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Do you count dividends as your ER income?
Old 05-26-2013, 12:33 AM   #1
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Do you count dividends as your ER income?

My profolio generates $18K dividends from tax deferred accounts, and $18K from taxable accounts also.

Do you count dividends as retirement income, therefore reduce your overall withdrawal rate? For example, my estimated expense after ER is $95K. It appears that I only need to actually withdraw $59,000, therefore do I use $59,000 as the amount to calculate my WR?
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Old 05-26-2013, 12:43 AM   #2
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The dividends are part of your total return. Therefore you should use $95K to calculate your WR.
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Old 05-26-2013, 02:49 AM   #3
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Originally Posted by FIREd View Post
The dividends are part of your total return. Therefore you should use $95K to calculate your WR.

+1

Presently the dividends from my tax deferred funds re-invest but the dividends from from my after-tax funds are withdrawn and go towards expenses, so are counted as part of the year's withdrawal %
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Old 05-26-2013, 08:05 AM   #4
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Yes. Dividends are currently what I live on. But they are also part of your total return and count towards your SWR.
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Old 05-26-2013, 08:18 AM   #5
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Originally Posted by FIREd View Post
The dividends are part of your total return. Therefore you should use $95K to calculate your WR.
+1 so your WR would be 95 divided by the value of your retirement accounts when you retire.

Keep in mind that if you retire before SS or pensions come on line, that your WR when you ER may be higher than the ultimate rate once any SS and pensions come on line. So if you are comparing your WR to the 3-4% SWR many cite, it is the ultimate WR that is most important.
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Old 05-26-2013, 08:39 AM   #6
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Originally Posted by pb4uski View Post
So if you are comparing your WR to the 3-4% SWR many cite, it is the ultimate WR that is most important.
Looks like, using 95K as my budget, without adding SS, our initial WR will be 4.3% for 8 years. We have no pension.

Then it drops to 3.1% for 5 years after I begin SS.
Then it drops to 1.9% after DW begins her SS.
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Old 05-26-2013, 08:52 AM   #7
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I have decent dividend and interest income in my tax-advantaged accounts, and dividend income in my taxable accounts.

Even though I would be drawing from only my taxable accounts when I ER, I look at the total dividend/interest income from all of my accounts combined when figuring out what WR I would need when I eventually ER. Since I'm not planning on taking the tax-advantaged account dividends until the 'legal age' (59.5, or age 65 for my HSA), I will just have to take more from my taxable accounts in the meantime (and thankfully, it does generate just about enough cash flow in the form of various distributions to equal the overall portfolio cash flow)...but I still want to know what my overall portfolio is generating cash-flow wise to see how sustainable my total withdrawal rate is.
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Old 05-26-2013, 09:08 AM   #8
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Originally Posted by fh2000 View Post
Looks like, using 95K as my budget, without adding SS, our initial WR will be 4.3% for 8 years. We have no pension.

Then it drops to 3.1% for 5 years after I begin SS.
Then it drops to 1.9% after DW begins her SS.
Those look good to me and similar to mine and I sleep well at night. Just make sure that in computing the ultimate WR that you have taken into account withdrawals for 8 years. IOW, the ultimate WR is the annual withdrawal after you both start SS divided by your projected retirement account balance when you both start SS.

You'll have to make a guess at investment results for those 8 years as well.
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Old 05-26-2013, 09:13 AM   #9
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Originally Posted by fh2000 View Post
Looks like, using 95K as my budget, without adding SS, our initial WR will be 4.3% for 8 years. We have no pension.

Then it drops to 3.1% for 5 years after I begin SS.
Then it drops to 1.9% after DW begins her SS.
You and DW have identical SS benefits? Or close to it?
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Old 05-26-2013, 09:38 AM   #10
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You and DW have identical SS benefits? Or close to it?
Yes. DW and I met at graduate school; graduated at the same year; worked in similar IT jobs all these years. Our income level is almost idential till this date, though she is 5 1/2 years younger than me. I wasn't sure what I was doing when I was youngter for few years.
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Old 05-26-2013, 11:05 AM   #11
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The investment data FIRECalc uses includes dividend reinvestment. That's why withdrawing dividends count as a withdrawal. Similarly, no taxes are accounted for, so you have to pay for taxes using part of your withdrawal. And it uses pure indexes, so you have to explicitly add the ER or accept the default ER value.
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Old 05-26-2013, 12:17 PM   #12
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Other than my teeny-tiny federal pension, my retirement income is entirely from my dividends. The same is true for several other ER Forum members, and obviously we are not living off 0%. So, there is your answer.
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Old 05-26-2013, 01:15 PM   #13
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I set up my ER budget so that dividends would be my main source of income between now and when I can begin tapping into my "reinforcements" in about 10 years from now. Those include unfettered access to my IRA, my frozen company pension, and Social security. Right now, those dividends exceed my expenses so anything left over gets reinvested. Any cap gains distributions, erratic as they are, also get reinvested.

