick: ideally, the gains you've made on your remaining stocks should keep growing over time, offsetting the portion you've sold. hmm did i say it clear
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u/collin2477 May 17 '24
aside from the obvious there are more complicated structures out there but you should spend time finding out a lot about them before using them. SBLOC is a straightforward enough starting point.
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u/nobertan May 17 '24
You can also look into securities backed loans and take a loan out against your securities.
Granted, you’re going to have to pay it back, but it allows you to not sell and still capture gains, which end up paying for the loan anyway.
It’s not a 1:1 with simple liquidation, but an alternate to consider, especially if you don’t use your assets as collateral for options or share lending.
- & additional risks to consider (like ole Musky who’s likely over-leveraged his securities for loans and the underlying is crashing hard [Tesla], leaving him at risk of being the equivalent of margin called and forced to liquidate…)
[Probably why he’s begging for his bonus money to cover]
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u/poopspeedstream May 17 '24
You can pay it back on your own time though. Some people never pay it back
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u/rackoblack May 17 '24
The stuff in the IRA/401k you won't be liquidating til retirement, ideally. When you do, it's regular taxable income (not the Roth portions tho).
If you have equities outside of tax-advantaged accounts (in a regular brokerage, not IRAs), you can sell portions of that before retirement age as you need it. If you add as much as you can, for a very long time, the numbers get large enough that selling enough stock to both pay tax on the gains and buy your new $35K car is doable.
You're right that you don't want to cut down your amount invested too much or too soon. The idea is to get a big enough pile of cash (in taxed and tax-advantaged accounts) that it's enough to outlive your expense needs. That's when you quit working, sell (from taxable) or distribute (after retirement age, from tax-advantaged accounts) what you need when you need it.
That's all rather simplified. You have to be careful that the pile continues to grow a little and that you don't take it down to nothing while you're still kicking.
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u/Dull-Elephant-6186 May 17 '24
Simple answer . If you have good credit, borrow 500k . If your portfolio lately is averaging 12% you are easily making more than the interest on the loan . If your returns are weak occasionally you are still in a pretty good place .
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u/poopspeedstream May 17 '24
Very scary to take that much debt for an uncertain return. When the bill comes due, you may be forced to sell at a loss and be underwater on your loan. Making pennies for a huge, huge risk.
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u/newsjunkee May 17 '24
I have 1.7 million invested right now, but it's not all in stocks. I would not recommend that. About 60% of that is in stocks. The rest is in bonds/CDs/MM. I only invest money in stocks that I am not going to need for several years. I just pull my spending money out of my 5+ percent MM.
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u/Dirkclaude May 17 '24 edited May 17 '24
Your mommy and daddy give you ten dollars to open a lemonade stand. So you buy lemons and you buy cups and you buy sugar. But it turns out, you only needed $9.
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u/XOM_CVX May 17 '24
You never spend them.
Once it goes into the market it never comes back out.
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u/DuePomegranate May 17 '24
You spend it when you retire. This seems to be OP’s mental block. Either he wants to spend/waste it now, or he doesn’t get that it’s ok to use up most of your money in retirement.
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u/Chart-trader May 17 '24
Well that's where the importance of
- Having a job comes in that covers your costs
- Emergency fund comes in where you cover 6 months of your expenses
- Fully funded 401k comes in where you never withdraw until you retire
- Where you have a HYSA where you invest your money that you need for expenses like a car, new roof etc that you purchase within the next 3 years.
- Several investment accounts that you invest in and only take out gains you made but you never touch the principal.
You go from 1 through 5 only if you fulfilled the needs of the previous ones.
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u/Substantial-Crazy-72 May 17 '24
I do this differently. $5k, back in the day when that was the roth limit, it's now 7k. (Doubles as my emergency fund.) Repeat, repeat, etc. each year. I then have growing funds but because it's a Roth and after tax, the $5k each year is yours to spend if you need it, just not the gains unless you pay the taxes on them and penalty if it applies. This way you are making gains on your money that you can spend and you have an emergency fund. I did this and never needed the money for anything and have a quarter million (after 10 years) just kinda waiting around. It's kinda opposite of what you asked but the result is the same.
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u/Seattleman1955 May 17 '24
Yes, take out less than your investments are growing and you will always have money in the market.
If you can do that long enough so that the gains way outpace your spending then it's easy.
Once you have a house and car paid for it's also easy unless you are just fixated on material wealth for show.
You can live in a small, average house and drive an average car and be very wealthy. Just because you have wealth doesn't mean it really adds anything positive to your life experience to throw money around and live an extravagant lifestyle.
