Let’s say I am 80 years old with $1m to live off. My wife and I are in a zero tax environment.
We have the classic Australian equities portfolio with say a third in resources (yield 2.1%), a third in banks (yield 6%) and third in other mixed industrials (yield 4.5%). That averages out to a yield of around 4.2% plus franking. If we (generously) assume 100% franking on all those dividends the yield comes in at exactly 6.0%. In reality a bit less than 6.0%. We have instructed all the companies we own to pay their dividends into a specific bank account and my spouse and I live off that bank account. On this scenario we live off $42,000 a year plus an annual ATO cheque for somewhere between $10,000 and $15,000 depending on the franking.
For us there are a number of issues which we probably share with all retiree income investors:
- Because the franking can take up to 18 months to arrive we only really budget to live off the dividends and the truth is that because the franking arrives once a year in one cheque from the ATO we don’t dare budget on it for living expenses and use it instead to cover one off items like holidays, cars or the bathroom renovation.
- We have to worry about the equity market. When your brain is the only organ that still pumps blood that can be a great occupation, but quite honestly, for us it’s more stress than pleasure, especially when we are not experienced, confident, IT savvy or losing our marbles.
- We are vulnerable to anomalous events that we can’t afford but no-one factors them in. Like the GFC. The GFC was to us what that meteor was to the Dinosaurs and if it happens again we are royally buggered. We cannot afford to have the equity market fall. Not on $42,000 a year. We have to preserve capital.
- On top of this there are niggling issues like the dividend cheques arriving in lumps which means we’re sometimes hanging out for dividends to arrive before we can pay some annual bills and that’s not to mention inflation. We know the RBA says its 2-3% but they obviously don’t eat anything or drive anywhere.
- We aren’t big spenders but as my wife and I spend a bit more than $42,000 a year we are cutting into our capital.
All in all we feel poor and with ‘real’ inflation included our standard of living is going backwards. On top of that we struggle with the stock market involvement, we don’t know what we’re doing and it is worrying us.
OK, a few observations
- You could currently earn $30,000 pa putting your money into a 1 year term deposit with (almost) zero risk. If you don’t like or trust the stock market that’s probably where you should be. Shouldn’t encourage that as a stockbroker but if peace of mind in the twilight of your life is what you’re after that’s more important than my commission.
- A dollar’s a dollar however it arrives. If you change your mindset to include spending your capital as well as your income and budget on living to 100 you can spend an extra $50,000 of your capital a year on top of the dividends. Now you’re earning $80,000 sliding down to $54,200 in our hundredth year.
- Now we budget on releasing and spending the equity in your one million dollar house that doesn’t have a mortgage on it. The kids don’t need it. It’s yours. That’s another $50,000 pa. Now you’re on $130,000 next year. Now you’re booking the Roman Room at the Bellagio.
Bottom line, there are a lot of rich people out there who think they are poor because of the “spend dividends, preserve capital” and the “old people are income investors” mantra. And because of that there are a lot of income investors that go quietly into the night with their dividends whilst their ingrate offspring clean up on the capital. What a shame when with the smallest of mindset changes could have had them schmoozing each other in the Roman Room at the Bellagio next week.
OK so by the time they’re 100 they’ll be penniless, but when that day comes, hell, they’ll be able to look at each other in contentment and know “We always have Vegas”. So what are you waiting for? Poise pants, a wheel chair and a cup-a-soup?