Withdrawal rate even in bad years?

[NW-Bound]

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Originally Posted by mathjak107 actually study after study shows that cash cushions are a mental issue and not a financial one . while on the surface it looks like keeping the cash for the downturns is the better deal the drag and weight of a cash buffer in the up years actually cuts the cushion of gains in the more volatile stuff . the end result is there is little difference spending equally from the pie vs spending down cash buffers . there is a slight edge though to reinvesting dividends to grow while utilizing the lower return cash . in effect by spending dividends you have less and less in equity's compounding for you at the start of each quarter then had the dividends been reinvested .

I've always had quite a bit in cash, but it's really extra safe fixed income like I-bonds and a stable value fund in 401k. I have been thinking about moving them elsewhere for a bit better return. With lower return in the years ahead, every little bit is going to help.

[UpAnchor]

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Originally Posted by Lawrence of Suburbia How many here can just live off dividends in retirement?

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Originally Posted by nun Depends on the portfolio and the income requirements....I reinvest all dividends and plan for a negative glide path.

I'd guess quite a few probably "can". But from perusing this forum over the last few years, I'm of the suspicion that no small percentage of those follow-or plan to follow-a total return approach. Yet were I to go into retirement with with a large enough PF (not likely), I'd be tempted to try the dividend approach. And I say that fully understanding the fungible nature of money and that it all comes out the same in the end. :-)

[hnzw_rui]

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Originally Posted by BBQ-Nut I could also, but RMDs will kick in so, not much of choice there as DW and I don't expect to have completely converted to Roths.

You can always do an in-kind transfer from IRA to taxable if you don't want to sell.

[Danmar]

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Originally Posted by UpAnchor I'd guess quite a few probably "can". But from perusing this forum over the last few years, I'm of the suspicion that no small percentage of those follow-or plan to follow-a total return approach. Yet were I to go into retirement with with a large enough PF (not likely), I'd be tempted to try the dividend approach. And I say that fully understanding the fungible nature of money and that it all comes out the same in the end. :-)

I am very concerned about total return. It is just that my portfolio generates a dividend yield that approximates a reasonable SWR. Total return has been a little over 10% CAGR since I retired in 2006 while divs have yielded from3.25% to about 4.0%. Just seems easier to spend the divs rather than reinvesting and liquidating.

[W2R]

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Originally Posted by Danmar I am very concerned about total return. It is just that my portfolio generates a dividend yield that approximates a reasonable SWR. Total return has been a little over 10% CAGR since I retired in 2006 while divs have yielded from3.25% to about 4.0%. Just seems easier to spend the divs rather than reinvesting and liquidating.

+1

I invest like a total return investor. But, my dividends are enough to cover my spending for now and I have them sent to a money market account at Vanguard. So, it's easy to just get my spending money from there.

[petershk]

I wonder if it depends on your withdrawal strategy? I'm close to ER so been thinking about this a lot.

My written plan is this:
+Maintain 60/40 asset allocation.
+Withdraw once a year simultaneously rebalancing.
+Keep one year inflation adjusted cash buffer that I "fill" at that same time.
+evaluate quarterly but only rebalance if more than 5% drift

From tracking... My WR would have been around 3-3.5% depending on market and dividend payout would be around 2.8% right now (including cash drag).

Note I'm currently moving TO the 60/40 + cash buffer so real numbers might look different by then ).

So... If I switched to dividend spending would I spend less or just invest differently . Or maybe if dividends covered 100% I'd suddenly think of myself as a dividend spender? Dunno.

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[ejman]

Could the total return folks clarify something for me please? Do you reinvest your dividends and CG in your taxable accounts and then afterwards sell the shares that you need to for your living expenses? I've been trying to wrap my head around that and having a great deal of difficulty.

[petershk]

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Originally Posted by ejman Could the total return folks clarify something for me please? Do you reinvest your dividends and CG in your taxable accounts and then afterwards sell the shares that you need to for your living expenses? I've been trying to wrap my head around that and having a great deal of difficulty.

Here's what I plan to do.
Reinvest all dividends and sell annually to rebalance.

