When it comes to making your portfolio last a lifetime, you may be surprised at how long that might be. According to this Vanguard longevity tool, for a couple both age 40 today, there is a 50% chance that one will live to 88. That’s 48 years.
For a young person making a plan to reach financial independence at a very early age (under 50), I think using a 3% withdrawal rate is a reasonable rule of thumb. For someone retiring at a more traditional age (closer to 65), I think 4% is a reasonable rule of thumb.
In addition, I track the dividend yield of my portfolio. This is not necessarily my spending target, but more of a very safe benchmark number. Having lived through a crisis like 2008, I know that it can be hard to appreciate “very safe” things until the poo hits the fan. The analogy I fall back on is owning a rental property. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and ignore what the house might sell for on the open market.
Specifically, I track the “TTM Yield” or “12 Mo. Yield” from Morningstar, which the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. I like this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of my most recent portfolio update (66% stocks and 34% bonds).
|Asset Class / Fund||% of Portfolio||Trailing 12-Month Yield (Taken 6/11/18)||Yield Contribution|
|US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
|US Small Value
Vanguard Small-Cap Value ETF (VBR)
|International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
Vanguard Emerging Markets ETF (VWO)
|US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
|Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
|Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
Our overall plan is still based on a 3% withdrawal rate. This calculation tells us that 2.5% will come out as income “naturally”, and we would have to take the remaining 0.5% by selling shares. Living off a portfolio is an area of ongoing debate, so don’t let anyone convince you that there is a “right” answer. I’m not a financial firm convincing you to let me handle your money. I’m not here to pitch you an easily-achievable dream lifestyle. Even if you run a bunch of numbers looking back to 1920, that’s still trying to use 100 years of history to forecast 50 years into the future.
Your life is not a Monte Carlo simulation, and you need a plan to ride out the rough times. We are a real 40-year-old couple with three young kids, and this money has to last us a lifetime (without stomach ulcers). Michael Pollan says that you can sum up his eating advice as “Eat food, not too much, mostly plants.” You can sum up my thoughts on portfolio income as “Spend mostly dividends and interest. Don’t eat too much principal.”
© MyMoneyBlog.com, 2018.
Read More: My Money Blog Portfolio Income – June 2018