Money is security and control. You have less stress and you can do what you want and not have to think about money all the time.
That doesn't mean that you now have to up your spending. A new Corolla gets you from point A to point B, in comfort, whether you are super wealthy or just starting out.
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u/Ok-Savings2625 May 17 '24
If you buy in right now, you'll be averaging down for probably a couple years. If you hold out and continue to buy, when things go positive you'll have a big bag you can trim and reallocate those funds. I started in 2021. So this exact scenario happened. But I learned a lot along the way. Lost a little bit, but it's the cost of knowledge. I looked at charts and price movements for years to get a slight understanding of how to move with the market. There's no magical way of figuring out the market, just keep watching it
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u/Successful_Taro8587 May 17 '24
If you need it to be that simplistic, you may need a financial advisor but you can certainly live off earnings and perserve the nest egg.
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u/reno911bacon May 17 '24
Your pot will grow, so if you need XX amount, you would sell less and less shares in the future as your positions gain value.
Your hypothetical scenario would happen if you need a constant XX amount but your positions never grow. Then you’ll eventually empty out if your XX withdraws (selling shares) don’t change (reduce).
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u/dannydigtl May 17 '24
Correct, when you spend your money it is gone.
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u/DuePomegranate May 17 '24
And you try to time things so that you will die before you run out of money.
OP doesn’t seem to get that it’s ok to spend your money in retirement. You don’t accumulate forever.
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u/Mrslyguy66 May 17 '24
One of the ways I save is when I sell stocks and make a profit, I put the profit in a high interest savings account. Say I have $1000 invested and I sell at 1200. I reinvest the $1000 (in a different stock) and put the $200 in a savings account. I have a bank account just for my stock profits. It's fun to watch it grow.
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u/brick1972 May 17 '24
Let's say your million was 1000 shares of a stock that trades for $1000. For purposes of this exercise we'll just assume you get 5% gains every year and can sell fractional shares to make exactly $50000 that you sell. I'm going to just round as appropriate. You can do the real math in a spreadsheet if you want.
After a year, the stock trades for $1050. So you have $1,050,000. You sell 47.62 shares for $50k, leaving you with 952.4 shares.
Year 2: Stock: $1102.5 price, total $1,050,000. You sell 45.35 shares leaving you with 907 shares.
Year 3: Stock $1157.63. You sell 43.19 shares and have 862.8
Year 4: Stock $1215.51, you sell 41.13 shares
etc. etc.
I think you are thinking about this like you have to sell the 47.62 shares every year, which indeed would eat away at your principal if you were to do it. But will also net you more than $50k every year after the first.
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u/sweetmilkysmooth May 17 '24
How often are you expecting to sell? Are you investing “extra” money that you don’t need immediately to live off of and pay bills?
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u/Catch-1992 May 17 '24
One thing to consider is that most brokerages now let you buy and sell fractions of a share.
So previously if you had 10 shares, and you never bought more, you could only sell and take gains 10 times at most.
But now, say you invest $100 in a stock. It doesn't really matter if that equates to 1 share or 100 shares or 23.87 shares. You can sell $20 worth of stock and withdraw that money, and maybe you now have 0.8 shares or 80 shares or 19.096 shares, but all that really matters is you still have $80 in stocks.
Selling stock and withdrawing the money will always result in owning fewer shares, but now it's much easier to only withdraw an amount equal to your gains and keep the original principal invested, if that's what you decide you want to do.
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u/yeetdabbin May 17 '24
Ok this makes perfect sense!
So in theory if I sell an amount that returns less than the potential growth, say in 1 years time, I can keep doing this while still maintaining my money in the market??
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u/Catch-1992 May 17 '24 edited May 17 '24
Yes.
So you invest $100 now, it grows to $120 next year, you can choose to withdraw $20 and still have $100 invested. In general with investing, you're more concerned about percentage gain, not absolute dollar gain per share. So if you always keep $100, and it always grows 20% in a year, it doesn't matter that you'll have fewer and fewer shares every year.
It's not guaranteed to grow though. It could go down 20% instead of up 20%. There can, and will, be stretches that last several years where you won't see gains at all. The safest bet is to invest in an ETF that tracks a large portion of the market, like VOO. There will still be ups and downs, and you won't do as well as somebody who gets lucky and picks the next Apple, but you're essentially guaranteed to make money in the long term (like, decades).
