A Very elemteray - probobly dumb question

[modhatter]

In retirement for income: If you have a stock/bond portfolio, and you make yearly 3 or 4%withdrawl from it - How do you go about doing this. Is there a stratagy to this withdrawl, or do you just sell the losers or those that you feel have run their course. I wish I didn't have to ask this. (I told you this was elementary)

How then are you taxed on what you cash out? (From profits, I know-but at what rate are you taxed) Is there a way to minimize your tax burden? You don't owe any taxes until you sell the stock. Is this correct?

 

[maddythebeagle]

For taxable accounts, if you just collect dividends that is the most tax efficient for a stock portfolio (in other words dont reinvest and take as income instead). Qualifying dividends have low tax (currently 5% in the 10 and 15% tax bracket)and starting in 2008, it goes to 0. I think congress has to reauthorize the lower rates, though, but my guess is it will happen. Most bonds, you have to pay ordinary income tax on (as far as I know). I think some are tax-exempt if that interests you.

For iras/401ks, etc. The most tax efficient is to take 15k or so out in income (since with the standard deduction and 2 exemptions), your ordinary income taxes will be around 0 if you dont have other income.

 

[poyet]

Though I have no valuable contribution to make on taxation for US residents - still acknowledging the impact it has - (I'm a foreign exempt person paying taxes in my country on trades in the US), and though I do not finance my ER through selling @ a SWR of my portfolio, I'd like to state that reading your question I felt it was certainly not an *elementary question* !!!

Selling loosers is an elementatry trading strategy and letting winners run as well, but withdrawing from an ER portfolio and rebalancing to keep positions in line with the percentages of assets you have built your portfolio with has nothing to do with trading an is worth quite some consideration.

Nobody has yet picked up on the thread, and I'll let people with experience on funding ER on WR of a portfolio answer, but dont feel ashamed to ask, it is not an easy question !

Patrice.

 

[Mr._johngalt]

In retirement for income: If you have a stock/bond portfolio, and you make yearly 3 or 4%withdrawl from it - How do you go about doing this.  Is there a stratagy to this withdrawl, or do you just sell the losers or those that you feel have run their course.  I wish I didn't have to ask this. (I told you this was elementary)

How then are you taxed on what you cash out? (From profits, I know-but at what rate are you taxed)  Is there a way to minimize your tax burden?  You don't owe any taxes until you sell the stock. Is this correct?

 

This is elementary also, but if you can live on 4% and you always earn more
(assuming you cover inflation), then you can never run out of money.

JG

 

[Nords]

This is elementary also, but if you can live on 4% and you always earn more
(assuming you cover inflation), then you can never run out of money.

Withdrawing 4% of ANYTHING guarantees it'll never run out. The kicker to this blinding flash of insight is that you might not be able to live on the withdrawal.

Mod, are you asking what to sell first? The simplest answer would be to sell off anything that exceeds your asset allocation. If your AA is 50% stocks and 50% bonds but at the end of the year your portfolio has gradually shifted itself to 52%/48%, then sell off enough of the stocks to bring the AA back to 50/50.

As for "which stocks", you can do that three ways. The first would be to sell your winners and let your losers recover. Although that can work it's generally more likely to run out of money than the second option. The second option would be to let your winners ride and sell off any losers from the last year (or the smallest winners) until you have your next year's expenses. That approach tends to pay less taxes but cuts more deeply into your stock portfolio during bad years. A third way would be to sell off enough losers & winners for your net capital gains to be zero. That's calculation-intensive but achievable.

Frank Armstrong's bucket article gives yet another approach!

 

[maddythebeagle]

Mod, it might help for you to put out there what your assets are and where you have them. I dont know what age you are, but if you are younger, it is easier to come up with a plan on future tax elimination.

I think many on these boards, have different ideas on income management.

 

[modhatter]

My assets are in real estate that I am selling. I do not have a Roth ir iRA etc. I would have approx. 1,200,000 after liquidating everything. (including Capitol gains tax) I think however, that I waqnt to do an exchange and keep at least on rental property. This will deduct about $250,000 from proceeds.

 

[poyet]

If your assets are RE, why not making a living of renting these assets eventually rebalancing for having some commercial RE props ?

Patrice.

 

[BUM]

Hi mod,

Is this the type of answer you're looking for?

Sell the RE or most of it.
Put the proceeds in a Vanguard (or similar) fund or funds of your choice
Have dividends swept into a money market account with check writing privleges
Spend 4%

 

[Martha]

Mod, I had a similar question a little while ago. Here is the thread:

http://early-retirement.org/forums/index.php?topic=3750.0