Several quick hits today.
Barron's wrote about the difficulty of spending down accumulated assets in retirement. I am pretty sure this will be difficult for me if our savings play a big role in our month to month lifestyle. This was an article where always read the comments applies. As is often the case for this subject, someone talked about building a dividend portfolio and living off the dividends.
SCHD is the Schwab US Dividend ETF which has yielded just over 3% most of the time. I used Global X S&P 500 Covered Call ET (XYLD) because it has a long track record but there are a lot of funds now that I think are far superior. SPMO tracks momentum stocks which have the tendency for a higher growth rate but give up yield and VOO tracks the S&P 500.
The yields of Portfolios 1 and 2 are now higher than SCHD due primarily to XYLD having a higher payout than it used to. The yield on just putting all in the S&P 500 has trended down over the years to now around 1.25%. I chose a starting point of $700,000 because it is a lot of money to have accumulated but strictly following the 4% rule someone starting at $700,000 is not rolling in it. Even double that amount, you're not really rolling in it with a 4% withdrawal rate.
Generically, dividends are not tax efficient. They are taxed at ordinary income. SCHD has historically paid "qualified" dividends which are taxed more favorably as capital gains but this is something to continuously track. Derivative income funds that track indexes might be taxed 60/40, you have to check. XYLD's distributions appear to be 60/40 but only a medium degree of confidence on that so check for yourself.
I'm not a tax guy, the take from above is just that it's complicated but with that out of the way, would the dividend only approach work for you? The two portfolios built above tried to add a better CAGR than just going SCHD. My hunch is that using some of the newer derivative income funds instead of XYLD would have a growth rate somewhat higher than just holding SCHD. The portfolios also had a defensive component by virtue of going down far less than VOO in 2022 but the next large decline could be completely different where dividend stocks do worse which happened in 2008 because the few dividend ETFs from back then tended to be heavy in financials. There's no way to know whether the portfolio yields can stay above 5% but this seems viable for someone who cannot emotionally sell to meet their income needs.
The Wall Street Journal wrote about buying Treasury Inflation Protected Securities through individual issues or funds. As far as individual TIPS, the taxation is tricky. Basically the interest is partially taxable and there is a tax owed on the bump up in the par value which is referred to as phantom income. That maybe an oversimplification but they are better to hold in an IRA account or Roth account. If you want actual inflation protection I think individual issues are better. If you want the effect of the price action in your portfolio then funds are fine.
One comment said you're better off in commodity stocks to beat inflation while another said actual commodities are better than TIPS. Here's a longer term chart. XME is a client holding.
That the long term CAGR is so close is fascinating. You can see that the market started to care about price inflation around the time of the 2020 Pandemic Crash.
Starting the clock in March 2020 gives a much different picture. When reported price inflation started to matter again, commodity stocks and commodities did their thing, they did what I think investors would hope they would do.
Another commenter said they own WIW in their IRA and are getting a yield of 8.57%. WIW is the Western Asset Inflation Linked Opportunity and Income Fund. WIW is a closed end fund with about 30% leverage trading at a discount to its net asset value.
The commenter did not say how long they have owned WIW but the fund is another example of how difficult in can be to hold closed end funds and take the dividend out as income. There have been some good years but also several years with very large declines. Someone who bought WIW at the start of the backtested period expecting the fund to deplete would probably be pleasantly surprised that the fund hasn't gone to zero but that is a lot of volatility to take on for that yield.
Following up on yesterday's post about threats to Social Security. I cited CNBC as saying there could be a problem/delay getting survivor benefits. The idea there was there would be less human help which the article said could create obstacles for older people (hasty generalization coming) who aren't as handy using the internet. The implication was that doing it online would still be possible which paves the way for the surviving spouse needing help from a family member.
If your parents are in their 80's or older, this might be something to start thinking about. God willing they live many more years but there are still eventualities at play here. I am unfamiliar with the part of the SSA website where this is done but my experience with fire related government websites is that they are designed very poorly and require reentering credentials many times in the process of doing whatever needs doing. Any of us as potential helpers of parents or in-laws if calling in or going to an SSA office is off the table need to be emotionally prepared for a long project to get this done if, again, the CNBC article I cited turns out to be correct.
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