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Old 01-06-2020, 01:24 PM   #21
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Originally Posted by RunningBum View Post
No, it does help. Let me use some made up numbers for an example.

Suppose the OP has $1M, all invested in a fund that pays 5.5% dividends. This is $55,000, over the subsidy cliff.

OP sells off that investment, and invests the $1M in a fund that pays 2% dividends. The capital gain on the sale probably knocks him out of a subsidy for this year, but that's ok, we're restructuring it for the future.

The new fund generates $20,000 of dividends. Well under the subsidy cliff, but not nearly enough to live on. So he sells $35,000 of his investment. He's now got $55K to live on, and his MAGI is $20K + whatever small capital gain is realized on the sale. Should be well under the limit.

The assumption is that a fund that pays 3.5% less in dividends will hopefully grow 3.5% or more than the other fund paying more in dividends. Total return investing, and relying on some sales along with dividends to provide the same cash flow.

I doubt the OP's case is quite this simple and these are fabricated numbers, but it shows how one can reduce MAGI while keeping the same cash flow. Whether the OP can do anything like this, I don't know. I did something like this a couple years ago, selling off VTMAX (which gives unpredictable capital gains distributions) and replacing it with VTSAX, a more efficient index fund. I also kept some of it in a CD ladder to help with my cash flow
I know how it works. You didn't need to explain for my benefit. Just because I'm not a total return investor, doesn't mean I'm ignorant of the basic concepts behind it. I didn't get into it for the OP because of his initial incorrect assumptions, considering that the part I bolded above is so integral to making the total return approach work for this purpose.
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Old 01-06-2020, 02:11 PM   #22
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FWIW, I ran the numbers both ways for our own situation - ACA subsidy with shifting away from dividends and toward total return, and no ACA subsidy with emphasis on generating dividend income to pay the bills. In our case, the focus on dividends to pay the bills wound up being the better of the two options.

That said, you really need to do a fairly in-depth spreadsheet comparison and model both scenarios out - because whether the dividends or subsidy winds up being "better" in one specific year, the impact on your portfolio and overall net worth can only be determined over the course of your planned retirement which for many of us will span decades..and for us, burning down taxable assets to live off of (instead of generating dividends) was worse to the plan OVERALL - even though we would have gotten very considerably subsidies..
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Old 01-06-2020, 02:34 PM   #23
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I know how it works. You didn't need to explain for my benefit. Just because I'm not a total return investor, doesn't mean I'm ignorant of the basic concepts behind it. I didn't get into it for the OP because of his initial incorrect assumptions, considering that the part I bolded above is so integral to making the total return approach work for this purpose.
If you know how it works, why did you say restructuring won't help?

I was explaining it more for the OP's benefit than yours. When someone states something that is wrong, I feel like I should go into detail to refute it.
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Old 01-06-2020, 02:41 PM   #24
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I have been getting my insurance from the Exchange with a subsidy since 2014. There are two ways to reduce the income that is counted towards being subsidy eligible or not, a contribution to an IRA or a contribution to an HSA. All income counts towards subsidy eligibility and as far as I know only an IRA or HSA contribution reduces it for subsidy eligibility.
+1

My contribution to my HSA typically gets me to a MAGI with an ACA subsidy, plus then having HSA money growing tax free.

In past years I dog sat as a gig, and could contribute to an IRA, and as a self-employed person I could deduct 50% of health premiums up to earned income. So two-fold reduction of income for ACA purposes. Sweet!
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Old 01-06-2020, 03:13 PM   #25
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If you know how it works, why did you say restructuring won't help?

I was explaining it more for the OP's benefit than yours. When someone states something that is wrong, I feel like I should go into detail to refute it.
I said why in post #13. I'm not entirely wrong. It depends on factors that OP hasn't shared with us. If OP needs all of the $55K, while restructuring would still give $55K, it would whittle down the cash cow over the years. This may or may not be detrimental to the long-term health of the portfolio, especially in the event of a prolonged downturn. 24601NoMore gives a nice summation above.

