Dividends4Life: The 4% Rule Provides New Insight

The 4% Rule Provides New Insight

Posted by D4L | Monday, September 03, 2012 | | 0 comments »

For about a year, I have been fascinated by the symmetry of dividend growth investing's typical 4 percent current yield with the familiar retirement strategy of withdrawing 4 percent of your assets in Year 1 of retirement. They are the same number! As with the traditional 4 percent rule, you can be flexible about how you use the annual income increases. You can just take them as income and spend them. Or you can take just enough to cover inflation and reinvest the rest.

The big difference, of course, between a retirement funding plan based on the traditional 4 percent rule and a "4 percent rule" derived from income generating assets is that in the traditional model, you must liquidate assets to produce the income you need in retirement. That is, you convert capital assets that you saved during your accumulation years into income by selling them. When you retire with income generating assets, the assets produce your income organically. It is a natural function of the type of assets that they are. Not needing to sell them means that you take Mr. Market's bipolar disease out of your retirement model.

Source: Seeking Alpha

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