ACA MAGI: Living off of dividends vs LTCG

[RunningBum]

Quote:

Originally Posted by jimbee Sorry, I need new glasses.

Somebody else made that same mistake once before. Apparently we have running in common, but not investment styles.

[RunningBum]

Quote:

Originally Posted by pb4uski I wouldn't agree with that.

How about "more volatility"?

[MarieIG]

Quote:

Originally Posted by pb4uski 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         Dividends Appreciation Withdrawals Balance   Dividends Appreciation Withdrawals Balance 0       1,000,000         1,000,000 1 20,000 80,000 -40,000 1,060,000   40,000 60,000 -40,000 1,060,000 2 21,200 84,800 -42,400 1,123,600   42,400 63,600 -42,400 1,123,600 3 22,472 89,888 -44,944 1,191,016   44,944 67,416 -44,944 1,191,016 4 23,820 95,281 -47,641 1,262,477   47,641 71,461 -47,641 1,262,477 5 25,250 100,998 -50,499 1,338,226   50,499 75,749 -50,499 1,338,226 6 26,765 107,058 -53,529 1,418,519   53,529 80,294 -53,529 1,418,519 7 28,370 113,482 -56,741 1,503,630   56,741 85,111 -56,741 1,503,630 8 30,073 120,290 -60,145 1,593,848   60,145 90,218 -60,145 1,593,848 9 31,877 127,508 -63,754 1,689,479   63,754 95,631 -63,754 1,689,479 10 33,790 135,158 -67,579 1,790,848   67,579 101,369 -67,579 1,790,848

I am FINALLY starting to get this. Took long enough.

[pb4uski]

Quote:

Originally Posted by 24601NoMore 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.

You clearly don't understand what total return is. Total return is dividends and appreciation. Your scenario A has a 10% return and your scenario B portfolio has a 16% return so your comparing apples and oranges.

[pb4uski]

Quote:

Originally Posted by MarieIG I am FINALLY starting to get this. Took long enough.

Great! Perhaps you can explain it to 24601, because he obviously doesn't get it.

[MarieIG]

Quote:

Originally Posted by pb4uski Great! Perhaps you can explain it to 24601, because he obviously doesn't get it.

Maybe not. I don't eat pie.

[24601NoMore]

Quote:

Originally Posted by pb4uski You clearly don't understand what total return is. Total return is dividends and appreciation. Your scenario A has a 10% return and your scenario B portfolio has a 16% return so your comparing apples and oranges.

Respectfully disagree, but let's just leave it at that. I was attempting to help OP, not get into a long back and forth on this.

ETA - I completely understand what total return is. Perhaps you weren't entirely clear on my example.

[RunningBum]

Quote:

Originally Posted by 24601NoMore ETA - I completely understand what total return is. Perhaps you weren't entirely clear on my example.

Your example shows a 10% price increase and no dividends for A (10% total return) vs. a 10% price increase + 6% dividends (16% total return) on the other. You either don't understand total return, or are intentionally giving a very biased example. Your example is possible but very very unlikely. pb4's example is pretty typical. The total return is the same, with more dividends in one and more growth in the other.

--------------------

OP, if you'd like some help, I suggest posting what stock holdings you have, ideally with amount, if you are comfortable. It may not be easy to drop $5000+ and replace it with unrealized growth, but it's worth a look.

[24601NoMore]

Quote:

Originally Posted by RunningBum Your example shows a 10% price increase and no dividends for A (10% total return) vs. a 10% price increase + 6% dividends (16% total return) on the other.

My example assumes a 10% total return from the portfolio in both scenarios. The $$s to cover the expenses shown ($60K) are coming from a totally different source (in my case, a second cash/CD portfolio that generates income). That's the whole point of the example. The example is PURELY to show that if you spend down from the investment portfolio, the investment portfolio value will be less than if you do not spend from it - regardless if the market goes up, down, or stays level.

The jey point I was attempting to make is that there's no shortcut to figuring out if keeping income < 4X FPL is a "better" option than maximizing income and foregoing the subsidy. FOR US, maximizing income and foregoing the subsidy netted a larger balance on BOTH portfolios (investments and cash/CDs) than keeping our income < 4X FPL and taking the subsidies. That's because staying under 4X FPL meant that we would not be generating enough income to pay the bills, and instead would have to pull from one or the other portfolio to do so.

