Living off dividends, cap gains and interest

[CardsFan]

I know most here look at total return investing, and up until now, that has been my focus. Now that I am retired, I am looking at the accounts in more detail, and it seems that just income, which was over 5% last year, could support us (actually 30 % more income than we budget!). I assume this is all factored in to the Trinity study and FireCalc, but it is a bit of an eyeopener. I know things change over time, and in a big down market the income could go down a lot, and I know you need to account for future inflation, but still.... When SS kicks in in 5 years at FRA, our income needs will be cut in half.

Looks like we might leave a lot of money on the table

 

[W2R]

From what I have read, re-investing some of that income helps in keeping up with inflation (if that is a goal, which it may not be for you right now with SS on the way in a few years). I think it is ideal if I can spend less than my dividends, and re-invest the capital gains and interest.

Which I normally do, but then last year I went completely overboard....

 

[ejman]

I know most here look at total return investing, and up until now, that has been my focus. Now that I am retired, I am looking at the accounts in more detail, and it seems that just income, which was over 5% last year, could support us (actually 30 % more income than we budget!). I assume this is all factored in to the Trinity study and FireCalc, but it is a bit of an eyeopener. I know things change over time, and in a big down market the income could go down a lot, and I know you need to account for future inflation, but still.... When SS kicks in in 5 years at FRA, our income needs will be cut in half.

Looks like we might leave a lot of money on the table

That's what I've been doing since ER end of 2002. Works for me. It's really beyond my comprehension how (apparently) some folks reinvest their taxable dividends and Cap Gains in their taxable accounts and then take out (sell shares) in the same accounts for their annual withdrawals. But to each his own...

 

[Animorph]

Capital gains are not income and should be reinvested rather than spent if you are an income investor. Of course I guess you can do pretty much whatever you want, and index fund capital gains can be small to zero.

Capital gains are simply a tax artifact of fund investing when the fund sells some shares of a stock it holds. No normal individual stock issues capital gains, they are not part of traditional dividend stock investing. I've had a couple of small-cap funds distribute about 30% of their share value as capital gains. Spending that is not sustainable.

Or just take your 5% and call yourself a total return investor...

 

[Terryjm51]

A year or so out to start this, All new to me


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[CardsFan]

Capital gains are not income and should be reinvested rather than spent if you are an income investor. Of course I guess you can do pretty much whatever you want, and index fund capital gains can be small to zero.

Capital gains are simply a tax artifact of fund investing when the fund sells some shares of a stock it holds. No normal individual stock issues capital gains, they are not part of traditional dividend stock investing. I've had a couple of small-cap funds distribute about 30% of their share value as capital gains. Spending that is not sustainable.

Or just take your 5% and call yourself a total return investor...

Ultimately, this is what we will do, I just thought it interesting the income could be livable.

FYI, Dividends and Interest are about 1/2 of this, so at FRA (with SS) it does become sustainable.

 

[CardsFan]

Which I normally do, but then last year I went completely overboard....

Well, odds are you won't buy your dream home EVERY year

 

[W2R]

Well, odds are you won't buy your dream home EVERY year

I hope not! My portfolio would be in ruins if I did, for sure.

 

[urn2bfree]

Capital gains are not income and should be reinvested rather than spent if you are an income investor.

If you have a high enough income, Capital Gains are considered income and generate a tax liability that has to be paid. You have to come up with that tax money from somewhere. I suppose you could just pay it out of dividends, but my spending is too high for dividends to fund all my expenses including taxes on Capital Gains.


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[scrabbler1]

From what I have read, re-investing some of that income helps in keeping up with inflation (if that is a goal, which it may not be for you right now with SS on the way in a few years). I think it is ideal if I can spend less than my dividends, and re-invest the capital gains and interest.

Which I normally do, but then last year I went completely overboard....

This has been my mindset and what I do in practice. Most of my dividends are used to cover my expenses (including taxes). But some of them, along with the far more erratic cap gain distributions ae reinvested, partly as an inflation guard.

