Reinvesting vs. collecting the income

[Kimo]

I am sure there is a posting here somewhere regarding my question, so please feel free to send me the link.

I am retired and would like opinions regarding reinvesting your gains vs. taking the income.

My thoughts in no particular order are that no matter which conclusion you come to they are both taxed and if you reinvest you will need a bigger bucket #1 for the monthly expenses etc.

Is this one of those decisions where you really can't pick a "loser"? (Except of course if you know which way the market is headed)

I am sure those of you reading have made the decision, how did you come to that conclusion?

Thanks!

 

[Major Tom]

The dividends in my deferred accounts are reinvested, because I am younger than 59 1/2 and want to avoid penalties.

All the dividends in my taxable accounts are automatically paid into my savings account and go towards my living expenses, as my withdrawal rate is higher than the amount of dividends in taxable accounts, so I will still need to sell some equities from time to time.

In other words, I cannot live on the income from dividends in my taxable accounts alone, so all the dividends in those accounts are withdrawn and not reinvested.

 

[Looking4Ward]

When I looked at 2013 results for my taxable accounts, I realized that the dividend and capital gain distributions were within a few hundred dollars of the amount I planned on withdrawing each year.

So when I RE'd a few months back, I set all of my taxable accounts to distribute dividends and CGD's to my savings account.

I need to withdraw that amount anyway, and count those distributions towards taxes as well, so I figured I'd do it that way and if it proves to hold true each year then I consider myself preserving my corpus.

Meanwhile, my tIRA will continue to grow untouched.

 

[KB]

I'm in a similar situation with my taxable account dividends, capital gains and pension covering most of my expenses. I'm not touching my IRA until I need to, I'll take SS before that. I'm turning 62 this month and am trying to decide what to do about early SS or wait.

 

[Kimo]

Major Tom, yea, because I am 62 I don't have the same situation you do. You do bring up a good point though, I can live off the CG's and dividends, I just don't know if I want a bigger bucket for monthly expenses all year or just take the money as it come in......

 

[Kimo]

KB, when I was deciding whether to take the SS @ 62 or not I remembered for every year you wait it is like getting a guaranteed 8% return. Not a lot of places where you can get that. I don't know if that will help you but it did me.....

 

[KB]

That is an excellent reason to wait, Kimo. I know I should wait, it's just tempting to think about starting to collect sooner.

 

[Kimo]

I went as far as actually applying for SS and after it was approved I went down and cancelled my application.......it doesn't get any closer than that, to say it was tempting is really an understatement.....I so understand your point!!

 

[scrabbler1]

Most of the dividends in my taxable account come from a single bond fund which barely covers my expenses. But to enhance my cash flow a little better, starting this year I have been taking the quarterly dividends from a stock fund in cash instead of reinvesting them. Any excess cash from this new influx of cash I invest into the bond fund, so the net effect is a mild rebalancing from stocks into bonds. I have two other, smaller bond fund whose monthly dividends get reinvested automatically.

There is no difference from a tax perspective by doing this switch. I had to make some mild adjustments to the stock fund spreadsheet because I was not reinvesting in there any more.

In my IRA, I have a stock fund and a bond fund, both of which reinvest all earnings. There, I do some rebalancing when the AA goes out of my desired range. No tax consequences from either the earnings or the transfers, of course.

 

[ERhoosier]

IMHO- The main reason for dividend reinvesting is to force that $ to w#rk rather than just spending it. An alternative might be to allow accumulation of those dividends to be reinvested at a time of your choosing (e.g. for market timing, adjusting global AA, or covering sudden unexpected cash flow needs). Div reinvesting might be more relevant to young-person's goal of long-term capital appreciation. In retirement, agree with others that using those dividends for living expenses may make more sense in many cases. With some brokers, div reinvesting only to frequently sell some shares for cash can waste $ in transaction fees.

 

[marko]

All my dividends go into a savings account which I draw from quarterly to cover expenses. I reinvest CGs.

I like the idea of having the dividends waiting there as savings instead of having to decide what equity and when to sell...invariably the market will be at the wrong time.

 

[Kimo]

I am siding with taking the cash, my question to marko is why to you reinvest the CGs?

 

[marko]

I am siding with taking the cash, my question to marko is why to you reinvest the CGs?

I reinvest the CGs because 1) I don't need the cash 2) I view it as an opportunity to build up the fund involved and 3) it is a lumpy revenue in the sense that some years are better/worse than others so I can't count on it as a reliable 'income'...as such I don't want to factor it in.

The day may come when I also dump my CGs into the savings for withdrawal, but I'm not there yet.

 

[Kimo]

Very informed answer, thank you. I am beginning to think there is no "right" or "wrong" answer to this question.

I am inclined to think those of us who like Santa to leave presents would also like CG's as cash . Please, just a joke, many of you who like Santa have everything reinvested.....

Again, thanks!

 

[marko]

Very informed answer, thank you. I am beginning to think there is no "right" or "wrong" answer to this question.

Again, thanks!

"There is no right or wrong answer" is a very common theme on this forum on a wide range of issues.

Everyone has a different need, background, resource, history etc etc etc; it all comes down to making some informed decisions and a place like ER.org has certainly helped me figure a lot of stuff out!

