As you all probably know by now, my retirement withdrawal plan is very simple. It consists of:
Spending most of the dividends
Reinvesting some of the dividends
In 2023, when I first started my on-again, off-again (currently back on, baby!) early retirement, I was spending about 75% of my dividends and putting the other 25% back to work. These days the split dedicated to spending is less, for a few different reasons — including the dividends going up over time, us paying off the mortgage, and cutting back a little bit on travel after going hog wild the first couple of years.
Here’s more info on the practical part of my withdrawal strategy.
Only spending the dividends is the Black Swan version of retirement planning. It gives you the best chance of surviving the unpredictable curve balls the market will inevitably throw your way.
The thing about retirement is there’s really only one risk — running out of money before you die.
Financial advisors and other advocates of selling off assets to fund retirement will argue underspending is a risk. It might be, but it pales in comparison to the Big One. Underspending means a higher inheritance for your descendants. Overspending means burdening them with your failure.
One is a minor inconvenience; the other is a disaster.
Retirees who only spend the dividends are taking the prudent approach to financial planning. They realize the inherent risks, and are acting accordingly. There’s a reason why study after study confirms that most retirees are only comfortable spending the income their portfolio generates. They might not be financial experts, but they understand Black Swan risk.
Unfortunately, this mentality has come with at least one downside. Canadian retirees are putting their cash in high yield ETFs and spending only the “income”, without realizing at least some of the income is actually capital gains in disguise.
I wrote about those a couple weeks ago if you missed it.
Anyway, today we’re going to do something a little different. Figuring out what to spend is easy, especially if you just limit yourself to the dividends. You spend ‘em all and then next year more show up.
But figuring out how to spend them? That’s much trickier.
My spending vs. saving war
As I’ve said before, one of the toughest parts of my early retirement was switching from a saving to a spending mentality. I anticipated most of the struggles early retirees have, but I didn’t realize how difficult it would be to actually take money away from my investments. My plan was to spend the dividends, but I found it difficult to even do that.
That post was from more than two years ago, but the struggle is still real today.
Various folks have come along with pieces of advice to help me overcome my affliction, which usually consists of things like “get over it” and “stop hoarding your money.” It’s unhelpful at best and borderline insulting at its worst. Its a logical solution to an emotional problem, which most of us realize isn’t very helpful.
My identity for 20+ years was the guy who saved, who made smart choices, and who intentionally lived a frugal lifestyle to maximize the amount of capital available for investing. It was probably the thing I was best at. I wasn’t overflowing with discipline in other parts of my life, but I was good at money, dammit.
Plus, money is a convenient scorecard. As long as that magical net worth number kept going up, I was winning. And who doesn’t want to keep winning?
Saying all that, I have gotten better at this over the years. I’ve tricked my brain in a few different ways.
The biggest difference maker was creating rules and telling myself I’d let the rules dictate my behaviour. That way I’m not making decisions, I’m following the rules.
These are the same rules I’ve talked about a million times before.
I keep 6-12 months of spending in cash (it’s closer to 12 months today) at all times
I reinvest a portion of the dividends — a portion that keeps getting bigger over time as dividend growth outpaces spending growth
I’ve given myself permission to dip into cash to buy stocks in specific situations. That makes it easier to withdraw dividends from my accounts. There’s still the possibility that cash might be reinvested
These rules have been helpful, but they’re just part of the equation. After years and years of hardcore frugality, I realized that I wasn’t really that good at spending money. My instinct was to budget for my needs, ignore a lot of my wants, and maintain the high savings rate. It’s a terrific way to get to early retirement, but a crummy approach for maximizing it.
For a while I just accepted this my fate. This was how my brain worked, I decided, and I needed to be okay with it. But I started to realize that was not an ideal mindset. I needed to take a hard look inside and prioritize my spending on things I valued and enjoyed.
And so, I started to think about these things. I’d walk and let my mind wander. I’d stay in bed 10 minutes longer than normal, alone with my thoughts. I’d bounce ideas off my wife, friends, or any vaguely sympathetic ear.
It took a little while, but what emerged was a framework on how I spend money.
Intermission
Speaking about living on the dividends… Bob and I recently did a pod about that very thing.
We looked at the good parts, the not-so-good parts, and the downright ugly parts about the strategy. I continue to think it’s still an excellent way for Canadian DIY investors to plan for retirement, but it is not without its faults.
Anyway, check it out on Spotify, YouTube, or wherever else you might get your pods.
How I spend
The first step was figuring out what I valued and what I didn’t.
You’d think this would be easy, but it turns out it wasn’t.
What I discovered is it’s easy to say you value things. Especially the things society thinks you should value. But when you think more deeply, things get a little more complicated, and a little more uncomfortable. For instance:
I’d lie to myself about not valuing material things. It was more complicated that that
I thought I valued some things, but actually valued what I thought would come from that thing (this was the big one)
I would say I valued something, but then discover my spending told a very different story
It’s easier to explain these with concrete examples.
I didn’t care about clothes, or brands, or any other status symbols. There was one exception — when my car needed a bunch of repairs and I decided to replace it, I realized it was important to me to get something a little nicer
I thought I valued a bigger house. If I had more space, the logic went, I’d entertain more. People would come over, and good times would ensue. What I realized is I didn’t value the house at all. I valued camaraderie
I told myself I valued learning and education. But I spend about $50 a year on books, and nothing on top of that for any actual education
I went through every spending category and, much to nobody’s surprise, created myself a series of rules. Because goddamn do I love rules.
All spending categories were divided into three sections. Because there are no points for originality, I labeled them Green, Yellow, and Red. I put things I valued the most in green, things I liked in yellow, and things I hated spending money on in red.
Green - Included travel, learning, golf, time with my wife, time with friends, all other experiences
Yellow - Included material things I valued, eating at restaurants, various other wants
Red - Included monthly bills, groceries, and other unavoidable expenses
Then, each category was assigned a spending level depending on how much I valued it.
Green - Spend as much as I want. There are no limits
Yellow - Practice a more balanced spending approach. Restrain yourself a little bit, but not much. When in doubt, just buy it
Red - Try to spend as little as possible
Since my first instinct even today is to not spend money when I have the choice, I made the rules fairly aggressive. There’s a chance I go crazy and spend too much, but even if I do it isn’t a big deal. At least I’ll spend the money on things I value.
It sounds stupid to say the rules make me spend, but it’s actually been helpful. The rules told me to go to Toronto and see a World Series game, and so I did. I’m not making the decision to sit closer to the front of the plane. The rules made that choice. I just executed it. The rules are making me golf more often, too. It’s just too bad they can’t help with my skill level.
I also found it’s been fun to try and spend as little as possible on things I don’t value. I like cooking and have fun learning how to prepare new recipes. I’m even spending money on cooking classes in the fall. But I’m a relentless deal hunter, and I rarely buy ingredients that aren’t on sale. Learning is a green category, groceries are red, and my spending is adjusted accordingly.
There is only so much you can save, and I make sure we’re still comfortable. But other than that, I’m cutting any red spending to the bone, baby.
The bottom line
You’re probably going to disagree with my rules. It’s okay; it wouldn’t be the internet without somebody disagreeing.
The point isn’t to copy my rules blindly. The point is to come up with your own set based on what you value. Maybe you value a big house, or a Rolex, or one of the many things that give me the ughh. That’s great. Spend your money on that, and cheap out on the things you don’t care about.
Intentional spending won’t be easy. I still find it difficult to spend as much as I should, and I’m probably reinvesting too much. But that’s okay. I’m keeping that part of my brain happy with mind games while still having fun. The balance seems to be working for me. Hopefully you can come up with something that works for you.