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Reinvesting vs. collecting the income
Old 10-08-2014, 06:48 PM   #1
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Reinvesting vs. collecting the income

I am sure there is a posting here somewhere regarding my question, so please feel free to send me the link.

I am retired and would like opinions regarding reinvesting your gains vs. taking the income.

My thoughts in no particular order are that no matter which conclusion you come to they are both taxed and if you reinvest you will need a bigger bucket #1 for the monthly expenses etc.

Is this one of those decisions where you really can't pick a "loser"? (Except of course if you know which way the market is headed)

I am sure those of you reading have made the decision, how did you come to that conclusion?

Thanks!
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Old 10-08-2014, 06:55 PM   #2
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The dividends in my deferred accounts are reinvested, because I am younger than 59 1/2 and want to avoid penalties.

All the dividends in my taxable accounts are automatically paid into my savings account and go towards my living expenses, as my withdrawal rate is higher than the amount of dividends in taxable accounts, so I will still need to sell some equities from time to time.

In other words, I cannot live on the income from dividends in my taxable accounts alone, so all the dividends in those accounts are withdrawn and not reinvested.
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Old 10-08-2014, 07:20 PM   #3
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When I looked at 2013 results for my taxable accounts, I realized that the dividend and capital gain distributions were within a few hundred dollars of the amount I planned on withdrawing each year.

So when I RE'd a few months back, I set all of my taxable accounts to distribute dividends and CGD's to my savings account.

I need to withdraw that amount anyway, and count those distributions towards taxes as well, so I figured I'd do it that way and if it proves to hold true each year then I consider myself preserving my corpus.

Meanwhile, my tIRA will continue to grow untouched.
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Old 10-08-2014, 07:33 PM   #4
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I'm in a similar situation with my taxable account dividends, capital gains and pension covering most of my expenses. I'm not touching my IRA until I need to, I'll take SS before that. I'm turning 62 this month and am trying to decide what to do about early SS or wait.
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Old 10-08-2014, 07:36 PM   #5
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Major Tom, yea, because I am 62 I don't have the same situation you do. You do bring up a good point though, I can live off the CG's and dividends, I just don't know if I want a bigger bucket for monthly expenses all year or just take the money as it come in......
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Old 10-08-2014, 08:50 PM   #6
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KB, when I was deciding whether to take the SS @ 62 or not I remembered for every year you wait it is like getting a guaranteed 8% return. Not a lot of places where you can get that. I don't know if that will help you but it did me.....
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Old 10-08-2014, 09:17 PM   #7
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That is an excellent reason to wait, Kimo. I know I should wait, it's just tempting to think about starting to collect sooner.
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Old 10-08-2014, 09:46 PM   #8
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I went as far as actually applying for SS and after it was approved I went down and cancelled my application.......it doesn't get any closer than that, to say it was tempting is really an understatement.....I so understand your point!!
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Old 10-08-2014, 09:49 PM   #9
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Most of the dividends in my taxable account come from a single bond fund which barely covers my expenses. But to enhance my cash flow a little better, starting this year I have been taking the quarterly dividends from a stock fund in cash instead of reinvesting them. Any excess cash from this new influx of cash I invest into the bond fund, so the net effect is a mild rebalancing from stocks into bonds. I have two other, smaller bond fund whose monthly dividends get reinvested automatically.

There is no difference from a tax perspective by doing this switch. I had to make some mild adjustments to the stock fund spreadsheet because I was not reinvesting in there any more.

In my IRA, I have a stock fund and a bond fund, both of which reinvest all earnings. There, I do some rebalancing when the AA goes out of my desired range. No tax consequences from either the earnings or the transfers, of course.
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Old 10-08-2014, 11:12 PM   #10
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IMHO- The main reason for dividend reinvesting is to force that $ to w#rk rather than just spending it. An alternative might be to allow accumulation of those dividends to be reinvested at a time of your choosing (e.g. for market timing, adjusting global AA, or covering sudden unexpected cash flow needs). Div reinvesting might be more relevant to young-person's goal of long-term capital appreciation. In retirement, agree with others that using those dividends for living expenses may make more sense in many cases. With some brokers, div reinvesting only to frequently sell some shares for cash can waste $ in transaction fees.
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Old 10-09-2014, 07:02 AM   #11
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All my dividends go into a savings account which I draw from quarterly to cover expenses. I reinvest CGs.

