Reinvesting Dividends in RE - Any good arguments?

[DawgMan]

My plan is to turn off the reinvest dividends switch in my taxable accounts once I start withdrawals and make that the first line of defense in filling up my cash bucket. It seems like a no-brainer since I will be paying taxes on those distributions regardless. Other than effectively dollar cost averaging during a year (talking about in most cases under 5%, depending upon the specific stock/bond yield) and then strategically selling certain assets at a specific time(s) to fill your bucket, is there any other reason not to employ this approach?

 

[Alan]

That's the approach I take. I need to withdraw from my investments so for the last 10 years I have transferred the dividends from my taxable accounts to my bank. I always need more than those dividends since I'm still below the age I plan to take SS so then then I make a decision as to where else to draw money from.

 

[CardsFan]

That's the approach I take. I need to withdraw from my investments so for the last 10 years I have transferred the dividends from my taxable accounts to my bank. I always need more than those dividends since I'm still below the age I plan to take SS so then then I make a decision as to where else to draw money from.

I do the same as Alan.

I have also turned off automatic re-investing in my tax deferred accounts, but that just my way of slowly reducing equity allocation, since I don't need to withdraw from those at this time. This money is then invested into CD's or bonds.

 

[PaunchyPirate]

What the OP is suggesting was my original plan. However, I have temporarily deviated from it. At the time I retired, I had built up a sizable savings account with about 2 years of anticipated income. My plan was to take all my dividends in cash and use that first, then pull from the savings account as needed to meet my spending needs. However, my dividends actually ended up meeting almost all of my spending needs in year 1. So for year 2, I have turned dividend re-investment back on and am spending more from the savings account for now.

The primary reason I did this was that I wanted the dividends to buy back into the funds at these lower prices that we have due to Covid. But, the market has significantly recovered quickly (I'm not convinced it will stay recovered) and I'm not sure I'm actually going to get all that many shares at rock bottom prices. None-the-less, I'm going to stick with reinvestment for this year and just spend down my savings some. By January 1 of 2021, I probably will revert back to original plan and mostly live off dividends and possibly selling holdings for my spending needs.

 

[Whisper66]

My plan is ... is there any other reason not to employ this approach?

Hard to think of a reason not to do this. I suppose if the dividends exceeded the desired amount for living expenses, I would continue to reinvest some as needed to keep the target asset allocation.

We spend more than our dividends so in our case, I've stopped reinvestment in all accounts (taxable, IRA, Roth). I use any of those cash sources plus taxable account bond fund or equity funds sales for living expenses. If I wish to moderate tax burden, one technique is to use cash or fund sales from Roth accounts to partially fund living expenses. Note: a run in I-ORP will suggest amounts to use for living expenses from each type of account.

 

[audreyh1]

My plan is to turn off the reinvest dividends switch in my taxable accounts once I start withdrawals and make that the first line of defense in filling up my cash bucket. It seems like a no-brainer since I will be paying taxes on those distributions regardless. Other than effectively dollar cost averaging during a year (talking about in most cases under 5%, depending upon the specific stock/bond yield) and then strategically selling certain assets at a specific time(s) to fill your bucket, is there any other reason not to employ this approach?

That’s what we did in our taxable accounts. I let cash accumulate in our retirement account during the year - most distributions are paid out in December anyway. And that usually covers most of the withdrawal in Jan. Then I rebalance as needed.

One reason I don’t automatically reinvest distributions is because they usually need to be directed to a different fund for rebalancing purposes.

 

[scrabbler1]

My plan is to turn off the reinvest dividends switch in my taxable accounts once I start withdrawals and make that the first line of defense in filling up my cash bucket. It seems like a no-brainer since I will be paying taxes on those distributions regardless. Other than effectively dollar cost averaging during a year (talking about in most cases under 5%, depending upon the specific stock/bond yield) and then strategically selling certain assets at a specific time(s) to fill your bucket, is there any other reason not to employ this approach?