Withdrawing your gains can be fine if that meets your goals, but it's a bad way to make money in the long term. Say you invest $100 and it grows 10% every year. You could withdraw $10 every year for 10 years for $100 total, or you could wait until the end of 10 years and withdraw $159. Stretch it out to 20 years, you could withdraw every year for $200 total, or wait until the end of 20 years and withdraw $572. 40 years? $400 vs $4425.
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u/Chonan_Akira May 17 '24
I'm an old guy and retired. I can sell some investments and spend that money each year. How much can I spend each year without running out of money before I die? Maybe 3% or 4%.
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u/SirGlass May 17 '24
You are overcomplicating it
You start with lets say 1,000,000
In a year it grows to 1,050,000
you take out 50,000
you now have 1,000,000
You repeat this
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u/Displaced_in_Space May 17 '24
I think you've overlooked what OP is missing. Let me try here:
You start with 1,000,000 and invest in 100,000 shares of ACME at $10 per share.
In one year ACME rises by 10%, so now you own 100,000 shares of ACME that are worth $11 per share. Or, said another way, your stock in ACME is worth $1,100,000.
So if you wanted to "take that gain" (called realizing a gain) you would sell 9091 shares of ACME at $11 a share, giving you $100,001 dollars. You'd now own 90,909 shares, which is fewer than you started with, but is still worth $1,000,000.
Does that make sense?
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u/SirGlass May 17 '24
if you do this assuming ACME gains 10% a year you need to sell less and less shares to achieve 100k, you can keep doing your above example for 100k a year for like 80 years and never run out of shares (assuming full shares rounding UP)
This assumes no stock splits and ACME shares would be like 25k PER SHARE after 80 years. realistically they would do stocks splits and you would get more and more shares vs let their stock price rise to 25k
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u/__redruM May 17 '24
Yes, but certainly you’re oversimplifying it. OP needs to google the 4% rule, and then make an informed decision at retirement.
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u/SirGlass May 17 '24
Well considering OP couldn't fathom how 1000k + 50k - 50k doesn't equal zero I felt the need to simplify it and not overly confuse him
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u/joe-re May 17 '24
This works but has a bunch of side effects:
Stocks don't always grow. In a lossy year, you can't take anything out, but you still end up with less. "Over time" this should work, but there is inherent risk.
Even if it works, you still have inflation. So after ten years, you still have the same money as before, but it's worth less.
"So I only invest in non-risky instruments and take out the gains above inflation." -- hope you are a multimillionaire.
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u/SirGlass May 17 '24
well considering OP couldn't grasp the consept of X+(.05X)-(0.05X)=X I did not want to bring up other stuff to confuse him further lol
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u/TonyzTone May 17 '24
In a perfect world, you’re invested in equities in your younger years and shift to fixed income in your later years. So, that $50,000 example is coming from guaranteed interest payments rather than equity increases.
“But interest rates might fall by the time you have to buy new bonds.”
Look up: bond ladders. If you structure them properly, you won’t really have to think about it too much.
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u/518nomad May 17 '24
Stocks don't always grow. In a lossy year, you can't take anything out, but you still end up with less. "Over time" this should work, but there is inherent risk.
This is called sequence-of-returns risk and there are methods of minimizing that risk, primarily by holding a bond allocation in a glide-path strategy. Bill Bengen figured out sequence-of-returns risk back in 1994 and the Trinity Studies in 1998 later confirmed the propriety of his "4% rule" for a safe withdrawal rate on a portfolio ranging from 50/50 to 75% stocks / 25% bonds. There have been further studies and variations on the strategy since, but all of them call for holding bonds (you can hold some in TIPS to also hedge inflation risk) as a hedge against sequence-of-returns risk.
The short version is: If the market tanks during retirement, then you draw from the bond allocation and only rebalance (assuming a tax-advantaged account) if your portfolio is still overweight bonds. By so doing, you are leaving your stock allocation constant, or increasing it, to maximize portfolio growth as the market recovers.
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u/whicky1978 May 17 '24
Mean you can get dividends or you could do this with bonds and get a payout or subtract any growth that you got and if you had a year with no growth, you just wait. You should be able to take 4-5% out and then on average you would still grow your portfolio.
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u/fireKido May 17 '24
dividends are irrelevant, they wouldnt do anything to help you in that situation
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u/whicky1978 May 17 '24
Well all right just give me all your dividends since they’re not helpful
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u/fireKido May 17 '24
it's irrelevant that some of the total return is distributed through dividends rather than capital gain... if I gave you my dividends I would be lowering my total returns which is not good..