I like the idea of having the dividends waiting there as savings instead of having to decide what equity and when to sell...invariably the market will be at the wrong time.
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Old 10-09-2014, 09:08 AM   #12
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I am siding with taking the cash, my question to marko is why to you reinvest the CGs?
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Old 10-09-2014, 10:03 AM   #13
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I am siding with taking the cash, my question to marko is why to you reinvest the CGs?
I reinvest the CGs because 1) I don't need the cash 2) I view it as an opportunity to build up the fund involved and 3) it is a lumpy revenue in the sense that some years are better/worse than others so I can't count on it as a reliable 'income'...as such I don't want to factor it in.

The day may come when I also dump my CGs into the savings for withdrawal, but I'm not there yet.
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Old 10-09-2014, 10:20 AM   #14
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Very informed answer, thank you. I am beginning to think there is no "right" or "wrong" answer to this question.

I am inclined to think those of us who like Santa to leave presents would also like CG's as cash . Please, just a joke, many of you who like Santa have everything reinvested.....

Again, thanks!
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Old 10-09-2014, 10:54 AM   #15
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Very informed answer, thank you. I am beginning to think there is no "right" or "wrong" answer to this question.

Again, thanks!
"There is no right or wrong answer" is a very common theme on this forum on a wide range of issues.

Everyone has a different need, background, resource, history etc etc etc; it all comes down to making some informed decisions and a place like ER.org has certainly helped me figure a lot of stuff out!
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Old 10-09-2014, 11:58 AM   #16
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Both DH & I are in the MRD phase of life. We reinvest all distributions in our IRA's and don't withdraw until December unless need be. I want those distributions to work for us over the year.

This MRD withdrawal can be automatic at Vanguard with Vanguard funds/ETFs. I own O in one account subject to MRDs so must sell/transfer in kind in December.
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Old 10-09-2014, 12:21 PM   #17
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Yes, but is that 8% quote based on your continuing to work? If you quit @ 60 and don't work again, would you get that much more if you waited more years?


Quote:
Originally Posted by Kimo View Post
KB, when I was deciding whether to take the SS @ 62 or not I remembered for every year you wait it is like getting a guaranteed 8% return. Not a lot of places where you can get that. I don't know if that will help you but it did me.....
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Old 10-09-2014, 12:36 PM   #18
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Quote:
Originally Posted by Major Tom View Post
The dividends in my deferred accounts are reinvested, because I am younger than 59 1/2 and want to avoid penalties.

All the dividends in my taxable accounts are automatically paid into my savings account and go towards my living expenses, as my withdrawal rate is higher than the amount of dividends in taxable accounts, so I will still need to sell some equities from time to time.

In other words, I cannot live on the income from dividends in my taxable accounts alone, so all the dividends in those accounts are withdrawn and not reinvested.
+1, this is exactly how I run my portfolio, too. Taxable accounts pay dividends into my cash pile. Deferred accounts reinvest automatically.

In practice, I look at my taxable account like this: There's about $320,000 in it. I spend $32k/yr. Without any real growth, I can spend the taxable account for 10 years and poof, it's gone.

In reality, it will grow and spit out dividends each year, so I'll spend the dividends and sell a portion of the principal. My goal is to keep it simple and keep taxable income as low as possible. Spending divs and CGs is simple. I can pick the least appreciated shares to harvest from principal.
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Old 10-09-2014, 01:36 PM   #19
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Yes, but is that 8% quote based on your continuing to work? If you quit @ 60 and don't work again, would you get that much more if you waited more years?
The 8% doesn't change according to the IRS office I was at.
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Old 10-09-2014, 01:39 PM   #20
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I reinvest the CGs because 1) I don't need the cash 2) I view it as an opportunity to build up the fund involved and 3) it is a lumpy revenue in the sense that some years are better/worse than others so I can't count on it as a reliable 'income'...as such I don't want to factor it in.

The day may come when I also dump my CGs into the savings for withdrawal, but I'm not there yet.
+1. I would have answered the exact same way for the same reasons. I view the extra shares from reinvested CGs a bonus which will over time generate a few more dollars of monthly dividends, especially with my big bond fund generating a smaller number of cents per share in monthly dividends.
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