Retirement income -dividends or capital drawdown?

C_Mababejive

Hi all,

I was watching a youtube vid presented by one of the financial gurus the other day (UK based) and he was putting the case that so many people make the "mistake" of relying on dividend income in retirement when really they should be using capital drawdown.

This got me thinking.

If people typically have a DC pot then surely this is exactly what they are doing?

Maybe i didnt listen attentively enough or failed to understand ?

Maybe what he meant was that one shouldnt have investments in your scheme that pay dividends out?

Whilst im here- and looking ahead, im just wondering if 600k at aged 60 is enough for a reasonably fit and healthy non smoking, clean living male? I'm kinda low maintenance so dont have extravagant expenditure but like to enjoy a couple of holidays a year etc,,live comfortably

Thanks all 

eskbanker

Presumably the point was that high yield investments aren't necessarily a better option than total return investing?

Hoenir

High yielding shares do so for a reason. There's rarely any free lunches when investing. 

dunstonh

I was watching a youtube vid presented by one of the financial gurus the other day (UK based) and he was putting the case that so many people make the "mistake" of relying on dividend income in retirement when really they should be using capital drawdown.

In the pension wrapper you don't get paid the dividends typically.  They either buy additional units or replenish the cash account.   Any draw from the pension is drawdown, whether the underlying investment strategy is yield or growth or combination. i.e. total return.

Its worth nothing that whilst total return has been the most method for the last 15 years, yield was the best method fo the 15 years (or so) prior to that.   In 15 years time, you will be able to tell what the best method was with the benefit of hindsight.

gm0

People advance various arguments on a range of angles and do tend to overlay / abuse the meaning of "dividends"
Strictly just a discretionary "pay out" from a company share which is not guaranteed but is planned for and anticipated by owners of it based on history of paying them.

Relying on dividends can mean investing in "high yield" aka "dividend stocks" which brings good and bad with it (as mentioned upthread).

Relying on dividends can just mean topping up your drawdown cash buffer by using "inc" unit funds - which pay out the dividends into cash rather than roll it up (as acc units do) - This can be paid out as income or just reduce the capital sales of units needed at next rebalancing for the next period of income

Relying on dividends only can mean being too conservative and not touching capital. Very few have enough to do that for a 30-40 year retirement income as the size of pot required is large if only the "natural yield" of the portfolio is to be used and no stocks sold.  Clearly your heirs will be delighted.

C_Mababejive

Thanks all ,
Yes it makes sense . I guess i misunderstood what the guru was saying and i need to pay more attention !

Dunston you refer to the 15 year rotation whereby dividends proved to be the better choice than total return for taking an income and i wonder if the difference was only marginal between the two?

GM0 .....also i guess theres no point in drawing just the natural yield if you leave a large pot and maybe no heirs  or live in penury !

Just for interest ,this is the vid i was watching..

https://youtu.be/jiW4i5ErLOc?si=pe1ufXt75a7wAtSh

dunstonh

Dunston you refer to the 15 year rotation whereby dividends proved to be the better choice than total return for taking an income and i wonder if the difference was only marginal between the two?

HYPs fell off a cliff post credit crunch.  Partly as the financials tended to dominate HYPs.
Prior to that tech stocks were the worst place to be.  After that, they were the best place to be.

So, effectively you had a cycle where tech was awful and yields were strong vs a cycle where it was the other way around.  It was not a marginal difference.

Before the credit crunch, the investment and pensions section was full of pro-HYP posters.   Much in the same way as you see pro S&P500 posters now who jump on recency as a basis for the future.

Bostonerimus1

Historically dividends have been popular to generate income. They tended to be from solid companies and did not vary much, but if you go chasing high levels of dividends you can end up in some very risky investments and unstable companies. So the trend today is to be diversified in both your investments and you income strategy and if you invest in major equity index funds you will get a mix of dividends and some capital growth (hopefully) that can be used for retirement income. You might also need to spend some principal as well and there we get into the area of portfolio sustainable withdrawal rates.

To estimate of your pot will be enough to fund your retirement first do a detailed budget to see how much you spend. If you have no debt like a mortgage, car loans etc this will greatly reduce how much you need. Then if you can live on maybe 2% of your total pot then just dividends from an regular equity index portfolio will probably be ok. More than that and you'll need to spend some capital gains and/or principal.

JohnWinder

Confused. The question seems to be about whether taking dividends or capital spending might be different income approaches. One of the answers is about investing for dividends specifically or not. They seem different issues. And lastly, the video I watched was about tax planning, not a word about dividend taking or investing.

NoMore

The No.1 Strategy For Retirement Income... (youtube.com)

Possibly the OP meant this one by the same youtuber