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Wednesday, April 23, 2008

* Auto Pilot Engaged, Sir!

You are a financial advisor. You have clients that have worked 30 years and built significant nest eggs, now they are ready to retire and enjoy the fruits of their labor. After a few years your clients start to complain that:

they cannot live on the withdrawals they have been making. Inflation, averaging eight percent over the last five years, has so eroded their purchasing power that they must substantially increase their withdrawals or face a drastically reduced quality of life. When you compute the effect on your clients' portfolios of these much higher levels of withdrawals, you are shocked: many clients will deplete their assets in less than ten years, even though in many cases their life expectancies are much longer. You have very bad news to tell them. What could have gone wrong?
The above fictional account is from the article "Determining Withdrawal Rates Using Historical Data" by William P. Bengen. The article goes on to say:

Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.
But what if you live 31 years? What if the market declines by double-digit figures for three years in a row? What if you don't want to spend your retirement managing and worrying about your portfolio?
Put it on Auto Pilot, specifically on a Dividend Investing Auto Pilot. Dividends from a quality, well-diversified portfolio are much more predictable than capital gains and best of all, they are passive. You don't have to do anything, they just show up in your brokerage account each quarter. Inflation? Not to worry, the good companies routinely raise their dividends well in excess of the inflation rate.
Retirement is not when you want to start learning how to dividend invest. There is a degree of art to dividend investing. Start young, time is always a great ally.

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