Comfortable with $300K

Has your nest egg fallen in half, from $600K to $300K? Even if so, you will be able to retire in comfort. Depending upon your situation, this could be today or it might take a decade, but not longer.

Stock Market Income Streams

The continuing income stream from the Practicing for Retirement portfolio was around 8% when I calculated it previously. Since then, prices have changed. The distribution yield of PFF has fallen to 9.5%. It is 5.85% for DVY. With a 50%-50% initial allocation, the continuing income stream is 7.3% of the original balance plus annual increases of 3% to handle inflation. Even under the hyper-inflation of the President Carter years, the buying power would not drop by more than 25%. The buying power would drop no lower than 5.48% of the original balance. Such a drop would be temporary.

Practicing for Retirement

In this analysis, I assumed that the DVY dividend grows only as fast as that of the S&P500, which is 5.5% per year (nominal; without adjusting for inflation). DVY's demonstrated growth rate has been 8% per year.

Stock Market Prices

Stock market valuations have fallen to P/E10=14. They are highly likely to continue to fall below P/E10=11, a drop of 20%. They could easily fall by 50%. This would be well within historical norms. Based on demographics, the bottom should occur between 2012 and 2020. It could occur earlier.

Judging from the past, dividend amounts will hold up. Price drops will translate into dividend yield increases.

S&P500 Dividend Theory

Retirement Income

Today’s retiree with $300K can start out with an income stream of 7.3% or $21.9K per year. With proper cash management, he can increase his withdrawals by 3% each year. He must defer some of his early income into the middle years while waiting on dividend growth.

This can be quite comfortable in most of the United States for those with Social Security or a pension. The biggest concern is health coverage prior to receiving Medicare. A younger retiree would have to allocate about $10K per year for full coverage health insurance.

The outlook is bright for those who put their money on the sidelines, investing enough to match inflation. Their future income streams will be boosted in proportion to price drops. Their income streams will be boosted to $27K if they wait for P/E10 to drop to 11, which is likely. Their income streams could be as high as $44K if they wait for P/E10 to drop all the way to 7.5, which is less certain. A reasonable approach is to ease back into the market gradually when P/E10 falls below 11.

Have fun.

John Walter Russell
January 21, 2009