So lets say I'm 60/40 vti/bnd... Hypothetically to make it simple .

On Jan 1st or whenever I look at my spending balance. My planned annual spend is 120k...

So lets say in the last year I spent 100 and inflation adjusts it to 125k.

That means I'd need 105k to get back to "full" for next year's budget.

Let's say the portfolio drifted to 65/35... Then I would sell VTI to get that 105k.

If that gets me to 63/37, then I'd sell an addition 3% (at the same time) and reinvest it into bnd.

Let's say the drift is only 61/39 and selling 1% only gets me to 80k.. then I'd sell equally from both beyond that to get to 60/40 again.

Does that make sense?

I thought about doing dividends and if I did that I'd divert the dividends into my "spending" account and use that. If it runs short then I'd sell to rebalance... If it's too much I'd plow it back in at the rebalance period.

The reason I decided to not plan on doing this is that because of my personality it'll tempt me to fiddle with asset allocation too much

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[audreyh1]

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Originally Posted by ejman Could the total return folks clarify something for me please? Do you reinvest your dividends and CG in your taxable accounts and then afterwards sell the shares that you need to for your living expenses? I've been trying to wrap my head around that and having a great deal of difficulty.

No - don't reinvest, but let them build up as cash in the retirement account. Most of them are paid out in December, and in January, I take my withdrawal. That can usually be taken from the accumulated distributions, if not, sell some funds. Rebalance what's remaining, then I'm done for the year.

[ejman]

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Originally Posted by audreyh1 No - don't reinvest, but let them build up as cash in the retirement account. Most of them are paid out in December, and in January, I take my withdrawal. That can usually be taken from the accumulated distributions, if not, sell some funds. Rebalance what's remaining, then I'm done for the year.

Yes, what you do makes sense. But apparently some, as in the prior post go ahead and reinvest dividends in the taxable accounts and then sell shares latter on. For the life of me I can't figure out why and I'm trying to understand what it is I'm missing.

[NW-Bound]

I have been spending more than the dividend I received, even though I get a bit more than the S&P (I am no indexer). On top of that, quite a bit of the dividend is in the tax-deferred accounts which I have not touched. That means I have been spending down my after-tax account. So, what to reinvest? I have been spending down principal big time there.

And about cap gains in after-tax accounts, I have been "washing" them to make use of the 0% tax on cap gains each year whenever I could. Not much cap gains left there.

Back on spending money in bad years, a bad year in the market is still a good year in life when I still have decent health. When the really bad years come later, all that money "won't a minute buy", to borrow from a song by the band Kansas.

[hnzw_rui]

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Originally Posted by ejman Yes, what you do makes sense. But apparently some, as in the prior post go ahead and reinvest dividends in the taxable accounts and then sell shares latter on. For the life of me I can't figure out why and I'm trying to understand what it is I'm missing.

Possibly avoiding cash drag. When markets are going up, it's possible reinvesting dividends might buy you 20 shares for $1K total while at end of year, you might only need to sell 15 shares to meet $1K of expenses.

Of course, you do need to be mindful of tax consequences. Not so much of an issue for those in the 15% or lower bracket.

[bmcgonig]

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Originally Posted by NW-Bound Back on spending money in bad years, a bad year in the market is still a good year in life when I still have decent health. When the really bad years come later, all that money "won't a minute buy", to borrow from a song by the band Kansas.

+1


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[ETFs_Rule]

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Originally Posted by Independent That surprised me, ******** and FireCalc both show 1969 as a really tough year. So I looked at the worksheet. I noticed that the withdrawal column started at $4,000 in 1969, and grew to $9,023 in 1989. When I go to BLS.com, I get a CPI in 1969 of 36.7, growing to 124.0 in 1989. (Both are annual averages) If I apply the CPI growth to the $4,000 initial withdrawal, I get $13,515 by 1989. I don't see any assumptions listed for the worksheet. Were withdrawals supposed to go up with the CPI, or by some other factor?

Just how risky are stocks?
It says "withdrawals pegged to inflation".