This has been the plan for the last 8 years since I ERed and lack unfettered access to my IRA, my frozen company pension, and SS, the three items I call my "reinforcements." And it will remain my plan for the next 6+ years until the first of those reinforcements arrives. If at some point before then I have to tap into principal a little bit, no big deal. I won't go broke.

 

[Texas Proud]

That's what I've been doing since ER end of 2002. Works for me. It's really beyond my comprehension how (apparently) some folks reinvest their taxable dividends and Cap Gains in their taxable accounts and then take out (sell shares) in the same accounts for their annual withdrawals. But to each his own...

I will agree with that... I have all mine sent to my ST bond fund and use that fund to move money to the bank...

I try to sell as little as possible... but right now all spending money is coming out of my taxable account so I have to sell at times...

 

[Amethyst]

I got fed up with paying taxes on reinvested CG, and then trying to account for the already-paid-taxes-on-it-part when I sold shares. The mutual fund companies are unable to take previously-paid taxes into account when they compute your gains. So I figured we were paying some portion of our taxes twice. Now I just take the CG in cash and reinvest them somewhere else...or spend them, as we have had a lot of expenses in the past five years.

Nobody told us about this nonsense when we started investing....it was all, "Oh, buy a no-load mutual fund, and be sure to send them a check every month, it's called dollar cost averaging!"

 

[Montecfo]

Couple of side notes

1. When people talk about living on their dividends/Interest, I assume you mean those from your taxable accounts? I have less than a third of assets in taxable right now, so this is not really possible. Nor do I stretch for yield to try to.

2. The idea of spending capital gains being the same as invading your capital does not make sense to me.

Your return from an equity investment has two elements: dividends and capital gain/loss.

So so if you have a stock that grows 2% and in addition pays a 3% dividend in a year, you have a 5% return. If you spend the dividend and half the gain (total 4%) you still have grown your capital by 1%. That should be fine.

What you would want to avoid if possible is drawing 6%, which would reduce your capital below the original investment.

Further, if dividend is 3% and you suffered a 2% decline in value of the stock, you have a total return of 1%. If you draw 3% to spend, you are reducing capital invested, despite the fact you are only "spending the dividends".

I think when people try to "live on the dividends" there is a tendency to want to overreach for yield. That has been fine these last few years, but you are putting yourself in a risky position if rates ever start to rise again.

Just some thoughts.

Good Investing!

 

[scrabbler1]

Just to add to my earlier comment: When I was putting together my ER plan back in 2007-08, the part about living off dividends from my taxable account included two main parts. One was the number of shares in each fund and the other was the monthly dividends per share in each fund. The actual price per share and, by extension, the market value of each fund from day to day, didn't matter.


Cap gain distributions and any other reinvestments of excess dividends give me more shares in a given fund which will boost, albeit slightly, my monthly dividend in that (bond) fund, assuming the monthly dividend per share remains stable. The only time the price per share mattered a lot is when I made my huge initial purchase into one bond fund (back in 2008) which supplies me with most of my dividend income. Thankfully, the markets were crashing that year so the price per share dropped about 25% so I was able to buy an extra 25% more shares than I had planned to. Those shares generate extra monthly income although the monthly dividend per share in that fund has dropped gradually over the years. The added shares have roughly offset the drop in monthly dividends per share. But the quarterly dividends per share in my stock fund have risen which has been helpful.

 

[Danmar]

We have been living off divs (and pension) since ER 10 years ago. All in taxable accounts with individual equities. Portfolio is up a fair bit over this period and at some point will need to spend some of that appreciation or resign ourselves to leaving a large legacy. Current yield about 3.95%. Nice not to have to pay too much attention to the stock market. Had only one immaterial div cut in 2008/2009. Since then they have increased by about 80% (CAGR about 9%). Well ahead of inflation.