But If I could wave my wand and make dividends disappear, I would do it immediately... they are tax-inefficient and they tend to confuse people without a good understanding of finance, like you
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u/OverReyted May 17 '24
Lmfao found the Boogerhead. Tax inefficient…. Guess ole boy forgot qualified dividends are a thing, IRAs… so damn inefficient that dividend generating stocks and ETFS are the primary source of income for retired aged adults in the US.
Imagine having to sell your assets to generate profit.
Nom nom nom more dividends for meee
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u/fireKido May 17 '24
Imagine not realising that selling an asset or receiving a dividend is the exact same thing…
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u/randomdancingpants May 17 '24
Not the same thing at all.
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u/fireKido May 17 '24
People still can’t find an argument against dividend irrelevance.. if you have one please share..
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u/murtsman1 May 17 '24
They can be tax inefficient though… If you are forced to realize your gains in the form of dividends during your working years, you’ll probably be paying taxes on them. Most people don’t liquidate their investments until retirement, when they don’t make enough to get taxed on capital gains.
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u/OverReyted May 17 '24
Are you familiar with qualified dividends?
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u/murtsman1 May 17 '24
Yes, you still get taxed on qualified dividends depending on your income level. Any single person reporting more than $50,000 dollars a year pays 15%-20% on dividends.
All being ‘qualified’ does is convert dividends from your income tax rate to capital gains tax rate.
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u/Vindaloo6363 May 17 '24
And slowly diminish the value of your investment due to inflation.
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u/yeetdabbin May 17 '24
Ok so this answer is simplistic enough for me to respond to.
With this example, wouldn't I eventually "run out" of stocks from taking out money due to selling off the stock?
Or is the general idea that I'll be able to sell a proportionally lower amount of stock because the value is increasing year over year?
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u/randomdancingpants May 17 '24
It would be more simple to buy a dividend paying stock and then just collect dividends forever and never touch the stock again. Find a strong company like one of the dividend aristocrats and just sit back and let the money work!
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u/alfredrowdy May 17 '24
Yes, you would eventually “run out”. Most retirement planning is based on the probability of “running out” after 30 years.
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u/Huge-Power9305 May 17 '24
My cut (4%) + Inflation (2.9%) plus tax (1%) = 8%
You can do this with 80/20 equity/t-bill =9% and have a percent to spare.
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u/siamonsez May 17 '24
As the share price increases you'll have to sell fewer shares each time to withdraw the same amount of money.
If you sold that 50k worth of shares when they were 5000 shares at $10, a while later you want to take another $50k out and now it's $11/share so you only sell 4,545 shares.
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u/Accomplished-Pay5263 May 17 '24
But won't you eventually run out?
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u/LookIPickedAUsername May 17 '24
No. Let's look at very simple numbers.
Suppose you sell exactly half of your shares every year. So you start with 100%, then you have 50%, then you have 25%, then 12.5%, etc.
Will that number ever reach zero? No, of course not. No matter how many times you divide a positive number in half, it remains a positive number.
Now let's say that your stock also doubles in value every year.
So the first year you sell 50% of your original shares for X each. The second year you sell 25% of your original shares for X * 2 each - which, you'll see, is exactly the same amount of money you got the first year. Half as many shares, but they're each worth twice as much. The third year you sell 12.5% of your original shares for X * 4 each... there's that exact same number again!
No matter how long this sequence continues, you will still have a non-zero number of shares and you will receive exactly the same profit from selling every single year.
Now, of course no real portfolio is going to double every year, but it should be obvious there's nothing magical about the number 2 in the above example - it works exactly the same if you use something like 1.07 (for 7% growth).
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u/siamonsez May 17 '24
If you're withdrawing at a sustainable rate, before you ran out of share you'd get to where increments of 1 share are more than you want to withdraw.
It would be a very long time between when the $10 share was worth several thousand per share and you wouldn't be able to withdraw 50k with an even number of those shares. At that point you'd decrease the frequency of withdrawals to maintain the same rate, and finally you'd be selling your last remaining share for $1,000,000 and that would last you 20 years at the same rate.
This is oversimplified, but it's how it would go assuming you always keep those same original shares and they just keep increasing without splitting or anything.
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u/jmlinden7 May 17 '24
You sell a certain dollar value of shares, not a certain number of shares. This may end up being a fractional number so you don't necessarily run out. However that depends on how quickly you withdraw and what the returns are.
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u/Equivalent_Kiwi5390 May 17 '24
Are you going to have other income to buy some stocks while you are selling others?
It isn't always a one way street. Maybe one year you get funds from an inheritance. Maybe you sell your baseball card collection? But if you have no income from any source other than your stock portfolio, you would need to carefully draw it down (4% per year ) so you die with little left.
