I sometimes see people asking “How do you sell stocks & withdraw money in retirement? Do you sell all at once in January? Or sell every month? Or what?”

That’s a perfectly fine question to think about when planning retirement but I think that people underestimate how much of your early retirement income will come from dividends…even if you’re not a dividend investor. As a quick back of the envelope calculation: a total stock market fund is slightly under 2% yield; a bond fund is slightly over 2%; international funds are also slightly over 2%. So a diversified portfolio is going to have around 2% yield even in this age of very low yields.

Even though we’re not fans of constant dollar withdrawals, for the sake of argument, let’s say you read Early Retirement Now’s “Ultimate Guide to Safe Withdrawal Rates” and were convinced that 3.25% is the withdrawal rate you should be using.

Since we get 2% just from dividends, there is only 1.25% that we need to make up by selling from our portfolio. But there are two things to consider:

- A fair chunk of that 1.25% won’t be for our normal living expenses. It’ll be for vacations, Christmas presents, annual insurance premiums, buying a new car every few years, and paying for our hot water heater when it breaks. (You do have all those things in your budget, right?)
- As long as the market doesn’t crash, our portfolio will go up, which means our dividends will go up.
*In many cases, our dividend yield will eventually cover**all**of our spending*.

(And this is all without getting into discussions about Social Security or whether spending decreases in old age.)

Remember, this isn’t about being a dividend investor. It is just the reality of a growing portfolio; as the portfolio grows you withdraw a smaller and smaller percentage of it. Here’s how it might look (this is a 1950-retiree):

*(In this and all of the examples I’m going to use the follow assumption: a 30-year retirement & 2% yield from the portfolio. The 2% yield is ahistorical; in the 1950s the yield was actually much higher. So what I’m actually doing here is more like “pretend we have today’s yields with yesterday’s price movements”?)*

You can see by our 8th year of retirement we are withdrawing under 2% of our portfolio…which means our entire withdrawals are covered by dividends. For the next 22 years of our retirement we just live off of dividends. In fact, most of the time our dividends are much higher than our spending, so we can reinvest them, gift them to heirs, or donate them to charitable causes.

How often does this happen? 26% of all retirement years had withdrawals low enough (relative to the portfolio) that all spending was covered by dividends. Of course, this tended to cluster, as the following chart shows. There are essentially two long stretches in US history where the portfolio growth wasn’t enough to get to the point where dividends alone covered all of our spending.

Everyone forgets about the the Panic of 1893, the Panic of 1901, the Panic of 1903, the Panic of 1907, the Panic of 1914, and the Panic of 1919. Americans forget how unstable the financial system was before the Federal Reserve, federal deposit insurance (FDIC), the SEC, and so on.

50% of all retirements *never* see spending drop below 2% of the current portfolio. There is a crash in early retirement, or high inflation, or just slow but steady growth that isn’t enough to outpace withdrawals enough to achieve this.

But that still means in 50% of all retirements you’ll have *at least one year* in which dividends totally pay for all of your spending. And in *those* retirement dividends will cover your entire spending for, on average, 17 years of a 30 year retirement. If we look just at the good years, the distribution looks like this:

You can see that it is heavily skewed towards the right. It is (relatively) easy for dividends alone to pay for all of our spending for decades in retirement, even if we aren’t actively seeking a dividend growth portfolio.

One last way to look at this is to ask, for each year in retirement, what’s my chance that dividends cover all of my spending?

We can see that it starts out at 0%. By year 6 it is 5%. By year 7 it is 10%. By year 10 it is 24%. By year 15 it is 34%. By year 20 it is 40%, at which point it mostly plateaus. The biggest change is between years 5 and 10 when it goes from 3% to 24%. So, if it is going to happen to you, that’s probably when you’d notice dividends increasing faster than your spending.

To sum it up: assuming you start out with 3.25% withdrawals, and assuming that your portfolio yield never increases beyond 2%, you have a 1-in-4 chance that dividends will eventually grow to cover your entire spending for at least 15 years of your retirement.

All of this isn’t to say you shouldn’t have a plan for how you liquidate your portfolio. These numbers show you certainly can’t *rely* on dividends. But you also shouldn’t be too surprised if, seven or ten years into early retirement, you discover that your dividends alone are paying for everything you want & need in life.