Incorporating The Idea of Safe Withdrawal Rate to Living Off Dividend Income

Recently in a Telegram group, I come across a debate between Kyith from Investment Moats and a reader, where the reader claims that as long as his portfolio is made up dividend stocks with good dividend growth through the years, he can just live off the dividends with the total capital left intact, while Kyith on the other hand, supports the idea of Safe Withdrawal Rate (SWR).  The reader claims that he would not want to sell any part of his portfolio, and just having to live off the dividends makes dividend investing superior to the withdrawal method, while Kyith explains that the reader's perspectives show a lack of understanding of how the SWR method actually works.

After reading the long string of exchanges in the telegram group, I decided to pen this post.  Personally, I am definitely a supporter of the dividend investing group, and I also believe, and strives towards just living off dividend income upon FIRE.  From a dividend income investor perspective, the idealistic scenario is simple, as long as annual expenses do not exceed the annual dividends received, then all works out fine.  However, after having experiencing massive dividend cuts during the covid period, as well as the most recent dividend cut event that affected me first hand, I think a buffer is definitely necessary, and this is what Kyith's idea of SWR is all about (correct me if I am wrong, because this is what I understood from Kyith's numerous posts on SWR and his views on living off dividend income).  From what I understand, Kyith's recommendation, to put it simply, is just to spend much lesser than what one has, which is the same as implementing a lower SWR of either 3% or 2% instead of a 4% SWR.  So, with the same idea, if one is into living off dividend income, ensure that one's annual expenses is much lower than the annual dividend income received, so that a buffer of a certain percentage can be put in place.

So perhaps I can try my best here to combine the two ideas together and relate to a simplified method that I have shared here.  My personal understanding of the SWR is to have a big enough buffer that will ensure that the dividends are always sufficient for annual expenses, in good times and in bad.

To put things into context, the following assumptions are in place:

1)     The individual is intending to start his FIRE journey at age 50, therefore by age 48, all his dividends will be saved up in a high interest savings account to maintain a level of liquidity and none will be reinvested.  This allows his spending to be more predictable and flexible when he begins his FIRE journey at 50 year old.

2)     The market is going to move forward in a cyclical manner, allowing the dividends to grow at 5% annual from year 1 to 6.  Year 7 will be a year of market crashes and dividends is cut by 50%.  Dividend income will remain depressed in Year 8 and it will decline by another 25%.  In year 9, strong recovery occurs and dividend income improves by 40%.  In year 10, recovery continues and dividend income recovers by another 30%.  The cycle repeats itself thereafter (I understand that this is the most unpredictable part, but assumptions are almost always necessary for predictions to be made.  Feel free to disagree with the above assumptions and adjust the numbers accordingly to process the numbers that you are comfortable with).   

3)     Annual expenses increases by 2%, but in years 7 to 10, due to crashes and recovery in dividend income, annual expenses remain stagnant (once again, this is an assumption I make and I am comfortable with it, so if you disagree, kindly adjust the numbers yourself).

4)     To keep things simple, although the dividends are accumulated in a high interest savings account, I did not let the sum earn any interest in this calculation to make things more conservative.

5)     For the calculations, CPF Life comes into the picture when the individual turns 70 year old.  To be very conservative, I am assuming CPF Life payment of only SGD 1K per month.

6)     Instead of SWR, I used Annual Dividends/ Expenses ratio instead.  In the example below, I ran the numbers for a 1.2 ratio, where if the annual expenses is SGD 36K, individual will start accumulating the dividend income in the savings account for the next 2 years when his annual dividend collected is SGD 43.2K.

So based on the numbers above, with CPF Life starting at age 70, the dividend income can last for 36 years.  In a more wholesome overview, the table below will summarize how much dividends will last under different scenarios.  The bright green boxes show the ratio that can allow an individual to solely live off dividend income with all the assumptions listed above playing out, for 37 years till 85 years old with the capital in portfolio intact, and the pale green boxes show the ratio that can allow an individual to live off dividend income for at least 30 years till 78 years old with the capital in portfolio intact.  Thereafter, longevity risks can be buffered through the sale of shares in portfolio in exchange for liquid cash, starting the decumulation cycle. 