I think there is general agreement amongst investment professionals that a total return approach is optimal, although there are many who embrace an income approach in retirement. Usual reasons cited include convenience, consistency, and often a sense that divs are in some way more reliable than earnings. But this is unlikely.

 

[timemoveson]

Working towards exactly same approach as Danmar. The goal is to never touch the principle and completely avoid taking capital gains or other draw-downs unless I choose to make them for strategic reasons (e.g., giving some away to kids, etc.). I also want to avoid the scarcity mentality that results from seeing principle decline abruptly or be hit by major sequence of returns risk. I will be watching carefully but caring little for the day to day movements, and adjusting the portfolio as needed to continue to meet the strategy.

A large enough portfolio yielding 4% overall drives this. Composite of dividend and fixed income returns. It is achievable even in this high value/low rate environment with careful construction. History shows it will be easier at other times. And, of course it's not automatic. I realise that you have to have the capital in the first place, and that requires real saving and avoiding mistakes.

It is very liberating to have a strategy that does not rely on safe withdrawal rate estimates and total return/sequence of return outcomes. I'm fortunate, but I'm also educating others on this approach while they still have time to steer their course. It seems to resonate well. I'm learning how to manage the risks associated with it now, with the portfolio operating at scale and before formal ER.

Wife totally on board and understands this as well as I do now. I think this is really important so you have the right support system and backup plan ready in case needed.

 

[HFWR]

Since about 95% of my stash is in an IRA, the distinction between cap gains, dividends, and interest is moot, at least for tax purposes.

I reserve the right to adapt to circumstances, but for now it's 4% WR, about half of which is dividends/interest. I could tighten my belt if necessary, and just withdraw an amount equal to the "income". Would dampen any plans for "extravagance", but would be quite doable if I substituted vacation for staycation.

For SHTF scenarios, I could "survive" on SS and pension, but that would not be pleasant...

 

[ESRwannabe]

My investing strategy is built around generating income.

A few rules of thumb. If the income is from dividends then you can spend it all. If it comes from interest you should re-invest enough to offset inflation and maybe more to grow income a little, if you want.

There are many ways to invest for cash flow. Dividend focused ETFs, CEFs of all types, various ETNs, individual common/preffered stocks, MLPs, equity/mortgage REITs, BDCs, and bonds of all kinds.

You can invest for total return and still build your portfolio for cash flow.

 

[W2R]

When people talk about living on their dividends/Interest, I assume you mean those from your taxable accounts? I have less than a third of assets in taxable right now, so this is not really possible. Nor do I stretch for yield to try to.

Most of my accounts are taxable, but in my case I mean dividends (not interest or capital gains) over all my accounts. Ultimately I am a total return investor, I suppose. My assets are mostly in three of Vanguard's broadest index funds, VTSAX, VFWAX, and VBTLX. So, I don't think anyone could accuse me of "stretching for yield". Also I have 30% Wellesley, VWIAX, as well as TSP's G Fund.

Living off my dividends is a sort of game that I play with myself, just to see if I can do it. I realize that I would be fine just taking 3.5% off the top and that was my original plan. However for the first six years of my retirement, up until last year, I was taking an average of 2.0% and felt more at ease spending that amount. That 2.0% was easily covered by dividends alone for each individual year.

But like I said, in my case this is a game of sorts and not a rigorous requirement for survival. Last year I was able to take advantage of the money I had saved by spending 2.0% instead of 3.5% for the previous 6 years of retirement, by buying my "dream home". This is something I had wanted all of my life and had never had. Now that I have bought that, I guess I eventually spent more my dividends (?) although I could have cancelled the dream house plans if necessary and would have been just fine without it. I just thought I wasn't spending enough, and it came on the market...

Had I spent the full 3.5% all those years, I don't think I would have been in as good a position to buy the house as I was. Also the bull market sure helped.


I don't know but would imagine that those who indulge in ultra-expensive international travel, might do a similar thing - - go for a few years with no trip, to afford the trip of a lifetime later on.

