I have googled this extensively and failed to find a clear answer.
What does living off of your investments/ having income producing investments mean?
Does this mean that I only have dividend bearing stocks or rental properties?
Does it mean that I sell 4% of my stocks yearly ( won’t that reduce the principal?)?
I do not live in North America and therefore will have to live off of my stock investments during retirement.
How do I invest so as to live off of said investments?
You are exactly right – it means any and all of it actually.
In a pure sense, it means you sell 4% of your stocks yearly and use that money to live. That’s what a 4% withdrawal rate means.
It absolutely means you are drawing on the capital and reducing the principal, BUT it is assuming you are earning 7% on that money, so whatever you are withdrawing, you’re really only skimming off 4% of that earned average 7% a year — with 3% of those profits accounted for inflation/future value.
Of course, some years, you make 25%! … but you don’t take out all of the profits! You only withdraw a disciplined 4%, and leave the other 21% untouched to grow and compound for future years when you might LOSE 25%, and need that money then.
Sort of like budgeting and rolling over the amounts, except to an uncertain future.
The key is just even, steady, consistent, 4% withdrawals, weathering ups and downs in the market, because it is an AVERAGE of 7% over a long-term period.
If you don’t want to draw on the capital, then you need dividends or some other form of passive income coming in to cover your expenses, otherwise you need to divest your investments each year.
My partner is already retired, and starting a new career path as a professor (or so he says, who knows), and each time he needs to pay the bills, he picks a stock or two, and sells some of it, and uses that money to pay for his half.
If he had dividends coming in, he could literally just take the dividends instead of reinvesting them, and live of that money – which is my plan actually, to use dividend proceeds as my living, and to NEVER TOUCH THE CAPITAL.
But, that’s only really feasible if you have enough invested that it produces enough to live on (assume 4% dividend yield, so $1,000,000 invested at 4% would give you $40K a year – which is part of my overall life goal actually).
For more information on how much you need to have saved in retirement to produce a certain income, click here.
If you had rental properties, you could just live off the rental income and never sell a place. Also ideal, but requires a lot of capital, and paid off places.
I know a landlord who plans on divesting a property quite soon, and just living off the proceeds, and slowly selling off places bit by bit to fund his and his wife’s retirement.
Hope that helps!