If my calculations are correct, the table above shows that with income from CPF Life, having a dividend to expenses ratio of 1.5 will be quite safe for retirement, as the excess 50% serves as a good buffer for one's retirement, in good times and bad.  Do note that even with the depletion of the dividends, the capital of portfolio remains intact.  Therefore if accidents happen and dividends happen to deplete a couple of years too fast, one can start the process of decumulation earlier and sell the portfolio slowly in exchange for the cash for retirement (of course we do not wish for such events to happen as far as possible).  Do note that this illustration only applies for dividend portfolio.  If individuals have other sources of income, that will definitely help to cover more expenses, reduce the percentage of dividends used and hence allow the dividend income to last even longer.

With this calculation, it further provides myself with a clearer picture of how much I will need for my own FIRE process.  I think I will be able to fit the timeline I have given myself in this post last year, attaining Barista FIRE in 2026 (with dividend/expense ratio of 1.2), and achieving FIRE in 2029 (with dividend/expense ratio of 1.5) through dividend growth, or cut in expenses.  Personally as I strive for Barista FIRE in the initial years, the additional income I continue to generate can help to stretch the dividend available for use by a couple more years, which further strengthens the buffer margin available for retirement years.

Overall, I believe no one strategy is superior to other strategies, only the most suitable strategy for oneself based on one's belief and lifestyle (even different dividend income investor will have to tweak their strategy a little to suit their personal needs and wants).  My personal opinion is always the same: every individual will think that the other strategy is not as good as the one you believe in because you are biased and you failed to see the beauty in the other strategy.  I am not here to criticize anyone (neither am I fit to do that as a relative newbie), and definitely not here to criticize any strategy.  I believe dividend income strategy also has its pros and cons, and there is a possibility that it may fail too, considering the numerous number of assumptions I have to make in this forecast.  

(**Note: I just realised that Kyith has mentioned about this in his blog last year, and I think it's only fair that I include his perspective here.

"I think one bias (or blind spot for readers) in many of the local successful dividend investors is the size of their portfolios, such that it is throwing out 3X of their annual spending needs.

If the dividends is 3X at the start of one's retirement ... That's basically compensating for the next 30 years of inflation, dividend cuts during recessions, rights issues and dilutions during said recessions and credit crunch, and the fact that Singapore's companies don't have a good track record of not cutting dividends during bad times.")

However, my perspective is that dividend income strategy will provide me with the flexibility I need, and I will be comfortable to adjust my spending based on the dividends I can use, as I have pre-accumulated two years' worth of dividends for my expenses in the third year.  Most importantly, have a margin of safety (buffer) and making sure that income is always higher than or equal to expenses, ensuring cashflow will always be positive.  Once again, things may be easier said than done.  Will self-experiment it in time to come.  Barista FIRE, here I come...!


  1. Thanks for sharing new perspective of adding buffer to the dividend strategy for retirement. Yeah, totally agree that there is no right and wrong in terms on how we embracing the challenges such as market downturn or decrease in dividend payout.

    Just curious let say with dividend/expense ratio of 1.5 times, would it be able to embrace the assumption 2 by changing the decrease in dividend start at age 50.

    1. Hi Kk, thanks for reading. Yup, that is the sequential risk that one may need to take into account. Be it the safe withdrawal method or the dividend income method, the success rate for these two methods in the event of sequential risk will definitely decline.
      As such, perhaps it is important for individual to be flexible and choose to start their retirement after any immediate market crashes. Got to be nimble all the time.

    2. Yeah, I think safe withdrawal rate already factor in the sequential risk, but might not be 100% get rid off, maybe at 95% or 99%. Your assumption is quite conservative, the dividend receive only recover to highest dividend amount (ie year 5) at year 16, about 10 years later.

    3. Yup, the calculation is meant to be very conservative, because there are too many variables involved. As such, if under these conservative assumptions and the success rate is promising, then it will be highly doable.
      Of course, on the flipside, the discussion will be will this be a case of overly-conservative where over-saving occurs. So I think nothing is cast in stone, and I think the easiest way out is margin of safety and flexibility in spending.


    This response by Kyith to why I 'ignore the SWR' and plan to live off dividends (with dividend growth covering inflation) shows that there is a lot of common ground between him and dividend investors.

    Kyith isn't actually disagreeing with the idea of the funding retirement with a 'passive income' stream but with the idea that some dividend investors select the 'dividend investing strategy' simply because it 'matches the income characteristics they require' without thinking about sustainability.

    1. Hi Hello World
      Thanks for responding. I suppose it's fine for every individual to have their own perspectives, because others will not know your current personal situation and circumstances. I would like to think (hopefully) that individuals know themselves best, though there are many who failed to identify the blindspots.
      Nonetheless, as long as you can make a particular method work for you, it is a good method.


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