Part of the reason I started this blog was to become a better investor. I’ve found that having to justify my investing decisions publicly has made me a better investor as it encourages me to think and justify my actions. It also provides a platform where I can hear and learn from readers.
I’m always curious to hear opposing views so that I can hopefully defend my strategy or make necessary adjustments. Part of my retirement strategy involves utilizing a growing stream of dividends to help pay for retirement. Naturally, when I read a National Post article by Jason Heath titled “Why living off your dividends in retirement may be a mistake” it got me thinking about my retirement plan. One quote stuck with me particularly.
Retirement planning is a personal decision, but you might be making a big mistake if you go out of your way to ensure you can live off your dividends, since you will be leaving a great deal of money when you die. In the process, you may have worked too hard at the expense of family time or spent too little at the expense of treating yourself.
I thought the author made a good point about leaving too much money on the table when you kick the bucket. Rather than hoarding money you could be out enjoying life. This is a valid point, but for my situation I’m not sure it would apply because I hope to have an early retirement age and I like the idea of the added security while I’m still young.
My goal is to become financially independent by the end of 2034 at which point I would be 48 years old. The stretch goal is 40 years old; which if I’m being honest, is quite a stretch. If the wife and I “retire” when we are 40 to 48 years old we won’t have any of the other sources of income that you typically receive at retirement as we won’t be eligible for them until we are much older. In the National Post article the author assumes a retirement age of 65. When you retire at this age you are usually eligible for government programs like the Canadian Pension Plan (CPP) or Old Age Security (OAS). These programs and perhaps a company pension can be used to help pay for retirement expenses and help reduce dependence on dividend income. Because I won’t be eligible for these alternate sources of income at such an early “retirement” age I like having the added security of only using the dividend income and not having to sell investments to cover expenses.
Related article: My Goals
Assuming the wife and I live to our mid 80s or later means that we will have roughly 40 or more years worth of expenses to cover. A lot can happen in this period of time and I don’t want to start selling investments early on in this “retirement” period unless I absolutely have to. I don’t want to run out of money too early. Relying on dividend income only, gives us a more conservative approach. This is on purpose because our retirement period will be longer than the average person.
When we start getting older and become eligible for government programs or company pensions then we can decide if we want to sell some investments and live a more luxurious life as we will have alternate income sources at that point. Because we will be retiring about 20 years before we would be eligible for government programs or company pensions I do not want to create a financial plan that relies on these programs until I get closer in time to them. I think these government programs will likely be around in the future, but with baby-boomers retiring in large numbers these plans may have been altered through pension reform by the time I would be eligible for them. I don’t want a financial plan reliant of these programs when they are so distant in the future and it is conceivable that they could be materially changed.
Another reason that I like the idea of living off of dividend income is that it makes me a more relaxed investor. I sleep better at night knowing that I don’t have to worry too much about the ups and the downs of the market because I’m a long-term investor and so long as increasing dividend payments keep coming, I’m in a good position. Focusing on a growing dividend income instead of a volatile stock price can be good investment behaviour because it promotes long holding periods, which is how I want to invest.
If the time comes when I have enough money to retire by selling a portion of my investments each year then I can make the decision to use that strategy vs waiting longer and retiring off of dividend income at that time. Currently I’m a long way off from that kind of money so this scenario is purely hypothetical. My main argument for retiring with dividend income is that it provides me a more conservative and flexible financial plan. I prefer retiring off dividend income initially because I plan to have a long “retirement” period and I won’t be able to rely on government or company pension programs for roughly the first two decades. Assuming these pension plans are still around when I get older, I can re-assess at that time.
What do you think, is living off of dividends a mistake?
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