My apologies if I sound impatient. I prefer not to debate things to death. I'm trying to be more succinct in my replies instead of posting novellas. You have to be careful when you're quoting someone and immediately say they're wrong, then start talking about OP in the 3rd person. It can make it appear directed at the person quoted.
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Old 01-06-2020, 04:13 PM   #26
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I said why in post #13. I'm not entirely wrong. It depends on factors that OP hasn't shared with us. If OP needs all of the $55K, while restructuring would still give $55K, it would whittle down the cash cow over the years. This may or may not be detrimental to the long-term health of the portfolio, especially in the event of a prolonged downturn. 24601NoMore gives a nice summation above.

My apologies if I sound impatient. I prefer not to debate things to death. I'm trying to be more succinct in my replies instead of posting novellas. You have to be careful when you're quoting someone and immediately say they're wrong, then start talking about OP in the 3rd person. It can make it appear directed at the person quoted.
OK, you're not entirely wrong, but you either don't understand total return as much as you think you do, or you are misrepresenting it.

The bolded part is a misrepresentation. It may whittle down your holdings, but your holdings might also grow. If there wasn't a good possibility of that happen, we "total return" folks would be investing in the high dividend payers because that would give the best total return. You and 24601 use the terms "whittle down" or "burning down", which is a very slanted view. I say we are eating some of the pie when we sell some holdings for cash flow, but the pie may be getting bigger while we are eating it.

I'll admit there is more risk in total return, because you are counting on growth. But with that risk is the possibility of greater returns. Investing in dividend payers is not without risk either.
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Old 01-06-2020, 04:27 PM   #27
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gwraighty: My thinking was: If LTCGs were somehow not included in MAGI, then I could simply sell stocks for an amount approximating the money I need to live on, rather than take dividends. Under that reasoning, I could have avoided the cliff, and gotten a subsidy. But I now have learned from this thread that such a strategy is a pipe dream. So I will go subsidy-less.

The good news is that in my area, a 58 year old guy's gold-level coverage is under $700/month, with 800 deductible and 5000 OOP max. Not a bad deal.

Every time I hit a losing strategy and have my pipe dream disappear into thin air, as now, I remember to be thankful that (a) I have many first-world problems; and (b) I have a forum like this to bounce ideas off of.

Thanks so much!
Dang. If you don't mind me asking in what area are you in? I just signed up for the ACA and the lowest Bronze plan for my wife and I is $1500/month.
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Old 01-06-2020, 04:35 PM   #28
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You and 24601 use the terms "whittle down" or "burning down", which is a very slanted view. I say we are eating some of the pie when we sell some holdings for cash flow, but the pie may be getting bigger while we are eating it.
True, but while it probably goes without saying - the pie may also be getting smaller while you are eating it..especially with equity valuations near all time highs in terms of CAPE 10, forward P/E and other measures. The likelihood that the next decade won't be like the last in terms of equity (and bond, unfortunately) returns is quite high, IMHO, and the odds of a near-term and possibly large drop in equity markets are in many people's thinking increasingly high. It's been a very long bull run and I wouldn't want to be a large seller of equities when things start to go south, which is quite possible over the next several years if not sooner.

I modeled both cases (maximize income via dividend payers vs keep income under 4X FPL for subsidies) out over our remaining lifetime, and the net for us was that maximizing income yielded a "better" end result (ie: larger portfolio value in the end, all other assumptions constant) than keeping income under 4X FPL and pulling from taxable (regardless of what you call it) to cover the delta between the lower income stream and total expenses. The net reason is that I don't have to pull from the portfolio to pay the bills, but instead use a higher level of income generation to do so..and regardless of whether the pie grows or shrinks while you are eating it..if you aren't eating the pie to begin with, the pie will be bigger in the end either way.