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u/dismendie May 17 '24
Less shares overall maybe… depends on dividend set on drip or if shares split… or again if value of total shares go upward you would sell less shares… why worry? Most investment options also allow fractional purchases as well… if you start 5% downward draw of 1 million dollars but fairly young you might run into a chance of running out of funds…
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u/reno911bacon May 17 '24
You are selling enough shares to an amount…..$50k
You are not selling 100shares everytime.
TLDR: There’s two numbers here. You are keeping the wrong one constant.
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u/MrMannWood May 17 '24
If you only work with individual shares then this is what would happen, yes. But most brokerages abstract the concept of actual shares, and instead allow buying and selling of dollar amounts. This is called Fractional Shares.
Think of it like this. You have a container of 1,000,000L of water. You sell 1L for $X. The price of water increases. You later sell 0.98L of water for $X. Repeat.
In this model you will eventually run out of water, but it’s so far into the future that it doesn’t actually matter.
And in the real world, there are mechanisms where the dividends that your assets earn are used to purchase more assets for you behind the scenes. Refilling your original container.
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u/LookIPickedAUsername May 17 '24
In this model you will eventually run out of water, but it’s so far into the future that it doesn’t actually matter.
The whole point is that that isn't actually true, though. As your stock (or water) increases in value, you have to sell less and less of it. Yes, the amount you own will trend downward, but it will never hit zero, instead asymptotically approaching but never actually reaching a particular lower bound. It's akin to Zeno's paradoxes.
If the price increase went on for long enough, eventually you'd reach a point where in practice you couldn't divide things sufficiently finely (your stock broker doesn't offer enough digits of precision on the sale, or in your water example even a single molecule of water would be more than you wanted to sell) to follow the math properly, but fortunately we can be confident that exponential price increases will not last long enough for that particular issue to arise.
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u/Schmittfried May 18 '24
The whole point is that that isn't actually true, though. As your stock (or water) increases in value, you have to sell less and less of it. Yes, the amount you own will trend downward, but it will never hit zero, instead asymptotically approaching but never actually reaching a particular lower bound. It's akin to Zeno's paradoxes.
Which only applies to continuous values. Last time I checked stocks were discrete units.
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u/LookIPickedAUsername May 18 '24
Since you replied to all of my posts with the same nonsense, I'll just direct readers to my reply here.
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u/daab2g May 17 '24
The amount you'll be able to sell to keep your invested amount constant will therefore depend on how well the market is doing.
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u/SirGlass May 17 '24 edited May 17 '24
Ok I do not know how much simpler I can make it, you won't run out
You have 1,000,000
After a year you have 1,050,000
you take out 50k
you are back at 1,000,000
How exactly will you eventually run out?
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u/randomdancingpants May 17 '24
lol yes I guess in a perfect world where stocks only go up every year
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u/SirGlass May 17 '24
Or you buy a 20 year bond at approx 5% and get 5% returns every year, back in april they yeilded over 5% but rates have dropped
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u/porncrank May 17 '24
As someone who has lived on the system you describe for over ten years, you definitely wouldn’t run out in the single year scenario you describe. However, it’s too simple. There will eventually be a year when:
You start with 1,000,000
After a year you have 800,000
You take out 50k (because you need it to pay your bills)
The market recovers and you are now at 937,000
Now youre living off <50k if you want to maintain.
And we haven’t even discussed inflation.
Yes, the general idea you have is correct, but there are factors that make it more complicated and risky than you seem to imply.
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u/pedros430 22d ago
thats a 16% withdrawal rate, of course you are going to end up running out of money eventually
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u/CrazyAnchovy May 17 '24
The number of shares decreases every time you sell. Next time, you'll sell less shares but still it keeps repeating.
You have 1,000,000 shares worth $1 each.
They grow in value to $1.05.
You sell 47,619 shares to collect $50K
You now have 952,381 shares worth $1.05 each. It's $1,000,000.
You have less shares now. This is what he means.
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u/LookIPickedAUsername May 17 '24
And you'll still never run out of shares. It's possible for a number to continually decrease and still never reach zero.
This really isn't that complicated. If your account balance always remains exactly $1,000,000 after selling, how could you possibly run out?
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u/Schmittfried May 18 '24
No, for integers it‘s not.
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u/LookIPickedAUsername May 18 '24
Since you replied to all of my posts with the same nonsense, I'll just direct readers to my reply here.