 

[Brat]

Both DH & I are in the MRD phase of life. We reinvest all distributions in our IRA's and don't withdraw until December unless need be. I want those distributions to work for us over the year.

This MRD withdrawal can be automatic at Vanguard with Vanguard funds/ETFs. I own O in one account subject to MRDs so must sell/transfer in kind in December.

 

[Livefree]

Yes, but is that 8% quote based on your continuing to work? If you quit @ 60 and don't work again, would you get that much more if you waited more years?

KB, when I was deciding whether to take the SS @ 62 or not I remembered for every year you wait it is like getting a guaranteed 8% return. Not a lot of places where you can get that. I don't know if that will help you but it did me.....

 

[FUEGO]

The dividends in my deferred accounts are reinvested, because I am younger than 59 1/2 and want to avoid penalties.

All the dividends in my taxable accounts are automatically paid into my savings account and go towards my living expenses, as my withdrawal rate is higher than the amount of dividends in taxable accounts, so I will still need to sell some equities from time to time.

In other words, I cannot live on the income from dividends in my taxable accounts alone, so all the dividends in those accounts are withdrawn and not reinvested.

+1, this is exactly how I run my portfolio, too. Taxable accounts pay dividends into my cash pile. Deferred accounts reinvest automatically.

In practice, I look at my taxable account like this: There's about $320,000 in it. I spend $32k/yr. Without any real growth, I can spend the taxable account for 10 years and poof, it's gone.

In reality, it will grow and spit out dividends each year, so I'll spend the dividends and sell a portion of the principal. My goal is to keep it simple and keep taxable income as low as possible. Spending divs and CGs is simple. I can pick the least appreciated shares to harvest from principal.

 

[Kimo]

Yes, but is that 8% quote based on your continuing to work? If you quit @ 60 and don't work again, would you get that much more if you waited more years?

The 8% doesn't change according to the IRS office I was at.

 

[scrabbler1]

I reinvest the CGs because 1) I don't need the cash 2) I view it as an opportunity to build up the fund involved and 3) it is a lumpy revenue in the sense that some years are better/worse than others so I can't count on it as a reliable 'income'...as such I don't want to factor it in.

The day may come when I also dump my CGs into the savings for withdrawal, but I'm not there yet.

+1. I would have answered the exact same way for the same reasons. I view the extra shares from reinvested CGs a bonus which will over time generate a few more dollars of monthly dividends, especially with my big bond fund generating a smaller number of cents per share in monthly dividends.

 

[nash031]

+1, this is exactly how I run my portfolio, too. Taxable accounts pay dividends into my cash pile. Deferred accounts reinvest automatically.

In accumulation phase: I take all deferred dividends and re-invest. I take most taxable dividends and re-invest except those that come from positions where I do not wish to increase my holding (an S&P 500 index fund with a higher ER than my TSM fund). I take those S&P dividends into checking, and then make a quarterly deposit into my other taxable account to purchase more TSM.

In effect, I reinvest all of it, just not automatically.

 

[MBAustin]

I am inclined to think those of us who like Santa to leave presents would also like CG's as cash . Please, just a joke, many of you who like Santa have everything reinvested.....

Now that you mention it, I do sort of look at the CG payments as surprise gifts - I don't count on them but when the savings account bounces high suddenly towards the end of the year, it's like getting a bonus. Some years the dividends and CGs plus DH's pension and SS are enough for us to live on, other years not. But it's sort of fun when I don't have to sell in January for the year's living expenses.

 

[Kimo]

MBAustin, I agree completely with everything you said!

Prior to starting this post I was having everything paid to me, now I think I will keep the dividends/interest coming in as a deposit but change the CG's to reinvest. I do like the idea of letting it grow a bit by doing that and I believe I can live on the remainder with the annuity payments also.

FWIW, the first financial planner I spoke to at Vanguard liked my idea of having everything paid to me (a few years ago). The VG planner I spoke to a few days ago suggested I just put what I need for the year in my bucket #1 and reinvest everything. That is why I started the post. All in all, I like both ideas and doing this actually lets me do both!

I am not knocking Vanguard, I have everything I own with them, it was more of a FYI.

 

[jimnjana]

We are now just tinkering with taking the dividends from DWs IRA. I had started earlier in the year, taking a little each month then stopped after three months. Now I think we will wait until the beginning of next year. Rather than take a set amount each month, we will likely take them several times a year. Once we sell a property ot two, we won't need to touch the dividends at all.

 

[Looking4Ward]

Even though I posted that I have dividends and capital gains distributions posted to my bank account, I'm still trying to get my head around this.

Assuming that both equal the amount I would need to withdraw from my taxable portfolio each year:

Reality of not reinvesting those proceeds:

1. I have to pay taxes on them whether they are reinvested or not
2. It's roughly the same $$ amount of shares I would have to sell anyway, so I've preserved the number of shares I have in my portfolio.
3. The number of shares in my portfolio never increases

Reality of reinvesting those proceeds:

1. I have to pay taxes on them whether they are reinvested or not
2. I incur small gains (or losses) on those reinvested proceeds
3. I increase the number of shares in my portfolio but ultimately have to sell shares in order to withdraw for the year.

Now I'm not sure which is best.