Most of the dividends in the taxable part of my portfolio come from one big bond fund. I take those as cash and they pay my bills. From time to time over the 11 years I have been retired, I have had to supplement this monthly dividend income with smaller dividends from 3 other funds, two bond funds and one stock fund. The stock fund's dividends are quarterly, so they helped out with the larger, lumpier expenses.

Some years, I have had to take large, year-end cap gain distributions (from the stock fund) in cash because they incurred income taxes I could not easily cover with the regular dividend income. Those cap gain distributions got me into some trouble the last few years because they were interfering with my ACA premium subsidy. So, for 2020, I unloaded that stock fund and bought into a similar index fund to greatly reduce those distributions and make me eligible again for significant ACA premium subsidies. This has also reduced my monthly expenses so my big bond fund's monthly dividend can now cover all my monthly expenses with room to spare. All other funds are set to reinvest dividends and cap gains.

I have a rollover IRA which has been reinvesting all dividends and cap gains since its inception when I retired and left my company in 2008.

 

[jollystomper]

For me so far, it has depended on the account. This is not a focused strategy, I am just lazy. I have plenty of cash so I do not "need" the money now. I have stopped reinvesting dividends in my, long held accounts,with the view that I do not need any more shares in these accounts. I have shifted some of this money (to the extent allowed by law) to our Roth IRA accounts at my desired AA.

 

[pb4uski]

My plan is to turn off the reinvest dividends switch in my taxable accounts once I start withdrawals and make that the first line of defense in filling up my cash bucket. It seems like a no-brainer since I will be paying taxes on those distributions regardless. Other than effectively dollar cost averaging during a year (talking about in most cases under 5%, depending upon the specific stock/bond yield) and then strategically selling certain assets at a specific time(s) to fill your bucket, is there any other reason not to employ this approach?

No.

I have my taxable account dividends set up to be transferred to our checling account, where they supplement my pension and automatic monthly transfer from our portfolio (aka my "monthly paycheck"). We have a lump of spending in November (property taxes and home insurance renewal) so they effectively just reduce the special withdrawal that I need to do in November to cover off that special spending.

 

[Cobra9777]

We also take taxable dividends in cash. Tax-deferred, Roth, and HSA are reinvested.

Taxable dividends are automatically transferred to our CMA along with our two pensions and rental income. These sources act as a "paycheck" to cover normal, ongoing, non-discretionary expenses.

For large discretionary spending and lumpy stuff like annual property tax and insurance renewal, we draw from a small cash reserve and then once or twice per year, as needed, we sell some shares in taxable to replenish cash and rebalance.

 

[W2R]

I take my taxable dividends in cash. Some of these end up being used for living expenses, and the rest is used in rebalancing later on.

 

[OldShooter]

Our situation is a little different than most, I think. We used up our taxable investment accounts years ago paying taxes on Roth conversions. So now 100% of our investments are in tax-sheltered accounts.

So for us, we just reinvest all dividends. This is basically the total return argument; a dividend dollar is the same as an investment growth dollar. So we just withdraw from the tax-sheltered accounts when we need cash. This is typically for income taxes, real estate taxes, and big trips. QCDs, too. Otherwise our SS and my tiny megacorp pension cover our cash flow needs.

I think I would not reinvest in a taxable accounts because then I end up selling with lot identification and a jillion little lots to track for tax status. I am too lazy for that even though Quicken will do most of the work.

 

[donheff]

I do this now but will start reinvesting dividends when DW's RMDs kick in. The RMDs will exceed our living expenses so we will be adding to taxable and may as well reinvest dividends.

 

[Cobra9777]

...We used up our taxable investment accounts years ago paying taxes on Roth conversions...

I've been looking at this... I started doing larger Roth conversions last year (top of 22% bracket). Plan is to continue that level until SS at 70. We're both 59. But according to my projections, the additional tax payments are going to hasten the depletion of the taxable account several years before then. And we'll see a declining stream of taxable dividends along the way.

Previous plan was to use taxable dividends and withdrawals to bridge the gap to SS at 70. But with the larger conversions, it appears we'll need to start drawing from tax-deferred or Roth at some point... maybe HSA also... or DW could take SS at FRA. Plenty of options.

But yeah... we're going to be in the same boat much sooner than previously planned.