Mutual Fund Capital Gains During FIRE: Reinvest?

[scrabbler1]

Trooper, I share Audrey's opinion. You read my post here (#7) where I wrote I live off the dividends only and reinvest the erratic cap gains to boost the number of shares I own, another way of maintaining the principal.

 

[audreyh1]

DUMP EDWARD JONES! If you are no longer earning a salary and are withdrawing from your portfolio that advice could be beyond stupid.

If the dividends and cap gains are taxable you have to come up with the money to pay those taxes someplace else. That might even mean having to sell something else and having to pay taxes on THAT Capital Gain. Now you just raised your tax bill!



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Yes - if the dividends and capital gains distributions are from taxable accounts, you have to pay those taxes out of your income. Most people have to pay taxes on the amount they withdraw from a retirement portfolio whether it's after withdrawing the funds from an IRA/401K, or taxable distributions generated by a taxable account. So that's just part of dealing with income from a portfolio - there is your income, then there is the after-tax income available for spending. All this has to be figured out before you can determine whether you have sufficient assets in a retirement portfolio to actually retire and live off of!

In general, a dividend income only investor has to live off a smaller withdrawal percentage of their portfolio than an investor using a total return approach like what FIRECALC models - which determines so safe withdrawal rate percentage. The former seeks to maintain the principal, while the latter allows you to gradually draw down that principal over your lifetime.

 

[W2R]

Simple - capital gains are not dividends. They occurs because some stock was sold at a profit. That sold stock must be replaced to maintain the principal. Maintaining the principal (i.e. not dipping into it) is important to an income investor - someone who wants to live off only the interest and dividends generated by their portfolio.

+1

Most of my portfolio is in taxable accounts. I take the capital gains in these accounts in cash, and use it to re-balance. For the first five years of retirement I spent less than my dividends only, averaging a 2.0% WR, and my capital gains were re-invested according to my AA. The market soared and so did my portfolio.

Then I started dipping into my principal:

(1) In 2015 I bought my dream house in cash, and it cost more than the house I sold. Ouch.

(2) 2016 has not been much better, with two dental implants, a bridge, extensive landscaping work, complete replacement of my HVAC system except for the ducts, and other uncommon expenses all arising at once.

Hopefully in 2017 I can get back to maintaining my principal by spending less than my dividends. I'd really like to get back to lower spending, to prepare for the next big market crash whenever that might happen.

 

[MBAustin]

We take dividends in cash from funds in taxable accounts. That cash is part of our annual spending. Record keeping is easier too.

For funds in our IRA and ROTH IRA, we reinvest the dividends. Record keeping there is much easier since it will all be considered as income in the IRA and is non taxable in the ROTH. Also, we aren't taking distributions from those accounts yet.

+1.

We switched to this when DH retired (4 years before I did) and it has worked well for us. If the CGs are more than we need for spending in the following year, I move the excess into a short-term tax-exempt bond fund which is where I hold our "spending money" for the next few years.

 

[shotgunner]

I am fully retired as of a year ago August and 2 years away from starting Social Security at 62. I get my health insurance through the "Exchange" aka Obamacare. Since dividends and capital gain distributions are taxable in that they count towards your MAGI for Obamacare I took them as cash in 2015 and 2016. This may change when I start drawing more from my tax deferred accounts and SS or if Obamacare is repealed or changed from it's current methodology of eligibility and subsidy (refundable tax credit) calculation. It will probably reinvest them again at 65 when qualify for Medicare.

 

[GTFan]

Yep, way more important to take divs (and possibly CGs) if you're getting subsidies for the ACA. Anything you're getting taxed on anyway so you can minimize withdrawal CGs.

Tax loss harvesting helps a lot too, it's going to offset all my CGs this year and then some (international index sale after Brexit).