Sunday Afternoon Musings on DGI: “Financial Independence Retire Early with Dividends”

As many of you know I am striving to be F.I.R.E.D. (Financial Independence Retire Early with Dividends).  While the name is similar to the traditional concept of F.I.R.E, there are some significant differences between the philosophy of each.  I have been listening to a podcast/YouTube channel called Two Sides of FI, where the hosts are on a traditional F.I.R.E. journey.   One of the hosts is recently F.I.R.E. and the other is a few years away. It is a great podcast and I highly recommend it for anyone with similar aspirations.  

In a recent episode they were discussing asset allocation and how and when to drawdown each bucket (stocks, bonds, cash, etc.).  One takeaway I got from the episode was how stressed over it they seemed and how much thinking goes into making these decisions.

It made me reflect on my choice to focus on DGI instead of the traditional drawdown approach of traditional F.I.R.E.

Here are my thoughts:

In traditional F.I.R.E. the goal is to accumulate enough investments to be able to drawdown a percentage of your principal every year to pay your expenses (typically 3-5% each year).  Theoretically, with the market going up over time, your money should last your lifetime.   What can get in the way is market crashes, especially at the beginning of retirement, which can derail your plan and you are at risk of running out of money. 

F.I.R.E.D. is different in that you don’t really care about the principal balance since you are never going to use it.  You will be living off the dividends, not selling down the principal to live off of.  Your principal balance outlives you.

The accumulation phase of F.I.R.E.D. is not about accumulating dollars, it is about accumulating future income.

You don’t need to worry about bonds and interest rates, you don’t need to worry about market downturns affecting your drawdown, you don’t need to worry about selling at the bottom because you had to pay your property tax or pay for a big expense at the worst time.

Markets go up, markets go down, a basket of dividend growth investments pays forever. Since you are not selling down the balance, asset allocation, the mix of your investments, is not a problem.  The solution is a diverse group of strong dividend payers.  That’s it. 

Dividends are the cash flow you will use to pay your expenses.  The principal invested is just the payment or funding vehicle for that future income, not your actual future income.

Traditional allocations of of 60/40 stock/bond mix or other variations doesn’t apply.  Dividend payers, especially solid payers like dividend kings and dividend aristocrats, will continue to pay you through good and bad market cycles.

With traditional F.I.R.E. you are selling assets, with dividends you are only using the cash flow from the assets.

With traditional, you have nothing or little left when you pass on.  Dividends can last generations.

While both paths are better than doing nothing, I find F.I.R.E.D. Is an easier and more sustainable path.