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u/AbbreviationsFar9339 May 17 '24
You have typo in numbers. Normally I wouldn’t bother saying anything but it may confuse OP even more at this point. 🤷♂️
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u/MenopauseMedicine May 17 '24
This is why people recommend the 4% rule for withdrawal or even less. Do your best to keep the principal in tact or even growing while taking some gains to soend
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u/illyoats May 17 '24
You would have less shares than you started with but they increased in value so still worth 1 mil.
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u/unreliabletags May 17 '24
You can theoretically live on a portfolio forever, but you do have a finite number of shares. So if nothing else changes, and you keep selling, eventually you really are going to be out of shares!
The trick is that, as the value of a share increases, the company will typically do a stock split, leaving you with the same total value divided over a greater number of shares.
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u/LookIPickedAUsername May 17 '24
if nothing else changes, and you keep selling, eventually you really are going to be out of shares!
This is not true. If your portfolio increases by $50K a year, you can sell $50K every year and never, ever run out of shares no matter how long you do this for.
The mathematical concept you're looking for the is "the limit of the sum of a convergent geometric series". The number of shares you sell over time will asymptotically approach this limit, which is both finite and less than your starting number of shares. (Of course, this assumes you are able to sell fractional shares.)
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u/Schmittfried May 18 '24
Of course, this assumes you are able to sell fractional shares
Exactly, but you’re not. So you run out of them eventually unless they do a split.
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u/LookIPickedAUsername May 18 '24
What do you mean, I'm not? Sure I am. Maybe you're not, but that's down to which brokerage you use. Some allow fractional sales, some don't.
Furthermore, this is basically irrelevant anyway. Yes, in a pure mathematical sense obviously you need the values to be continuous for the math to work out. But in actual practice all of this is just an approximation anyway since no stock is going to continually grow at a perfectly steady rate, and to have a significant dollar value of almost any stock you'll need to own a large number of shares, making the roundoff error unimportant.
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u/pedros430 22d ago
im pretty sure brokerages dont allow you to sell 0.000000001% of a share for your math to go to infinity
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u/LookIPickedAUsername 22d ago
And that will become super relevant in checks notes ten thousand years when your stock reaches a trillion dollars per share, having somehow undergone no splits over that whole time period. Definitely a real problem people alive today need to be concerned about.
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u/Lord-Nagafen May 17 '24
A lot of people say a safe withdrawal rate is 4%. That leaves room for the investment to climb with inflation and your spending power stays stagnant… now let’s say you spend 1-2%. It might seem crazy to think you can have $1m and can only touch $10k a year but much more than that and you kill the growth
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u/Vindaloo6363 May 17 '24
This is the correct answer. It depends a bit on your portfolio, end goals snd risk tolerance but I take the dividends plus up to 1.5% of the value per year.
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u/Darth_Candy May 17 '24
In principle, you’re correct- the goal is to have enough assets so that your growth matches or exceeds your withdrawals. The desire to not sell off your assets is what draws a lot of people towards income-focused assets like dividend stocks or bonds as they approach retirement.
To this end, most people set their nest egg target such that their annual withdrawals will be 4% of their portfolio’s total value. You certainly can withdraw more, and most people do end up withdrawing more (because frankly, having a strong 7-figure nest egg puts you very far to the right on the bell curve), but the 4% rule is the back-of-the-envelope goal for maintaining a portfolio in perpetuity.
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u/SchleepyGoose May 16 '24
Invest->line go up->sell->line go down->invest In a perfect world, of course.
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u/Loquater May 16 '24
You're overthinking it, and you've generally caught onto the idea that you need more money.
How much is enough? That's a personal question which depends on your goals.
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u/Certain_Childhood_67 May 16 '24
You could purchase dividend stocks. Taking money out will lower the amount of stocks but if their value is up your portfolio could still grow
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u/LonleyBoy May 17 '24
Dividends do the same thing, it reduces the value of the stock as if you sold and withdrew it.
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u/Certain_Childhood_67 May 17 '24
No it doesn’t if he only takes the dividend.
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u/LonleyBoy May 17 '24
The value of the stock decreases the amount of the dividend. You end up at the same place.
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u/civeng1741 May 17 '24
Maybe the day of distribution but that company presumably has ways of generating income. That is priced in and the stock price rises. Otherwise coke company would have gone up 28% in the past 5 years.
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u/Certain_Childhood_67 May 17 '24
No The value of the stock is what is. Each stock pays x amount.
