Spending Every Last Dime!

I hear some retirees who say, “I’m saving everything for my kids and grandkids; I want to leave everything to my heirs, so they never have to worry about money the way I did growing up,” Then we have some retirees who say, “Heck no, I made it, I’m going to spend it. I want to enjoy myself to the max, and my goal is to die as I spend my last dollar!” Frankly, there is no right or wrong answer. Personally, I do believe in the idea of making the next generation work hard and not feel entitled. Recall the section titled Short Sleeves to Short Sleeves in Three Generations. At the same time, I totally understand the feeling of wanting to provide your kids with things you did not get to enjoy, maybe, so they don’t have to struggle the way you did. I lean towards the latter with my 10-year-old son Chance, but my conscious always tells me otherwise. It’s hard. And the more capital you have, the more worries you have, at least in terms of this particular area of wealth generation and transfer. I did have a client who once told me he’d rather have big money problems than no money problems; a valid point. So no matter if your goal is to spend down your assets or to pass down your assets, or maybe a combination of both, the Dividend Lifestyle can work for you.

The person who wants to die with one dollar left would be taking out the max income. They’re not reinvesting the dividends produced. They are taking them out as cash payments. In fact, they’re not only taking the dividends out as cash income, but they’re also strategically selling off and cashing out shares of stock. If they had that million-dollar bucket of Dividend Lifestyle stocks and were 65 years old, and they said, “I want to spend this down, and I want to try to die with $1 left,” I would tell them we can probably get pretty darn close just let me know when you’re going to die, and we could easily do that! 

Obviously, no one but the Good Lord above knows this. If we did know, it would make a lot of things easier to plan for. Let’s say our spend down investor uses the best judgment they can manage. They begin by looking at their current health and lifestyle, family history, mental outlook, how long their parents lived, and their longevity risk. Let’s say that they guestimate they’ll live to be 85 years old. Okay, so our 65-year-old investor has a 20-year runway, and they want to maximize their retirement income as the number one goal. With $1 million in dividend-paying stocks, this person could sell 50 grand worth of shares of stock in the first year and take withdrawals, paying any capital gains or losses as they go. They’re also going to take their 50 grand of dividends (5% dividend yield from their portfolio), so they’re going to receive $100,000 total that first year.

What happens in year two? We know they’re still going to collect a 5% dividend yield, but off of what amount? They sold some shares for extra income, and if the market stayed exactly the same, they would have $950,000 left in the account. If the market declined, they would have less, and if the market worked, they would have more. This is why I said income planning should be dynamic. In our example, if the market goes up 15% the first year and they sell $50,000 worth of stock in addition to taking the $50,000 in dividends, they would end the year with $1.1 million. So they get $100,000 of income in year one from a $1 million portfolio, and they finish the year with $1.1 million, not too bad! Suppose the market went down in year one. They might have to wait a year, or instead of selling $50,000 worth of shares, maybe they defer the sale of stock that year and only take the $50,000 of dividends, allowing the stock prices to climb back the following year. They could take extra income from their other assets that year. We always have our retiree clients have a couple of years worth of cash to weather any storms, so they’re not ever forced to sell for a loss. The average Bear Market only lasts around 18 months, and we have a lot more good years than bad. The S&P500 historically has averaged around 10% annually, meaning in our example, our investors should be able to get $50,000 to $100,000 of annual increasing income and never run the risk of running out of money.

To keep it simple, let’s pretend that the market stayed the same. It didn’t go up or down. They take the $50,000 in dividends and sell $50,000 worth of shares, giving them a total of $100,000 income in the first year. In year two, because the market was flat, they had $950,000 left. Now for year two, instead of $50,000 of dividends, they will get $47,500-Assuming none of their stocks increased their dividends that year, which is not likely with the Aristocrats. In reality, their stocks should, on average, be increasing dividends between 5%-10%, which would more than make up for the lower number of shares. The idea is to do this in perpetuity due to the rising dividends and stock price appreciation. That’s the math. Let’s say the dividends keep increasing, as they have done historically, and our “spend down” investor continues selling more shares each year. By the time they hit their target spend down age of 85, they’ve sold the last share of stock. They took out dividends along the way, plus they enjoyed the sale of the shares. Our spend down investor, who started with $1,000,000 assuming 7.5% annual dividend increases plus 10% growth annually on their stocks, would have received close to $4,000,000 of income over the 20-year spend-down period, dramatically beating inflation.

That’s what I mean by a dynamic spend down. If you want to maximize your retirement income and die with one dollar left, you can do that by taking dividends plus selling shares based on a target age. If you want to enjoy some passive retirement income and also leave money to heirs, you can just take the dividends and never sell shares. And if you want to maximize what you leave for the next generation, you can reinvest the dividends and let the compounding effect snowball enjoying increasing dividend reinvestment plus market growth on the underlying stock prices. These Aristocrats, the stocks ideally used for the Dividend Lifestyle, produce income, and that’s why we like them, but they also typically have price appreciation on the underlying stocks. We want companies that have consistently paid and increased dividends annually for a minimum of 10 years and ideally 25+ years. With that type of financial strength, we can confidently utilize both options laid out in this chapter.

Disclosure: One cannot invest directly in an index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Examples are for illustration purpose only and do not represent an actual investment. Dividends are not guaranteed and must be authorized by the company's board of directors.