Living off dividends, cap gains and interest

[explanade]

We've been very fortunate in life to have put away a sizeable retirement stash (unfortunately no pensions and don't care for annuities). We live very well off Social Security, and taxable account dividends (occasionally pulling long term capital gains to replenish cash). Will draw off IRAs for Roth conversions in a couple of years (ACA issues), and at 70.5 when RMDs have to be taken.

What do you do with the capital gains distributions from funds?

When you say "occasionally pulling long term capital gains" you're talking about redeeming shares?

 

[fritz]

What do you do with the capital gains distributions from funds?

When you say "occasionally pulling long term capital gains" you're talking about redeeming shares?

Realized LTCGs on our taxable mutual funds declared at years end are normally reinvested, but if we've used any of our cash reserves during the year, I'll switch the year end capital gains distribution from "reinvest" to "bank" to replenish cash reserves. Vanguard allows this change to be made easily online anytime. Have done this a couple of times with taxable and once with Roth accounts gains at year end before distributions (costly medical issue for wife, daughter's wedding, and a couple of large purchases). Roth accounts are used as we manipulate income for ACA subsidy. Haven't paid federal taxes (maybe a few hundred subsidy bucks back to the ACA for underestimating annual income) since retiring. That will change in another 1.5 yeas when the wife goes on Medicare, and we can do Roth conversions between 65 and 70.5 before RMDs kick in on our IRAs.

We use my Social Security, and quarterly dividends off taxable and Roth accounts to cover basic living expenses. Wife's SS is used for travel or for any special purchase we desire, and not for basic living expenses (goes away when one of us does).

Using the above method has allowed me to never have had to sell shares for cash funds since retiring (seven years now - retired early at 58/57). As mentioned previously by another member here - reinvesting any taxable account Divs and CGs on which one pays taxes annually, and then selling taxable account shares (which exposes LTCGs gains and creates another taxable event) isn't good financial management. Given our manipulation of annual income - LTCGs are not taxed Federally, but our state sees both as normal income (Divs and CGs) and are fully taxable.

 

[explanade]

I haven't sold any shares yet.

The two years of my ER, the dividends and cap gain distributions have been reinvested but they would have been enough to cover my annual expenses with some money left over.

But I don't know if that will always be the case. If the market is flat or even down, it seems the dividends and cap gain distributions go down slightly.

 

[Danmar]

All my portfolio is in individual equities so I don't have to worry about any end of year cap gain distribution. I think it would be easier to spend some if this distribution though, rather than having to actually sell shares. Just hate to "encroach".

 

[fritz]

When we first retired, we had set aside a separate cash reserve for the years between retiring and 59.5 to tap my IRA. I'd have to look back, but it was a year or two where we just took dividends off my IRA B4 Social Security. Took Social Security at 62 and continued tapping Divs on just taxable account (1/3rd of investments) and Roth accounts for covering basic living expenses. As mentioned, I have never had to sell shares during our 7 years of retirement.

Part of our early retirement plan was figuring out how to take our funds and minimize taxes. We paid our healthcare as individual accounts - had to buy them on the open market. I am VA, but carried insurance as VA doesn't say it will cover emergency care in non VA facilities. Wife's was the heavier coverage as no VA fallback like me. FYI - healthcare was less than half of what it is now on the ACA (just wife now as I went on Medicare last month) and coverage back then was much better.

Set our taxable accounts up for paying out dividends for an income stream. Was a long time holder of Vanguard Wellington, and added Wellesley when first retired. Moved taxable to 50% stock and 50% bond for that income stream (right now it's 50/50 Wellington/Wellesley). Don't see changing this anytime soon. Used to do my own slicing and dicing, but came to realize that this wasn't prudent for us, as wife cares little about investing. I also realize that as I age, I will probably suffer diminished abilities to handle finances (and not realize it). Had to figure out how to set finances for the long term (possibly without me). Wellington and Wellesley balanced funds do all my rebalancing and income stream is on auto for Divs, and optional for gains (wife understands this method). There is a simple 2-page letter of instructions for what to do when, that includes through age 70.5 (don't change anything and only use Vanguard if you need any assistance). Flagship offers this assistance. Even if she hands it over to them and incurs the now .3% extra management fees - it's still cheaper than anywhere else.

We live off investments as we have no pensions, and don't care for annuities. We live below our means, but live well, winter south since retiring, and purchase what we desire (new cars, etc). There will be tax issues in the future with IRA RMDs (and we have a tentative plan), but feel pretty good about retirement income sources and current tax strategy.

 

[mathjak107]

I haven't sold any shares yet.

The two years of my ER, the dividends and cap gain distributions have been reinvested but they would have been enough to cover my annual expenses with some money left over.

But I don't know if that will always be the case. If the market is flat or even down, it seems the dividends and cap gain distributions go down slightly.

this is year two for us in retirement . year 1 saw us up 1% while spending down 3% . year two so far is doing better and the almost 6% we are up is a head of the 3-1/2% draw rate we are spending at . overall we are still down principal so far since retired . getting closer to breaking even ..

 

[kcowan]

Have been converting 10 year maturing bonds into 1-5 year certificates. Gradually buying more dividend-paying stocks.