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u/rossiskier13346 May 17 '24
The value of a stock isn’t just a random number. While there are a bunch of factors involved, some of which are probably speculative, the value of a cash is one of the easier ones for the market to account for. If a company builds up $10 million cash that it then distributes as a dividend, then the company now has $10 million less in assets. So if traders are assessing the companies value, they’ll assess it to be worth $10 million less. The stock price will rise back up as the company builds up cash reserves again, because the value of cash holdings are very easy to evaluate, but after the next dividend, the loss in value from distributing cash is also very easy to evaluate.
There are other forces that also affect stock price, but if we isolate the effect of the dividend, it’s absurdly simple for the market to account for it.
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u/Certain_Childhood_67 May 17 '24
But a company that consistently pays a dividend does not necessarily drop a cent when the dividend is paid. The stock could be worth more equal or less on that day.
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u/rossiskier13346 May 17 '24
There are other market forces that affect share price. The stock doesn’t necessarily have to drop, but the share price will basically underperform by the amount of the dividend. Eg, if a company pays a 0.5% dividend and the rest of the market forces drive stock prices up 1%, the share price goes up 0.5%. That said, if the general market forces would bring price down 1%, the stock price would go down 1.5%. Just because a dividend doesn’t happen in isolation doesn’t mean there is no effect. It might just be hard to see because market noise may be louder than the dividend effect.
If you truly believe that share prices don’t decrease in response to dividend payouts, then I have a trading strategy for you. Every day, invest everything into a company who has an ex dividend date that day. The next day, you collect your dividend, sell all your shares, and find a company with an ex dividend date that day. Collect that dividend the following day and then repeat until rich.
Quarterly dividends can easily be in the range of 0.5-1%. So if you repeated the above process even once per week you’d have an annual return of around 25-50% (it would actually be higher than this because you’d be compounding weekly, but I’m too lazy to do the math). I bet you could get to 100% returns or better if you really optimized picking stocks with the highest dividends. That’s pretty good considering most people are happy with 8-10% per year. Now imagine if you repeated the process twice per week, or even daily…
In practice, this unsurprisingly doesn’t work. Believe it or not, it’s because markets can easily evaluate how much value a company loses by giving away cash.
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u/Certain_Childhood_67 May 17 '24
So do you short all these companies before ex dividend date sounds like free money
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u/rossiskier13346 May 17 '24
Short sellers are generally required to pay share lenders any dividends issued on borrowed shares.
So no. I don’t do that.
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u/thedjotaku May 17 '24
It drops on the exdividend date, I believe, not on the day the dividends are paid.
Look up SGOV for an extreme example
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u/LonleyBoy May 17 '24
I can’t believe I have to explain how dividends are not free to NetLiq in /r/investing.
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u/Certain_Childhood_67 May 17 '24
So if Op has 1000 shares of company x and the stock pays 1 dollar per share and he withdraws 1000 dollars op still has 1000 shares
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u/LonleyBoy May 17 '24
And the stock is now worth $1 less per share. And the total value of those 1000 shares is $1000 less.
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u/Certain_Childhood_67 May 17 '24
So if stock is 10 bucks pays a 1 dollar dividend per year you believe the stock is worth zero dollars in 10 years. Show we one dividend stock that has gone to zero from your math
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u/LeMonkeyInDisguise May 17 '24
If you take it a step further and your $10 stock gives a $10 dividend, then it would go to 0 since that would represent the company liquidating all its assets and giving away their entire market cap. Same logic follows for a 50% or 10% dividend all the way down.
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u/Lukilla May 17 '24
Yea I'm with you dog. I don't know what this man is on about
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u/Certain_Childhood_67 May 17 '24
Why is it worth less it could be worth more All dividend stocks do not go down in value. The company pays with profits.
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u/cockNballs222 May 16 '24
You’re investing for your retirement so theoretically you’ll have 30 years of your money growing, in the meantime you live off your salary - what you’re investing…when you hit retirement you’re able to withdraw about 3.5% a year, which theoretically maintains your principal and you’re living off the interest
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u/Technical-Seat535 May 16 '24
Possibly get an asset based loan.
1
u/joe-re May 17 '24
Incredibly risky. Most likely, the terms of your loan aren't great. If interest rates rise and as a result stocks tank, you are in deep trouble.
Read up on the consequences of a margin call and some associated war stories before doing this.
1
u/poopspeedstream May 17 '24
Not risky if using a small percentage of your margin. Keep it under 20-25% and you're protected from margin calls.
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u/ASK_ABT_MY_USERNAME May 17 '24
With rates in the 9%+ range this is an awful idea.
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u/poopspeedstream May 17 '24
IBKR is 6.35% right now
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u/ASK_ABT_MY_USERNAME May 17 '24
Still better off selling stock than to borrow at over 6%.
