Withdrawal rate even in bad years?

[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]

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]

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


Sent from my iPad using Early Retirement Forum

 

[ETFs_Rule]

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]

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]

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]

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]

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 =

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[audreyh1]

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]

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.

 

[bingybear]

Than you for your suggestion as well as others who responded. The one wrinkle is that my wife and I will be shopping for a healthcare plan on our state's ACA healthcare exchange. In order to maximize subsidies, we will delay ROTH conversions until age 65 when MEdicare kicks in and then convert as much as we can.

your 800k in muni's won't help on ACA subsidies. But maybe small enough not to stop them.
I would still look at roth conversions... do the numbers long term. You may find the marginal tax rate high at RMD time and get to pay more toward your medicare.
Even if you keep your income just below the cliff (get a good chunk of the subsidy, you may be able to convert a little bit.
I still have to work out my numbers.

 

[petershk]

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.

Yup. And most of my accounts are taxable so that's totally applicable. So lets say I have around 80-100k in qualifies dividends a year and a burn rate of around 120k... Since around half of those dividends come in Q4 it probably makes sense to not reinvest them and instead lump it all together holding the dividends as cash throughout the year.

Note I still see that separate as allocating the annual budget once a year.

I guess if I wanted to get complex I could reinvest dividends early in the year but not later... But that would violate the simplicity I suppose . I haven't looked at the historical long term impact of always reinvesting dividends vs. Holding as cash and allocating vs. Taxes. My gut is holding as cash and minimizing taxes wins.

H

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[ejman]

Yup. And most of my accounts are taxable so that's totally applicable. So lets say I have around 80-100k in qualifies dividends a year and a burn rate of around 120k... Since around half of those dividends come in Q4 it probably makes sense to not reinvest them and instead lump it all together holding the dividends as cash throughout the year.

Note I still see that separate as allocating the annual budget once a year.

I guess if I wanted to get complex I could reinvest dividends early in the year but not later... But that would violate the simplicity I suppose . I haven't looked at the historical long term impact of always reinvesting dividends vs. Holding as cash and allocating vs. Taxes. My gut is holding as cash and minimizing taxes wins.

H

Sent from my HTC One_M8 using Early Retirement Forum mobile app

Good, the world of dividend reinvestment for taxable accounts is back in a place that makes sense to me. Feel better.

 

[mathjak107]

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"

in reality the number of shares from reinvesting dividends really does not give you more than you had dollar wise assuming the same total return vs no dividend ..

all profits are on the amount of dollars invested not number of shares that make up those dollars .

if you have 100k invested and get a 10% return you have a 110k .

if you have 100k invested and get a 10% dividend then you have 90k invested the next morning at the open to be compounded on by markets over the new quarter and a 10k dividend .

if you do not reinvest the 10k then all you have compounding at the ring of the bell is 90k . if your investment goes up 10% it is on only the 90k you started with not 100k .

if you reinvest the 10k you have your original 100k being compounded on by the markets at the ring of the bell for the next quarter . you have the same 10% gain on 100k as before .

folks get confused here because they have more shares but number of shares does not matter . all that counts is the dollars being compounded on at the ring of the bell kicking off the next quarter .

exchange computers have to reduce the bids automatically down to offset the dividend giving you the same dollars you had at the close prior . . your share price plus dividend = just what you had prior the reduction and payout .,

in the end total return is the same regardless of how many shares if the amount in dollars compounded on and total returns are the same .

a 10% total return does not care if it is 10% capital appreciation or 5% dividends reinvested and 5% capital appreciation .

at the end of the day all that counts is i started with x in value and ended with y in value .

 

[papadad111]

your 800k in muni's won't help on ACA subsidies. But maybe small enough not to stop them.

I would still look at roth conversions... do the numbers long term. You may find the marginal tax rate high at RMD time and get to pay more toward your medicare.

Even if you keep your income just below the cliff (get a good chunk of the subsidy, you may be able to convert a little bit.

I still have to work out my numbers.

I would continue to do Roth conversions as much as possible. Get that money working in a Roth tax free as fast as you can especially if looking over the long horizon. May even be better tax savings long term than the subsidies you now receive.

Also, Don't count on ACA subsidies being around as is, that is, without some form of total assets means testing in the future or mechanism to limit subsidies beyond current MAGI test. The health insurance companies are already screaming for higher rates and maybe this increase will be shared by government and consumer alike. Not to mention the "optics" of millionaires receiving subsidies ... Someone in Washington will see the opportunity to close that loophole and start screaming about it sooner or later, so for planning I would do some scenario planning and simulation versus just assuming status quo. Best to Take your plan year by year - as we have seen rules can change overnight - not dissimilar to what happened to the file and suspend social security rule change.

 

[petershk]

at the end of the day all that counts is i started with x in value and ended with y in value .

This is exactly what I thought and why I just DRIP everything.

But in withdrawal mode the tax impact makes a difference.

If company A pays a dividend and that 100k becomes 90k with a 10k dividend, I get hit with taxes on 10k. If they buy back shares or do whatever else, I dont.

Then at the end of the year if I sell shares in company A to rebalance and fill my spending pool, that is also a tax event. If I didn't buy back the shares and I just have the cash as spending and it's enough to fill the budget tank, it's not.

So the question is... Is the accumulation on the 10k between the time of reinvestment and the time of future sale to rebalance/withdraw greater than the tax cost of two events vs. one?

It seems like a big factor there is how long ago the dividend reinvestment took place. Since many take place at end of year.. if that 10k payout hits Dec 15th, I reinvest, then I sell on Jan 2nd, it probably is tax wise a mistake, if it pays February 3rd, it probably makes sense to reinvest.

I haven't run actual scenarios to work it out but I think that's the idea?


Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[hnzw_rui]

So the question is... Is the accumulation on the 10k between the time of reinvestment and the time of future sale to rebalance/withdraw greater than the tax cost of two events vs. one?

It seems like a big factor there is how long ago the dividend reinvestment took place. Since many take place at end of year.. if that 10k payout hits Dec 15th, I reinvest, then I sell on Jan 2nd, it probably is tax wise a mistake, if it pays February 3rd, it probably makes sense to reinvest.

I haven't run actual scenarios to work it out but I think that's the idea?

Alas, this is really a case by case basis. A 55-year old married couple filing jointly with very little ordinary income would probably be in a different boat compared to a single person with $50K pension.

For those in the 15% or lower marginal tax bracket (and no state income tax on investments), as long as total ordinary income + qualified dividends + capital gains/losses do not exceed the 15% bracket, then effective tax cost of either scenario is $0. Same if the funds in question are in tax advantaged accounts.

 

[rayvt]

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.

Dividends are a form of capital distribution. Today the value of the company is X, the next day the value of the company is X - dividend distribution.

Reinvesting the dividends is reversing the dis-investment that the company just did to you.

Also, the shares that you sell later on aren't necessarily the same shares that you got with the reinvested dividends. You may reinvest the JNJ dividends back into JNJ and later on sell some IBM shares.