I'd still suggest OP model out both scenarios year by year through remaining life expectancy to see which option yields a better end result. You can't look at it in the context of only one year and instead need to see the impact that the decision to limit income to get subsidies will have on your end result by looking at portfolio growth, income stream and expenses on a year by year basis, through age 95 or whatever age you choose to model through.

[RunningBum]

Quote:

Originally Posted by 24601NoMore My example assumes a 10% total return from the portfolio in both scenarios. The $$s to cover the expenses shown ($60K) are coming from a totally different source (in my case, a second cash/CD portfolio that generates income). That's the whole point of the example. The example is PURELY to show that if you spend down from the investment portfolio, the investment portfolio value will be less than if you do not spend from it - regardless if the market goes up, down, or stays level.

I'm nearly speechless. You think it's valid to compare partial portfolios, ignoring that you're draining that previously unmentioned second cash/CD portfolio? I'm done with you.

My offer to help the OP stands.

[ncbill]

Quote:

Originally Posted by 24601NoMore My example assumes a 10% total return from the portfolio in both scenarios. The $$s to cover the expenses shown ($60K) are coming from a totally different source (in my case, a second cash/CD portfolio that generates income). That's the whole point of the example. The example is PURELY to show that if you spend down from the investment portfolio, the investment portfolio value will be less than if you do not spend from it - regardless if the market goes up, down, or stays level. The key point I was attempting to make is that there's no shortcut to figuring out if keeping income < 4X FPL is a "better" option than maximizing income and foregoing the subsidy. FOR US, maximizing income and foregoing the subsidy netted a larger balance on BOTH portfolios (investments and cash/CDs) than keeping our income < 4X FPL and taking the subsidies. That's because staying under 4X FPL meant that we would not be generating enough income to pay the bills, and instead would have to pull from one or the other portfolio to do so. I'd still suggest OP model out both scenarios year by year through remaining life expectancy to see which option yields a better end result. You can't look at it in the context of only one year and instead need to see the impact that the decision to limit income to get subsidies will have on your end result by looking at portfolio growth, income stream and expenses on a year by year basis, through age 95 or whatever age you choose to model through.

But that's not a valid assumption for the OP.

As long as the OP can live with a mAGI less than the 4x cliff they can also enjoy a few thousand after-tax dollars worth of ACA subsidies.

[Mo Money]

I will catch up and post my numbers soon! At the dentist!

[24601NoMore]

Quote:

Originally Posted by RunningBum I'm nearly speechless. You think it's valid to compare partial portfolios, ignoring that you're draining that previously unmentioned second cash/CD portfolio? I'm done with you. My offer to help the OP stands.

Love the polite discourse.

That said, I'm not "draining" anything. The value of the second portfolio remains constant after dividends cover most of the bills. Whether it's keeping pace with inflation or not is totally irrelevant to my plan. For the record, I don't CARE what it is at the end - it will be roughly what it is today in terms of 2020 dollars. That's where the second (growth) portfolio comes in.

My plan is rock solid, and survives all market scenarios. Plus, it maximizes total portfolio value at the end - unlike plans that "burn down" (via spending) your main investment portfolio balance to pay the bills.

If you prefer to spend from an investment portfolio - even in scenarios where the market may be down 20, 30, 50 or even more % while you're pulling from it to pay the bills, that's just fine. I prefer an income based approach to pay the bills while keeping reserves to cover out years (10+). In my case, CDs make up a good part of that 2nd portfolio. Others prefer dividend paying stocks, individual bonds, bond funds or whatever.

Best of luck to all regardless of your approach. But let's also keep things civil here - the tone is getting a bit iffy and hasn't been particularly respectful of other's approaches or opinions.

[Luck_Club]

Quote:

Originally Posted by 24601NoMore Love the polite discourse. Best of luck to all regardless of your approach. But let's also keep things civil here - the tone is getting a bit iffy and hasn't been particularly respectful of other's approaches or opinions.

Never is when you are disagreeing with some fundamental stances of the borge:

Structuring income to get tax subsidies is morally superior and OK, where as structuring assets to get tax subsidies is morally reprehensible.

Any investing approach that is different from the total return philosophy has inferior returns and more risk, and not worthy of serious consideration or discussion.

Rental real estate in retirement is not truly being retired.

It gets to me sometimes but I still come back hoping to glean a few gems of knowledge here and there.