At sub 4%, it starts to make sense, when it was at 2% it was a no-brainer.
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u/Doubledown00 May 17 '24
If the account is owned by an entity or LLC, then the interest rate really doesn't matter as it's an expense against net income and is just a cost of doing business.
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u/poopspeedstream May 17 '24
Capital gains complicate a simple analysis though. With gains taxed at 20%, depending on the portfolio, it could still make sense to borrow instead of sell, despite a high interest rate.
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u/ASK_ABT_MY_USERNAME May 17 '24
Only if you can guarantee you'll get a return greater than what you're borrowing. There is no guarantee rate right now that's safe and reliably over 6.5%
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u/Sufficient_Cup2784 May 17 '24
Mines at 6%. Schwab doesn’t speak for everyone’s rates.
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u/ASK_ABT_MY_USERNAME May 17 '24
Who are you with?
Either way a 6% loan for anything other than a large purpose is wasteful.
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u/Sufficient_Cup2784 May 17 '24
Morgan Stanley.
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u/ASK_ABT_MY_USERNAME May 17 '24
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u/Sufficient_Cup2784 May 17 '24
That’s for a margin account. I have a Liquidity Access Line that’s backed by my assets, what Schwab calls a Pledged Access Line. It’s a variable rate, so can go up or down. I have not actually used it yet and just checked it’s at 6.6%.
1
u/Chagrinnish May 17 '24
SOFR is ~5.4%. I don't understand how you're getting a 1.2% on top of that when Schwab is showing 2.4%.
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u/Sufficient_Cup2784 May 17 '24
Because I don’t use Schwab. As stated in my previous comment I use Morgan Stanley.
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u/2buckchuck2 May 17 '24
And how do you make the monthly or annual payments plus interest payment if all your capital is invested?
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u/poopspeedstream May 17 '24
It is a non-amortized loan: unlike a mortgage, you don't pay down the principal each month, only the interest. This interest can be paid using, you guessed it, more loan. On this way, you never "have" to pay, there's no set term, you just pay when you want to.
Some wealthy people carry this loan their entire life, their heirs inherit the assets at a stepped-up (reset) cost basis, and pay the balance at their death by liquidating part of the portfolio. In this way you can avoid paying capital gains entirely.
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u/2buckchuck2 May 17 '24
Spoken like a true redditor who thinks they know what they're talking about lol
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u/iphollowphish2 May 17 '24
When rates were ultra low you could easily pay the interest with dividends or just stock price appreciation. If you take out a loan at 4% and the collateral compounds by 7% its effectively a free loan
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u/2buckchuck2 May 17 '24
The “rates” is set by the market and low rates means more dollars want to be long debt, not risk assets. Remember this when we get into the next inevitable recession and the feds are forced to lower funding rates, which cause short term debt to become cheap. Look at your assets and ask yourself if you’d be willing to leverage up your portfolio when borrowing is cheap.
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u/iphollowphish2 May 17 '24
You are confused my friend. You don’t sell assets to get an ABL, you pledge them as collateral, but they are still “yours” (unless you get blown out of your trade)
“Ask yourself if you’d be willing to leverage up when borrowing is cheap” ….. uh, yes, obviously, that is the ideal time to take on leverage.
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u/2buckchuck2 May 17 '24
No you’re the one confused. The ABL has payments. If someone who’s supposedly wealthy and doesn’t have a job, how are they paying the loan if they’re not selling assets to pay for it?
Man I guess you’re the best investor in the world since you’d know when the bottom of the stock market is? You realize if your collateral value drops below a certain amount it gets liquidated to pay for your ABL right?
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u/iphollowphish2 May 17 '24
OP is asking how someone can access their portfolio equity without selling, not what would happen in some made up scenario you’re describing where someone has a ton of assets and no job. In the aggregate they will pay the loan via dividends and price appreciation on the stock through the loan period, and if the rate on those exceeds the cost of the loan, they’ll never have to touch their original principal
I don’t have to be the best investor in the world to understand basic concepts
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u/2buckchuck2 May 17 '24
It’s really obvious you don’t understand basic concepts though because what you described is worse off than just selling your assets lmao it’s so funny how people with no money think they know how money works
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u/poopspeedstream May 17 '24
It can be better than selling assets in some cases. Bridge financing, short term liquidity, etc. You avoid paying capital gains.
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u/Disastrous-Low-2108 27d ago
Buy lots of protein and workout every single day (I take one rest day a week)
Edit: I think I may be in the wrong sub…