OLTB wrote:I also like CryptoPlankton's (and others) idea of only using a percentage of the income generated in retirement, and having a balance in cash to support income for years when dividends are lean.
It's a commendable idea but it's also insufficient. If the idea here is that there is a cash cushion to make up for years like 2008 when the income falls precipitously then that would require more than just setting aside a portion of the dividends, in the way that investment trusts do. You'd also have to set aside some of the capital. The reason is clear - that 40% drop in income could happen from year one to year two, and the portion of the dividends held back from year one would be totally inadequate to make up that shortfall.
So for instance if this portfolio had instead been set up in 2007, then you would have had to hold back 40% of 2007's income in order to be made whole in 2008. And even then what would you do in 2009, when the dividends were only a little higher than 2008?
What this really means is that if 75K is all you had at the start, then you'd have to invest only (say) 60K in HY shares and hold 15K as a safety margin. In addition you'd hold back some of the dividends each year to keep the margin adequate. Both of these approaches would significantly change the performance numbers cited, which assume 100% all-in with no risk mitigation nor safety margin.
So the real-life HYP1 would have 20% worse numbers than the theoretical one cited here.