[pb4uski]

Quote:

Originally Posted by 24601NoMore My example assumes a 10% total return from the portfolio in both scenarios.....

Not true. See XIRRs based on the cash flows of each scenario below. One is 10% and the other is 16.5%. Second scenario assumes that 6% dividend is paid mid-year and withdrawn for spending and uses the starting and ending values used in your example.

Your math is incorrect. Numerous posters have told you so and you refuse to believe. You are welcome to your own opinion but you can't have your own facts.

XIRR	10.0%	16.5%
12/31/18	1,000,000	1,000,000
01/01/19	-60,000
06/30/19		-60,000
12/31/19	-1,034,000	-1,100,000

Quote:

Originally Posted by 24601NoMore 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 ....

[24601NoMore]

Quote:

Originally Posted by Luck_Club Any investing approach that is different from the total return philosophy has inferior returns and more risk, and not worthy of serious consideration or discussion.

There are many (including people far smarter than me including Wade Pfau [who as many of you know is a Professor of Retirement Income], Michael Kitces [advocate of the "bond tent" for those in ER] among other income-focused strategies, William Bernstein [of "when you've won the game, quit playing" fame], Larry Swedroe [cautions those who want to chase higher and higher portfolios on the "marginal utility of wealth", Rick Ferri [who advocates that the "center of gravity" for those in ER is ~30-35% equities] and others) who would disagree.

Again, let's be respectful of others approaches and not make blanket statements that one approach over another is superior. Especially egregious is saying that a particular approach is "not worth of serious consideration' when some very smart people have for decades said and proven otherwise.

I don't have the time (or patience) to continue debating this. You guys with a "total return" approach have your strategy, and I have mine. I'm very confident in the outcome of my approach and have spreadsheets to the Nth level of detail proving things out. I'm sure many of the "total return" folks have something similar. Personally, I believe my strategy is lower risk and gets me to age 95+ with a minimal level of risk compared to a large amount of equities and living through market rollercoasters. If you believe otherwise, that's fine.

I used to think that we were all here to respectfully discuss the pros and cons of different approaches that people may have. Would be nice if we could do so respectfully without the derision that seems to have crept into this thread for whatever reason.

Best of luck..

[24601NoMore]

Quote:

Originally Posted by pb4uski Your math is incorrect. Numerous posters have told you so and you refuse to believe. You are welcome to your own opinion but you can't have your own facts.

Appreciate the effort, but you seem to insist on changing my scenarios around.

I (hopefully) clearly indicated a 10% total return on both scenarios, with the $60K coming from a SECOND portfolio.

The math is not incorrect. Please quit insisting that it is.

[pb4uski]

Quote:

Originally Posted by 24601NoMore Appreciate the effort, but you seem to insist on changing my scenarios around. I (hopefully) clearly indicated a 10% total return on both scenarios, with the $60K coming from a SECOND portfolio. The math is not incorrect. Please quit insisting that it is.

What second portfolio? Show us the cash flows of each scenario then and perhaps we can understand your point.

[RunningBum]

Quote:

Originally Posted by Luck_Club Never is when you are disagreeing with some fundamental stances of the borge: Structuring income to get tax subsidies is morally superior and OK, where as structuring assets to get tax subsidies is morally reprehensible. Any investing approach that is different from the total return philosophy has inferior returns and more risk, and not worthy of serious consideration or discussion. Rental real estate in retirement is not truly being retired. It gets to me sometimes but I still come back hoping to glean a few gems of knowledge here and there.

Not sure how you got that (bolded part) impression here. (The rest have absolutely nothing to do with this thread so I won't bother.)

In my example and pb4's, we used the same total return for income/dividend based vs total return based. Show me where we weren't fair. The non-income based method is more ACA subsidy friendly, which was the OPs goal, so it's very pertinent to try for that even if the return is the same. If I can get the same return with two different methods, but add on a subsidy with one method, why wouldn't I choose that method?

Other examples were wrong or misleading by omitting important parts. It's not in my nature to leave those things unchallenged. But I'm done with that now. The OP and others can decide what's pertinent to them.

[RunningBum]

By the way, most of the "disrespectful" stuff we are being accused of was never said. I think it's even more disrespectful to make up quotes and call out people for things we didn't say. Please stop. It's not in my nature to take false accusations lightly.