I actually calculate two SWRs: one using only my taxable accounts in the denominator and another using taxable+IRA accounts in the denominator. The former, which is greater, gives me an idea of what I am spending as a percentage of what I have available to spend right now. The latter is a more typical SWR we toss about here in the forum.

My current situation and ongoing plan is consistent with many of the posts made by others (pb4uski, Alan, FIREd, rbmrtn, MooreBonds, W2R, and Animorph) before mine.
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Old 05-26-2013, 03:23 PM   #14
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For example, my estimated expense after ER is $95K.
As someone else noted, this needs to include income taxes on any income, including taxable distributions.
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Old 05-27-2013, 11:26 AM   #15
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Do you count dividends as your ER income?

Yes,
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Old 05-27-2013, 12:08 PM   #16
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Do you count dividends as retirement income, therefore reduce your overall withdrawal rate?
I don't do a whole lot of RI counting myself but, if I were tallying up my numbers I would include only income that I receive in any taxable account including SS, DB pensions, taxable account earnings/distributions and tax deferred (IRA) distributions.
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Old 05-27-2013, 12:17 PM   #17
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Originally Posted by HighRoller View Post
Do you count dividends as your ER income?

Yes,
Well, you can do whatever you want, and you can call things whatever you want. But...

if you want to have a discussion about these things on this forum, it's going to be very confusing if you are referencing FIRECALC runs or talking about Withdraw Rates if you use different terminology. People will get/give bad advice. The FIRECALC outputs will not reflect reality.

Words have meanings - if I substitute 'Tablespoon' for 'Cup', we can't have a very productive conversation about recipes. In FIRECALC and discussions of WR and SWR, dividends are part of the total return of a portfolio. Counting them as 'income' will result in a double counting. This isn't opinion, it is fact.

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Old 05-27-2013, 09:29 PM   #18
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Originally Posted by Animorph View Post
The investment data FIRECalc uses includes dividend reinvestment. That's why withdrawing dividends count as a withdrawal. Similarly, no taxes are accounted for, so you have to pay for taxes using part of your withdrawal. And it uses pure indexes, so you have to explicitly add the ER or accept the default ER value.

I don't understand how Firecalc can work in dividends for a particular portfolio unless one can input as a calculation parameter what the portfolio's dividend yield is. I mean, it's got to make a difference whether the dividend yield of a particular portfolio is 1%... 3%... or 6%.

(And, if the answer is that Firecalc just takes the historical SP500 dividend yield into account, then IMHO that makes its forecasts faulty because they don't actually apply to a particular real portfolio.)

What's the answer here?

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Old 05-27-2013, 09:47 PM   #19
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Originally Posted by Alex in Virginia View Post
I don't understand how Firecalc can work in dividends for a particular portfolio unless one can input as a calculation parameter what the portfolio's dividend yield is. I mean, it's got to make a difference whether the dividend yield of a particular portfolio is 1%... 3%... or 6%.

(And, if the answer is that Firecalc just takes the historical SP500 dividend yield into account, then IMHO that makes its forecasts faulty because they don't actually apply to a particular real portfolio.)

What's the answer here?

Alex in Virginia
The answer is that FIRECALC has the data for total return for certain broad indexes and fixed income categories and inflation. It doesn't have the NAV and dividend data for every imaginable portfolio of individual stocks with individual weightings. Take a look.

There are options for a static return or a Monte-Carlo style return, where you enter parameters:


Quote:
A portfolio with consistent annual market growth of X %, fixed income returns of X %, and an inflation rate of X %

A portfolio with random performance, with a mean total portfolio return of X % and variability (standard deviation) of X %. Assume an inflation rate of X %.
But I can't answer any Q's on that, as I haven't looked at it much as I don't think they are as worthwhile as actual historical data with it's historical patterns of inflation and fixed income returns over those same periods.

edit/add: and even if you enter a div yield of X%, how will that vary over time? Will it keep up with inflation? What will the underlying portfolio value be, if you need to tap into principal to fund the later years?

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Old 05-28-2013, 02:27 PM   #20
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Originally Posted by mickeyd View Post
I don't do a whole lot of RI counting myself but, if I were tallying up my numbers I would include only income that I receive in any taxable account including SS, DB pensions, taxable account earnings/distributions and tax deferred (IRA) distributions.
From a tax liability perspective that is correct. I believe the OP was asking about which sources of funds to include in calculating an annual Withdrawal Rate. In that case I would say its all dollars spent less dollars obtaining from w*rk, pensions or SSI.
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