[marko]

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Originally Posted by ejman Could the total return folks clarify something for me please? Do you reinvest your dividends and CG in your taxable accounts and then afterwards sell the shares that you need to for your living expenses? I've been trying to wrap my head around that and having a great deal of difficulty.

I believe true total investors do as you say: reinvest dividends and CGs and then sell shares as needed.

Many people sell shares only after their non-invested dividends are gone but that's more of a hybrid approach.

The opposite are people who set aside their dividends and CGs and (try to) live off of that without touching their equities.

[audreyh1]

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Originally Posted by ejman Yes, what you do makes sense. But apparently some, as in the prior post go ahead and reinvest dividends in the taxable accounts and then sell shares latter on. For the life of me I can't figure out why and I'm trying to understand what it is I'm missing.

I don't understand that either as it causes higher taxes.

Since most distributions are paid out at the end of the year and withdrawal is at the beginning of the next year, the cash isn't idle for long.

In taxable accounts, I pay attention to the tax consequences of rebalancing and reinvesting.

[marko]

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Originally Posted by audreyh1 I don't understand that either as it causes higher taxes.

I think the idea is that as you reinvest in more shares you are making the pie bigger. Instead of 5000 shares you suddenly have 5250 shares which, in a good market will make you even more money (and more dividends).

This might work if you're in the accumulation phase or don't need all your dividends to live on but the key is "a good market", so short term can be a loser if you need the cash sooner than later. Taxes can be another factor as you do end up paying extra (but not quite twice) as those dividends grow and generate even more income.

As Einstein said "the most powerful thing in the world is compounding interest"

[petershk]

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Originally Posted by audreyh1 I don't understand that either as it causes higher taxes. Since most distributions are paid out at the end of the year and withdrawal is at the beginning of the next year, the cash isn't idle for long. In taxable accounts, I pay attention to the tax consequences of rebalancing and reinvesting.

Honestly I hadn't thought of that as I've been just accumulating .

I know all the calculators assume reinvestment and annual rebalance/distribution so I just kind of assumed I'd do that... but the tax consequences timed with the heavy year end payouts during withdrawal phase makes tons of sense to me so I think you're right

You may have just saved me some money when I retire. thanks =

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[audreyh1]

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Originally Posted by marko I think the idea is that as you reinvest in more shares you are making the pie bigger. Instead of 5000 shares you suddenly have 5250 shares which, in a good market will make you even more money (and more dividends). This might work if you're in the accumulation phase or don't need all your dividends to live on but the key is "a good market", so short term can be a loser if you need the cash sooner than later. Taxes can be another factor as you do end up paying extra (but not quite twice) as those dividends grow and generate even more income. As Einstein said "the most powerful thing in the world is compounding interest"

If one wasn't rebalancing every January, and taking a cash withdrawal every January, that might make sense. In practical terms it's a lot easier, and more tax efficient, not to reinvest until rebalancing time if you withdraw and rebalance in Jan shortly after distributions are paid out.

If you are certain you aren't going to trim from a given fund during rebalancing - it's lagged for the year, for example - then reinvesting the dividends in the specific fund instead of waiting to rebalance is fine.

In most years (not always) I find that funds that have grown the most often pay out the highest distributions, so taking them in cash means less taxable rebalancing after withdrawal in January. But this is not always true, and in down years I have let the laggard funds reinvest distributions because I know I'm just going to be adding that and more back in anyway. But I don't really know what the situation is going to be until pretty late in the year.

[audreyh1]

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Originally Posted by petershk Honestly I hadn't thought of that as I've been just accumulating . I know all the calculators assume reinvestment and annual rebalance/distribution so I just kind of assumed I'd do that... but the tax consequences timed with the heavy year end payouts during withdrawal phase makes tons of sense to me so I think you're right You may have just saved me some money when I retire. thanks = Sent from my HTC One_M8 using Early Retirement Forum mobile app

Definitely my scenario is for someone withdrawing from taxable accounts.

But another practical issue in taxable accounts, is that when a fund pays out a distribution, you owe taxes on that distribution. If you automatically reinvest the whole thing, then you have to take the money out somewhere else to pay the taxes, or you have to sell some shares from the fund later to pay the taxes, generating yet another taxable event.