Retirement Planning - One Fool's View

Absolutely. Having lots of money when you’re too feeble to do anything isn’t very helpful. We retired this year after a few health scares because we realized that our health will be good until it isn’t, and then it’s too late. It’s already not as good as 4 years ago, but we can still do things. Someday we won’t be able to. I have no interest in a coffin with gold accents. I prefer using the money to make memories today.

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@1poorguy

The following assumes you read on Desktop, not Phone - I don’t do phone.

Click on “Everything” under Community in left sidebar > Click “New(#)” at the top. That is my bookmarked Fool Homepage where I always start https://discussion.fool.com/new

Read any Thread that interests you, particularly Your Favorites … Rinse/Repeat

I click “Dismiss All” when there are none left of interest, so that there are fewer next time.

Assuming you have Favorites marked in sidebar, as you read your “unread Favorites”, anything New will show at top.

You can check “Everything > New” each time you log in

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Yes, and there have been times when the S&P 500 gained close to 30%. Over time you accumulate gains which then are a buffer against those down times. You are playing with other people’s money.

Of course it helps to begin the retirement in good times so you can accumulate those surpluses. Beginning in bad times means you must be more careful.

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“Everything” seems to give me everything. I usually click “Tracked”. It’s a bit clunky, but I get at least some messages (like your reply just now). I make a point of clicking the black bell on the old boards to track them in this new system. That’s what someone recommended, and it did help a bit.

I still prefer the old organizational scheme. They could have kept that, and updated the editor to this thing I’m using right now, and it would have been a lot better, IMHO.

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It’s true that happened in 2008, but 2008 was a unique time in stock market history. While there have been - and will continue to be - bear markets and ups and downs, only twice in 100 years did the economy come as close to total meltdown as that. (And, I point out, the 4% rule would have survived the 1929 cataclysm anyway,)

I don’t worry about being the 90-year-old who runs out of money, because I am a 75 year old whose spending went up at retirement (age 48) but whose spending is now going back down simply because of my infirmities and inability to do as much stuff. There is no golf, little travel, no mortgage, etc.

I see my spending continuing to go down, even as my portfolio goes up (yes, even in this bear market. Not as fast, mind you, but I’m not seeing big dividend cuts, at least not yet.)

I note that my father, and Mrs. Goofy’s father were both in Senior Care facilities which promised to keep them whether or not they could continue to pay the [exhorbitant] monthly fees after they had been there for a few years. Neither needed that provision, but those places do exist, and if I should get to 95, as seems doubtful, I suspect I will be in a home similar to that. (They, of course, garnish your SS and any other incomes you may still have.)

Anyway, 4% is historically guaranteed, which of course does not mean the future will be the same, but it does seem pretty likely. And if you spend 4% and even increase wealth at 4.1%, you’re going to be ahead of the game. Increase it at 5% or 6% and you’re going to be just fine.

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So good to hear someone else say that.
Dividends provide about 30% of our household income. We hold 62 dividend paying stocks and 4 Dividend-focused ETFs. I do not know what their prices are and I don’t care. This kind of approach to retirement income investing, where market fluctuations are, in my mind, irrelevant, make retirement much easier and less stressful.

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This type of thinking is somewhat naïve. Because many times the reason that markets go down is because earnings are down because of an economic recession (or worse). Yeah, if the market stabilizes here and the economy muddles through, you can buy more shares of stock, at a lower price than at the end of 2021, and enjoy a higher dividend (relative to the price paid). But if the waste hits the propellers, you’re dividends will decline too.

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‘Earnings’ are not what pay dividends. Operational Cash Flow pays dividends. It is the combination of trends in the net Consolidated Cash Flow From Operations (CFFO) and the dividend policy of the corporation that determines the strength of the dividend…not price movement.

Share price is a sensitive but non-specific indicator of cash-flow health. I divide my dividend paying stocks into Green, Yellow and yes, even a couple of Reds. These latter higher risk companies I do track, and yes, I’ve had some dividend cuts with unexpected events such as the credit crisis and the pandemic. This is a risk the true income investor must understand and accept. But core holdings are with companies who are resistant to such dividend fluctuations, where the worse thing that happens is a slowing of dividend growth. Almost 80% of my holdings since I began this approach have never cut their dividends and dividend growth will gradually make up for any of the cuts.

This approach is not only not for everyone, I’ve become convinced over the years that it is only for a very few. Teaching one’s self not to follow price is very hard to do and for many (most?), impossible to do.

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I honestly think you are fooling yourself. While dividends might be “once removed” from earnings, they are ultimately dependent on a company’s profit. It may be a good psychological/denial comforter to just focus on the dividend…probably a benign thing. But ultimately earnings matter and share price matters. And if we end up in a bad recession or worse, your “safe” dividend income will get cut.

