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John Kenneth Galbraith (1908-2006)

11/30/2021

I don’t recall anybody ever accusing him of being a modest person, but he was indeed brilliant.  More sociologist than economist, he wrote “The Affluent Society” among his many books and popularized the discussion of conventional versus unconventional wisdom.  The dictionary defines conventional wisdom as “the generally accepted belief, opinion, judgment, or prediction about a particular matter.”  Unconventional is obviously not mainstream.

When I was a financial-planner-newbie, it was the conventional wisdom that retirees should not expect to receive more than 5% from their nest-egg annually.  When interest rates were forced down dramatically in 2009 to cushion “The Great Recession,” the conventional wisdom evolved to become that retirees should not expect more than 4% from their nest-egg.  Since then, their next egg in the stock market has risen faster than dividends and interest rates.  The planning community is starting to recommend only 3.5% as a distribution rate.

Wait a minute – with interest rates near zero and dividend rates of the S&P 500 around 1.5%, how can even a lower 3.5% be paid?  That’s because too many planners have blind faith in the history of the stock markets, which leads them to believe it is safe to distribute principal to make up the difference between 3.5% or 4% and the actual income.  I disagree!

Rather than relying on a constantly-rising stock market to fund an excessive distribution level, it might be better to rely on a few good stocks with higher dividends.  Take AT&T for example, which pays a dividend of 8.5%.  Of course, the value of that or any company can go down . . . or up . . . but the dividend is unlikely to change.  Accepting the conventional wisdom that stocks will always rise enough to support excess distribution rates is naive.  Remember:  don’t eat your seed corn!

For those retirees who need to maximize income, I find it is better to narrow the portfolio to only those stocks paying rich dividends!  Beware:  that is unconventional . . . but I imagine Professor Galbraith would approve.

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