No. of Recommendations: 14
I have considered another option. Divide my portfolio into two parts. 70/30 division. Spend down the 70 percent part over seventeen years starting at one seventeenth of the total, next year one sixteenth, etc.
This is very elegant, and I like it. Your 70% divided into 17 divisions is 70/17 = approx. 4% withdrawal of your total equity. Of course, the 70% would need to remain in bonds or have a return that is at least the level of inflation so that the real value of your divisions of the 70% are not reduced over time owing to inflation.
However 17 years - with your expected high chance of much of another 17 years on top of that after - is a really enormous amount of time to have cut off, with so much of your equity off (70%) prevented from compounding over so many years. That is a tremendous opportunity cost.
I would recommend to allow the intrinsic value to grow at higher compounding rate, ignoring the stock quotations, and take out 4%.
This can be done, for example, by purchasing an international diversified high dividend low cost ETF, and just take the dividend and completely ignore the capital.
You can then extract at the same initial amount of cash (even slightly higher at 5%) but the amount you are extracting will grow over time at a higher real rate than the bonds.
I would recommend VYMI which his Vanguard ETF which fits by description "international diversified high dividend low cost ETF". Put 100% of your equity there, and just take the dividend and do nothing else. You would not even need to ever visit your brokerage account.
Your starting dividend is about 5% of your equity - higher than your starting amount, and this will increase at a higher rate than inflation over time. You can completely ignore the stock price, as the dividend will be far more stable than you would think.
During the 1930s Great Depression, the real (CPI adjusted) dividends of US stocks did not change much.
There is a bit of variation in the dividend from one quarter to the next, but over a whole year it should remain fairly fixed.
The alternative is to buy RSP (equal weight US stocks) and extract at a fixed rate of 4% year after year, which is certain (over your 20+ years) to be lower than the rate of value increase. The fixed 4% income from RSP will be less stable than the VYMI dividend strategy, but it would likely generate a little more value over time so your initial 4% cash amount would rise at a faster rate than the VYMI dividend.
Both strategies would be better than having 70% locked away for so long in bonds though.
- Manlobbi