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But of course dividend yield does tend to support the share price – especially compared to stocks not paying dividends. Indeed the support is not unlimited. Large earnings declines can be problematic.

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May be getting too deep into the weeds here, but . . .

There is a problem with relying too heavily on CFFO exclusively and that is that depreciation is a real expense that the company needs to recover over time. The tax code rules surrounding depreciation may not be all that accurate, depending on the particular business, but something needs to be alloted just the same. CFFO doesn’t do this (depreciation expenses is added back to get to CFFO).

Better to focus on Free Cash Flow from operations, by definition this is the available cash from operations not needed to maintain the business (replace depleted assets) and not needed to support future growth. It is the surplus money truly available to pay dividends and to buy back shares, should the company elect to do so.

If high inflation becomes the norm going forward, this distinction will become more and more important for investors because in order to repair or replace wore out capital equipment or add new capital equipment for growth it will cost more and more than it did in the past due to inflation over time. Simply, CapEx will need to be some multiple of depreciation and that multiple will be greater than 1.

Rich

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True enough. But the secret sauce to dividend investing is selection of those companies that will not need to cut their dividends due to economic hardship. There’s no hard and fast way to do this but there are things investors can do to minimize that possibility and to manage the risk a particular company’s possible dividend cut might have on one’s portfolio.

I try to do that as best I can. Setting that issue aside, I’d still rather buy a given company at a 4% current yield than at a 3% current yield - which is the thinking behind my original statement. Same company, same risk, better current yield.

Rich

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If it was that easy, wouldn’t many mutual fund managers be competing to do so? Put another way, why not just buy a high dividend paying mutual fund, maybe like the Vanguard High Dividend Yield Index Fund, Admiral Shares, VHYAX? Currently paying just over 3%? Why make stock picking a part time job, especially since study after study shows that most humans are miserable stock pickers, when you can let the experts do what you want with one click?

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Don’t get me wrong - it isn’t easy.

Not familiar with VHYAX. But I do own Vanguard High Yield (VYM) and Schwab US Dividend Equity (SCHD) - both are dividend ETF’s. The problem I have with these is that the dividend isn’t consistent quarter to quater (and the SEC yield is bogus) and so can never really know how much the current yield truly is. Longer term, dividend growth can very from unsatisfactorily low to astonishingly high and everything in between. There’s a certain amount of portfolio turnover which can be both good and bad.

When the economy really turns south, neither of these will be immune from dividend cuts either.

I’ve spent many years (decades) learning how to pick stocks for myself, and am confident that I will do satisfactorily over time. For the vast majority of folks, dividend ETF’s and/or mutual funds make an abundant amount of sense. And, I can see there being a time in the distant future where I may roll everything into dividend ETF’s when I’m not inclinded to spend the time (or am unable to) picking individual companies to own. I’m just not there yet.

Rich

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On your RV lifestyle, have a friend that has done exactly that. Sold their home, kept a few things in climate controlled storage, and traveled the USA. One thing they did that you may want to consider. If they knew they wanted to stay in a place for a month or more, they worked as park assistants. Majority of the time it got them free rent.

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Hey Rich
Yes, depreciation of investments is indeed a factor and Free Cash Flow (FCF) is a common way to measure this and I can certainly see its value. But I don’t use it as there is no GAAP standard for what constitutes CapEx, although there are 3 or 4 measures of it: Sustaining (very important during height of pandemic), maintenance, growth and acquisition CapEx. Which are used may often vary by what the writer is trying to show. Also, depreciation rates can vary depending on the investment asset, so by itself, depreciation is at best a guess.

I use an alternative: I measure the trend in the growth of Net CFFO/share to CFFI/share. (Cash Flow For Investing Activities). This is a measure of return on investment and tells us if the company’s invested dollars are showing up as an increase in corporate cash flow that exceeds the cost of the capital used to finance it.

Another problem I have with Free Cash Flow is that distributions to non-controlling interests and any preferred stock dividends need to be taken out first (most C-Corps will not have any or it will be very small) leaving Net CFFO and then the common dividend paid, because if there is not sufficient resulting CFFO to pay for CFFI, then any short-fall is financed. Common dividends are not financed. This is an issue with REITs who rarely have sufficient cash to pay dividends and investments.

You are absolutely correct on your concern over inflation and rising interest rates. One of the metrics I track is the ratio of the interest expense to CFFO with the interest added back. This trend tells you how much of the company’s cash flow is being consumed by the cost of debt. We’ve gotten spoiled by very low bond coupon rates over the years, but I sense that is going to change as debt matures and must be replaced with higher costs of the replacement. Heavily capitalized companies such as REITs and Regulated Utilities are going to feel this the most. I’ve also found this ratio correlates closely with the dividend growth rate. How responsive the company is in increasing the prices to cover these higher prices will then depend on the industry and its price/demand dynamic.

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