 

[ducky911]

One big surprise to me was when my income shrank as I retired my qualified dividends that where taxed at 15% are now taxed at ZERO. Taxable income below 75,000 dollars filing jointly is the limit on this zero tax. Unfortunately because I have rental properties profit I only get a portion of this. I am at a point where if I make one dollar more I'm not only taxed but also convert one dollar from zero to 15%.....This is another benefit of putting off SS.....For the next few years I am at an amazing place where my over all fed tax is 3.55%.

 

[RunningBum]

I got fed up with paying taxes on reinvested CG, and then trying to account for the already-paid-taxes-on-it-part when I sold shares. The mutual fund companies are unable to take previously-paid taxes into account when they compute your gains. So I figured we were paying some portion of our taxes twice. Now I just take the CG in cash and reinvest them somewhere else...or spend them, as we have had a lot of expenses in the past five years.

Nobody told us about this nonsense when we started investing....it was all, "Oh, buy a no-load mutual fund, and be sure to send them a check every month, it's called dollar cost averaging!"

Really? They weren't increasing your basis in the fund with reinvested CGs?

 

[athena53]

I agree with Runningbum; the brokerage reports your basis (what you paid for it PLUS any distributions already taxed) when you sell. Investors used to have to keep track of that but this way it's convenient for you and makes the IRS happy since the basis is less likely to be fudged.

 

[CardsFan]

Living off my dividends is a sort of game that I play with myself, just to see if I can do it. I realize that I would be fine just taking 3.5% off the top and that was my original plan. However for the first six years of my retirement, up until last year, I was taking an average of 2.0% and felt more at ease spending that amount. That 2.0% was easily covered by dividends alone for each individual year.

OP here. W2R's comment is really closer to what I was driving at. With 2/3 of our investments in tax deferred accounts we will make an effort to do Roth conversions, as opposed to spending from the deferred account.

 

[fritz]

I know most here look at total return investing, and up until now, that has been my focus. Now that I am retired, I am looking at the accounts in more detail, and it seems that just income, which was over 5% last year, could support us (actually 30 % more income than we budget!). I assume this is all factored in to the Trinity study and FireCalc, but it is a bit of an eyeopener. I know things change over time, and in a big down market the income could go down a lot, and I know you need to account for future inflation, but still.... When SS kicks in in 5 years at FRA, our income needs will be cut in half.

Looks like we might leave a lot of money on the table

That's what I've been doing since ER end of 2002. Works for me. It's really beyond my comprehension how (apparently) some folks reinvest their taxable dividends and Cap Gains in their taxable accounts and then take out (sell shares) in the same accounts for their annual withdrawals. But to each his own...

We've been living off taxable account dividends and occasionally LTCGs since we retired (retired at 58 - 7 years now). Also take divs (occasionally LTCGs) off Roth accounts as they don't count against income with Affordable Care Act. We both took social Security @ 62, but wife's is not used for base living expenses (as it goes away when one of us does). We lived off savings stash before then.

Have the quarterly Divs set up to transfer directly to our local bank. Take the year end realized LTCGs occasionally to replenish our cash account at Ally (normally reinvest). Haven't had to sell anything during the last seven years (for cars, daughter's wedding, etc) working it this way. Taxable is less than a third of our investments, and look to do Roth conversions between 65-70 to minimize IRA taxes when RMDs kick in at 70.5. Affordable care act subsidy manipulation for another 1.5 years for wife.

 

[Huston55]

Fill 15% Bucket with Cap Gains instead of Roth Conversions?

Hopefully, this question is enough 'on point' for this thread. (Can't find this specific subject via a thread search.)

When structuring ER income strategies, the question of taking as much income as possible within the 15% tax bracket often arises. Given that most of what I've read about the effectiveness of Roth Conversions hinges on what future tax rates (uncertain) will be, it seems to me that capturing Cap Gains @ 0% tax within the 15% tax bracket (certain) is a better move. Of course this depends on the structure of your investments but, it seems it would work for many.

Thoughts?