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Retired Early; Interest - Dividends - Capital Gains use to pay annual expenses?
Old 08-01-2014, 01:49 PM   #1
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Retired Early; Interest - Dividends - Capital Gains use to pay annual expenses?

Hi. The dividends, interest and capital gains that I receive amount to approximately 53% of my annual retirement budget. Is it a good idea for me to have these dividends, interest and capital gains directed into the bank account that I use as my source for current retirement expenses?

Until recently, I was in the accumulation phase, so I always had dividends, interest, capital gains, etc. set up to be reinvested back into the account they came from.

Thanks for your insight.
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Old 08-01-2014, 01:52 PM   #2
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If you need the dividends and interest for making purchases, etc to live on, yes, that makes sense. If not, why not let them be re-invested and grow until such time as you need to tap an account?
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Old 08-01-2014, 02:01 PM   #3
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If you need the dividends and interest for making purchases, etc to live on, yes, that makes sense. If not, why not let them be re-invested and grow until such time as you need to tap an account?
Hi. Well, I have savings in an account that would cover about 1.5 to 2 years of annual retirement spending. So I don't need the money specifically from the dividends, interest, and capital gains. I just wasn't sure if there was a tax advantage, or some other advantage, to change it from the way that I currently have it set up.
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Old 08-01-2014, 02:04 PM   #4
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I actually split what I do with different types of investment income.

I have one big bond fund whose monthly dividends cover my expenses, sometimes with a little left over. That monthly dividend goes into my local bank's checking account from which I pay the bills. I have some smaller bond funds whose monthly dividends I reinvest. I also have a stock fund which pays dividends every quarter. Until earlier this year, I reinvested that back into the stock fund but now I take it as cash. With the bond fund's monthly dividends a little lower now than they were a few years ago, this quarterly stock fund dividend can help me cover any expenses such as when I had a mild spending spree back in the winter. If I don't have any excess expenses, I now reinest this into the big bond fund (instead of the stock fund) as a mild rebalancing measure.

The big bond fund sometimes has cap gain distributions. They are often large but always erratic and unpredictable. I don't wish to rely on those to cover my expenses so I simply reinvest them back into the bond fund. Fidelity is good that I can split my reinvestment options that way - take monthly dividends as cash while reinvesting the cap gains. At least the added shares I buy with all of these excesses partly offsets the declining dividends per share the monthly dividends have been giving me the last few years.
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Old 08-01-2014, 02:45 PM   #5
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I think it's more a matter of what you find convenient. I take them as cash now. For me:

Advantages of reinvesting:
You get back in at the same price you "sold" at. No net change other than taxes.
Might save you the work of having to reinvest the cash manually.
Might not unbalance your AA.

Advantages of taking dividends as cash:
Avoids some sales for cash if you are withdrawing.
Avoids the possibility of an automatic buy creating a tax wash sale.
Allows you to rebalance by buying something different.
Avoids creating short-term shares and many small lots for taxes.

I can use the cash and I'm active enough with tax loss harvesting that avoiding the possibility of an unexpected wash sale is nice. But you might go either way for reasons of your own.
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Old 08-01-2014, 05:11 PM   #6
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We started taking dividends and capital gains in cash when I decided to ER and we use them to fill a good bit of the gap between DH's SS and pension and our expenses. Just seems simpler to me than having to decide where to take money from for expenses.
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Old 08-01-2014, 05:35 PM   #7
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I would roll it into you liquid checking account for two reasons. Both are tax related. First of all as a new retiree you may or may not have correctly understood your tax liability or you could get some surprises in December. Do not underestimate how different your tax situation may look now. It is best to be prepared for these potential surprises with extra cash. Second is the tax implications of your cost basis. When you roll new cash in then it affects your cost basis and if you need to take it out, you may incur a capital gain or loss. This of course depends on how you or your fund company calculate capital gains. As Animorph stated more concisely, Avoids creating short-term shares and many small lots for taxes.
So I would just keep it simple. If you end up with too much excess cash, then use it to rebalance.
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Old 08-01-2014, 08:09 PM   #8
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Quote:
Originally Posted by nico08 View Post
Hi. The dividends, interest and capital gains that I receive amount to approximately 53% of my annual retirement budget. Is it a good idea for me to have these dividends, interest and capital gains directed into the bank account that I use as my source for current retirement expenses?

Until recently, I was in the accumulation phase, so I always had dividends, interest, capital gains, etc. set up to be reinvested back into the account they came from.

Thanks for your insight.
Numerous threads on this topic. I do exactly what you did and propose to do. While I was working I didn't need the money due to cash flow from my job so I reinvested all. Once I retired I need the money to pay for living expenses so I took taxable account dividends and capital gain distributions in cash and made a commensurate reduction of the amount of our monthly "paycheck" (transfer from investment cash account to our bank account that we pay bills from). A bonus is that it made our taxes a bit simpler.
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Old 08-02-2014, 05:39 AM   #9
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i like to have my income stream safe,secure and consistant, keyword being consistant so i don't plan around paying bills via dividends directly. they can be cut or suspended just at the worst of times leaving you with no choice but to sell equities at a loss to fill short falls.

i prefer to let dividends get reinvested and down the road convert to spending money. compounding of my money over time is what is important. taking that money back in hand loses the compounding ability of that money over time.

i much prefer to create a withdrawal rate from my portfolio to match whatever dividends i want to have taken out.
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