For a young person making a plan to reach financial independence at a very early age (under 50), I think using a 3% withdrawal rate is a reasonable rule of thumb. For someone retiring at a more traditional age (closer to 65), I think 4% is a reasonable rule of thumb. However, life is less stressful when you are spending just the dividends and interest generated by your portfolio. The analogy I fall back on is owning a rental property. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and ignore what the house might sell for on the open market.
Therefore, I track the “TTM Yield” or “12 Mo. Yield” from Morningstar, which the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. (Index funds have low turnover and thus little in capital gains.) I like this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of (2/3rd stocks and 1/3rd bonds).
| Asset Class / Fund | % of Portfolio | Trailing 12-Month Yield (Taken 10/21/18) | Yield Contribution |
| US Total Stock Vanguard Total Stock Market Fund (VTI, ) |
25% | 1.71% | 0.43% |
| US Small Value Vanguard Small-Cap Value ETF () |
5% | 1.96% | 0.10% |
| International Total Stock Vanguard Total International Stock Market Fund (VXUS, ) |
25% | 2.86% | 0.72% |
| Emerging Markets Vanguard Emerging Markets ETF () |
5% | 2.56% | 0.13% |
| US Real Estate Vanguard REIT Index Fund (VNQ, ) |
6% | 4.30% | 0.26% |
| Intermediate-Term High Quality Bonds Vanguard Intermediate-Term Tax-Exempt Fund () |
17% | 2.90% | 0.49% |
| Inflation-Linked Treasury Bonds Vanguard Inflation-Protected Securities Fund () |
17% | 3.30% | 0.56% |
| Totals | 100% | 2.69% |
The 2.7% trailing income yield is up slightly than in recent updates, mostly due to increased bond interest. The fact that interest rates are now reliably above inflation across the yield curve is good in my opinion, even if it means some of my bond prices drop. The relative contribution of US stocks is down, as US stock prices are slightly up. The relative contribution of International stocks is up, as International stock prices are down. In this way, tracking yield adjusts in a very rough manner for valuation.
We are a real 40-year-old couple with three young kids, and this money has to last us a lifetime (without stomach ulcers). This number does not dictate how much we actually spend every year, but it gives me an idea of how comfortable I am with our withdrawal rate. We spend less than this amount now, but I like to plan for the worst while hoping for the best. If we both lose our jobs, we should have manageable expenses such that we still won’t need to spend more than 2.7% to 3%. For now, we are quite fortunate to be able to do work that is meaningful to us, in an amount where we still enjoy it and don’t get burned out.
Life is not a Monte Carlo simulation, and you need a plan to ride out the rough times. Even if you run a bunch of numbers looking back to 1920 and it tells you some number is “safe”, that’s still trying to use 100 years of history to forecast 50 years into the future. Michael Pollan says that you can sum up his eating advice as “Eat food, not too much, mostly plants.” You can sum up my thoughts on portfolio income as “Spend mostly dividends and interest. Don’t eat too much principal.”
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