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Old 06-14-2017, 08:07 AM   #41
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We take what we want to spend and know what 4% would be; always spending way less than that. Also paying taxes on more dividends and capital gains that we are spending.
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Old 06-14-2017, 08:17 AM   #42
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Originally Posted by bingybear View Post
I'm at a loss as to what makes reinvesting dividends makes it less tax efficient in general. That said, I too don't reinvest many of my dividends in taxable accounts and reinvest very few in other accounts. I reinvest dividends in holdings that I'm trying to increase holdings.
I would think if your portfolio was balanced before the distribution, then reinvesting them would keep the portfolio balanced as the holding would drop by the amount of the distribution.
I can see that you would not want to reinvest shares if you have or plan to sell shares in such a way to create a wash sale. This is even more true if you might repurchase shares in an IRA and loose the the capital loss. I do not have holdings in IRAs and taxable accounts that are significantly identical for this reason.
I would agree in not reinvesting if you are going to use pull the $ for spending or harvesting losses which could create a wash sale. I could see not reinvesting if you are going to need to sell more when rebalancing. The only headache I see is having more purchases to track. However, rebalancing causes similar book keeping.

I feel I must be missing something. Note that I don't make a yearly separation of spending $ if that has any effect. I'd like to know what I'm missing... maybe I can improve.
It simply that if you reinvest distributions, and later need to sell from the same fund for rebalancing and/or withdrawal, you create two taxable events, not just one. The first taxable event is the paid distribution. The second is the sale which may generate capital gains. If you reinvest the distribution just to turn around sell some of the mutual fund to fund your withdrawal, you will likely pay extra cap gains taxes, or if it turns out to be a capital loss, you also have to be careful about timing to avoid a wash sale.

It's pretty typical (but not a given) that mutual funds that gain the most during a given year pay out the most in cap gains distributions. So taking distributions in cash, for which I will already owe taxes anyway, helps take care of a big part of the rebalancing. After the dust settles - receiving distributions from all funds, taking my annual withdrawal - I can see if any additional trimming/rebalancing is required. Usually very little.
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Old 06-14-2017, 09:07 AM   #43
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Originally Posted by karen1972 View Post
Can I add a question? What are people using for inflation rates? Not sure what the best source is as every month the # changes and it varies widely if you used the BLS stats... ie April was 2.2 but Feb was 2.7
I just wanted to link folks to today's CPI (CPI-U) from the BLS. Last 12 months as always mentioned in the first paragraph, inflation was 1.9%. I always ignore the month to month comparisons which are way too noisy, and look at prior 12 months for a sense of the trend. https://www.bls.gov/news.release/pdf/

In term of what to use for a withdrawal method that increases using the CPI: you just have to pick which month you use each year and be consistent. Probably most recent month available is best. On Jan 1, that would be the Dec report, which would give you Nov to Nov of the prior year, unless you wanted to wait until mid-Jan for the rate for the entire prior year. It averages out over the long term, so it's not super critical.
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