Live off the deposit: This is what you should bear in mind
There are a number of myths and misunderstandings surrounding the topic of capital withdrawals. Because contrary to popular belief, it is Not necessary to hold distributing securitiesif you want to live from the portfolio.
Depending on the investment strategy, a Dividend portfolio only makes limited sense anyway. This is because during asset accumulation, distributions in the form of dividends inhibit asset growth and thus slow down your asset accumulation.
When day X is reached at some point, for example when you retire and you want to live off the deposit, at the latest then the so-called "retirement fund" will be created. Capital consumption a topic for you.
You could now switch to a distributing strategy and, for example distributing ETFs instead of accumulating ETFs use. But this is not necessary.
Thank you very much Eric. Very good contribution. I also struggle with such questions. Dividends are popular because you still hold the same number of shares, even though the dividend is paid out. When you sell shares, you have the optical impression that your assets are decreasing.
For me, there are also tax issues: I pay tax on dividends, but not on capital gains. However, on accumulating ETFs I also have to pay tax on hypothetical distributions. Do I understand this correctly?
The comparison between distributing ETFs and accumulating ETFs would be a topic for your blog.
Thanks for your input Martin, I'll be happy to take up the idea for a blogpost!
Dear Eric, thank you very much. I am always thinking about how I will use my portfolio in my old age.
I have one comment on dynamic capital consumption.
If I choose a capital depletion variant, I calculate exactly how much money I need per year to live. Example: Let's say I need at least CHF 30,000 per year, i.e. CHF 2,500 per month.
You suggest withdrawing a little more in good times and a little less in bad times. What if these stock market periods last longer than I can wait with the withdrawal (because otherwise I will get into financial difficulties?).
Then this possibility would only be a supplement to my other income, because it is too risky?
Dear Helga,
Thank you for your message and the question!
First of all, dynamic withdrawal is not a concept I invented, but was designed by economists.
It is of course absolutely true that it is never possible to say exactly how long the cycles will last and in general: What is actually a good or bad time? What is the reference and how far does it go "up" or "down" 🙂 ...
The topic is not entirely simple and can best be explained in a video (small advertisement for the FinanzFahrplan (in german)where we look at this in detail).
But to roughly answer your question in a nutshell: dynamic withdrawal only works with sufficient buffers and appropriate foresight. Going along the limit from year to year would not be feasible (unless you have a crystal ball that predicts stock market prices 🙂 ).
The technique therefore serves as a supplement and can make a considerable difference to your bottom line when used skilfully. Especially in bad years, a withdrawal is of course damaging for the portfolio and it recovers with corresponding difficulty.
I hope this brief explanation was able to provide some clarity 🙂
Hello Helga, I thought that dynamic withdrawal requires that you have a minimum budget and a comfort budget. In bad stock market times you limit yourself to the minimum budget, in normal stock market times you withdraw the comfort budget, and in exceptionally good stock market times you withdraw more than the comfort budget.
At least, that's how I plan to consume my assets in retirement.
I would like to apply a dynamic withdrawal strategy in future. I invest my capital in world equity ETFs (VWRL) and possibly a (small) portion in Bitcoin (max. 10%).
I plan to consume 0.5% of the current portfolio value every month (or 1% every 2 months). In this way, the value to be consumed fluctuates every month, but the money lasts forever (the capital even increases slightly; assumption: shares have an average annual performance of at least 7%).