All FWIW and YMMV..
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Old 01-06-2020, 04:54 PM   #29
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Yes, much of what you say is true. I'm not a market timer so I don't switch strategies while the market seems high, in part because I have the bulk of my money in taxable and I don't want the taxable event on the gains I've accumulated. But I don't know that I'd switch to a growth strategy now. I'm just showing how it can be done since the OP was asking about minimizing MAGI by selling off some assets and taking cap gains to replace some of the dividends. It's up to the OP to decide which way to go, armed with the information he has learned from all in this thread.

But then you said this:
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The net reason is that I don't have to pull from the portfolio to pay the bills, but instead use a higher level of income generation to do so..and regardless of whether the pie grows or shrinks while you are eating it..if you aren't eating the pie to begin with, the pie will be bigger in the end either way.
NO! Not always! Dividend stocks can lose money too. The pie can still get smaller even if you don't touch it. And dividends can be cut. Someone in another recent thread tried to tout the "dividend aristocrats" as proof that they don't get cut, but that list has changed often as former aristocrats cut their dividends. You are trying to say there is no risk in a dividend income stream strategy, and that simply isn't true! Less risk than growth, yes. No risk, no.
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Old 01-06-2020, 05:03 PM   #30
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Yes, much of what you say is true. I'm not a market timer so I don't switch strategies while the market seems high...
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Old 01-06-2020, 05:09 PM   #31
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NO! Not always! Dividend stocks can lose money too. The pie can still get smaller even if you don't touch it. And dividends can be cut. Someone in another recent thread tried to tout the "dividend aristocrats" as proof that they don't get cut, but that list has changed often as former aristocrats cut their dividends. You are trying to say there is no risk in a dividend income stream strategy, and that simply isn't true! Less risk than growth, yes. No risk, no.
I think you may have misunderstood my point..

If you have two buckets of money - say, investments and cash/fixed income (CDs, MM, etc) and only use dividends from the cash/FI bucket to pay the bills - the investments bucket will always be higher in the end than if you sell from it intermittently ("eating the pie") to pay all or some of the bills.

ETA - separate topic, but FWIW I'm painfully aware of dividend paying stocks that cut the divvy. Took it hard on the chin with CTL in the past year..plenty of risk in individual dividend paying stocks. Just ask the people who own/owned GE or any number of other dividend paying stocks. That said, I do think there are strong dividend payers like VZ, CVX, O, WELL and others out there that have a much better track record and that I have a lot more confidence in than a GE or CTL..
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Old 01-06-2020, 05:17 PM   #32
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The pie can still get smaller even if you don't touch it. And dividends can be cut.
Of course..but my point was that if you are "eating" the pie (ie: selling from your portfolio), that portfolio will always be smaller in the end than if you did not sell from it to pay the bills..doesn't matter if the market goes up or goes down..if you start with $X and the market (say, increases) by Y%, then your new balance $X * (1 + Y%). If you sell $Z, it's ($X - $Z) * (1 + Y%). Always smaller if you are eating the pie vs living off another income source.
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Old 01-06-2020, 05:25 PM   #33
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Its kind of hard to start now but what you really need (ed) was some tax diversification. Roth 401k and Ira. Pre tax and post tax. Also some real estate throwing off depreciation losses.

If you are as close as you say, I would tell you a good tax accountant should be able to guide you for your specific situation. This may include taking a larger withdraw in 2020 to be subsidy eligible in 2021 for example.
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Old 01-06-2020, 05:48 PM   #34
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Dang. If you don't mind me asking in what area are you in? I just signed up for the ACA and the lowest Bronze plan for my wife and I is $1500/month.

