Wednesday, May 2, 2012

Investing and Withdrawals

Safe Withdrawal Rates
The research I read that came with the 4% withdrawal was making 8% return and with 3% inflation. Do not forget with the earn 8% and take out 4% scenario you will be able to take out an increasing amount of money each year. I would not expect to earn 8% returns over the short term and but I do expect to do so over the long term.

I started to live off my portfolio in 1999. At that time I had half my money in Trading Accounts and half in RRSP accounts.

Saving For Retirement
I just wished there were TFSA when I started to invest. The problem is that I am currently paying higher taxes on RRSP withdrawals than when I was putting money into my RRSP. Unless you are currently in the highest tax bracket, RRSP may not be the way to go.

The reason I am in a higher tax bracket is that my investments have done well. I did get some pension money, but no full pension as I switched jobs during by working career. I was in some defined pensions, but if you do not work until retirement in the same company, you do not get much from them.

When I was investing it was always put money into RRSP now and get a tax benefit. It was also said by everyone that in retirement you will be in a lower tax bracket. This did not work that way for me. I was in a high tax bracket when I stopped working, but most of the years putting money into my RRSP account I was not.

How have things worked out?
I started with a 4% withdrawal, but have since gone lower. What I was worried about was that I was taking out some capital as my dividend income was running at around 2.8% per year. We also had a bear market just after I stopped working. I set about to increase dividend income and only take out dividend income. My portfolio has grown at 4% per year, my current dividend income is 3.5’% and I now withdraw 3%.

One thing that has happen is my dividends have increased much fast than inflation or the growth of my budget. The 5 year median growth in my dividends is running at 11.4%. My yearly dividend increases range from low of 5% to high of 24%. This really helped reduce my withdrawals to just dividend income.

One of the original financial bloggers I read talked on and on about dividend paying growth stocks. These companies tend to pay dividend around 1%, but they also tend to increase dividends by 15% to 30%. With some of these and other dividend stocks my dividends in 1999 was rather low. To increase dividends I bought some companies that paid a higher dividend and raised my dividends income. So now I have a mix dividend stocks with low, medium and high yields and low, medium and high growth in dividends.

Taking Money from RRSPs
When I stopped working, half my money was in a Trading Account and half in RRSP accounts. One RRSP account was a locked in one because the money came from Pension money. Split was Trading Accounts with 49.5%, RRSP 37%, Locked in RRSP 13.5.

I initially tried to run down my RRSP account, which I sort of did, as the split between the accounts is currently at 52.5%, 26.5 and 21%. Part of the reason for this is that my investments in my Locked-in Account worked out better than in my RRSP account. Also, I was only taking from my RRSP account initially, but lately I have switched my Locked-in Account to a RIF to take money out of this one also.

I am current moving money from my RRSP accounts into my Trading and TFSA. That is, I am taking proportionately more money from my RRSP account than my Trading Account. I am not taking anything from my TFSA account.

I always make sure that I have 5 years’ worth of projected money in my RRSP accounts for withdrawals so that I never have to sell a stock at an inopportune time. I use current cash and projected dividend income to ensure this 5 year coverage.

Dividends and Recessions
I have a portfolio rich in increasing dividend paying stock. In the last bear market my portfolio lost value (i.e. stock prices went down on the stock I held went down), but my dividends went up. The same thing has happened in all the bear markets I have experienced. I really have had no year when my dividends have not gone up.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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