Thanks

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Old 01-06-2020, 05:48 PM   #35
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.... I'll admit there is more risk in total return, because you are counting on growth. ...
I wouldn't agree with that.
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Old 01-06-2020, 05:55 PM   #36
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Of course..but my point was that if you are "eating" the pie (ie: selling from your portfolio), that portfolio will always be smaller in the end than if you did not sell from it to pay the bills..doesn't matter if the market goes up or goes down..if you start with $X and the market (say, increases) by Y%, then your new balance $X * (1 + Y%). If you sell $Z, it's ($X - $Z) * (1 + Y%). Always smaller if you are eating the pie vs living off another income source.
Absolutely not. It doesn't work that way.

Let's say that you have two $1m portfolios that each earn 10% annually. Portfolio 1 yields 2% in dividends and portfolio 2 yields 4% in dividends... and withdrawals are 4% at the beginning of each year starting at the end of year 1. After 10 years....

 Portfolio 1    Portfolio 2   
 DividendsAppreciationWithdrawalsBalance DividendsAppreciationWithdrawalsBalance
0   1,000,000    1,000,000
120,00080,000-40,0001,060,000 40,00060,000-40,0001,060,000
221,20084,800-42,4001,123,600 42,40063,600-42,4001,123,600
322,47289,888-44,9441,191,016 44,94467,416-44,9441,191,016
423,82095,281-47,6411,262,477 47,64171,461-47,6411,262,477
525,250100,998-50,4991,338,226 50,49975,749-50,4991,338,226
626,765107,058-53,5291,418,519 53,52980,294-53,5291,418,519
728,370113,482-56,7411,503,630 56,74185,111-56,7411,503,630
830,073120,290-60,1451,593,848 60,14590,218-60,1451,593,848
931,877127,508-63,7541,689,479 63,75495,631-63,7541,689,479
1033,790135,158-67,5791,790,848 67,579101,369-67,5791,790,848
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Old 01-06-2020, 06:09 PM   #37
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Absolutely not. It doesn't work that way.
Actually, it does. For instance..

Investment Portfolio Starting Value: $1M
Example annual return: 10% (total return - dividends, LTCG, STCG plus Capital Appreciation)
Annual Expenses (income needed): $60K

Scenario A ("eat the pie"):
$1M less $60K = $940K * 1.1 = $1,034M

Scenario B ("eat a different pie"):
$1M less $0 = $1M * 1.1 = $1.1M

That's what I was attempting to say..if you eat from the pie, it will ALWAYS be smaller than if you do not eat from it. Said another way..generate income from a different source and leave the pie be.

Modeling this out over the rest of OP's remaining expected lifespan is the only way to tell whether getting INCOME down under 4X FPL (and therefore, getting ACA subsidies) while eating more pie (needed to cover expenses) is better than maximizing income to cover more expenses while reducing pie consumption but also losing said ACA subsidies.
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Old 01-06-2020, 06:17 PM   #38
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That's Running_Man, not me, RunningBum.
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Old 01-06-2020, 06:23 PM   #39
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Actually, it does. For instance..

Investment Portfolio Starting Value: $1M
Example annual return: 10% (total return - dividends, LTCG, STCG plus Capital Appreciation)
Annual Expenses (income needed): $60K

Scenario A ("eat the pie"):
$1M less $60K = $940K * 1.1 = $1,034M

Scenario B ("eat a different pie"):
$1M less $0 = $1M * 1.1 = $1.1M

That's what I was attempting to say..if you eat from the pie, it will ALWAYS be smaller than if you do not eat from it. Said another way..generate income from a different source and leave the pie be.

Modeling this out over the rest of OP's remaining expected lifespan is the only way to tell whether getting INCOME down under 4X FPL (and therefore, getting ACA subsidies) while eating more pie (needed to cover expenses) is better than maximizing income to cover more expenses while reducing pie consumption but also losing said ACA subsidies.
That's meaningless and not at all what we're talking about. It's two different portfolios. One is high dividend based, the other is growth or total return based. They will have different income flows and growth rates. That's what you need to compare.
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Old 01-06-2020, 06:26 PM   #40
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That's Running_Man, not me, RunningBum.
Sorry, I need new glasses.
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