My main concern, Marko, was that by counting on mutual capital gains distributions as part of your annual income, you are subjecting yourself to a highly volatile, unpredictable income stream.
Looking at distributions in general, the dividend distributions as well as interest income are equivalent to “rent”. Capital gains distributions from mutual funds is where things get very murky, and IMO the concept of what is “principal” breaks down. You may not have sold any shares, but your mutual fund manager did sell some shares of the underlying assets, and passed along the gain to you as required by law. And it wasn’t necessarily even your gain as anyone holding the fund just before the distribution would get a share of this gain, regardless of when they purchased the fund. It’s actually possible to receive a capital gains distribution and have an unrealized capital loss in the fund.
Practically speaking, over long periods of time, you can take dividend/interest and capital gains distributions as income from equity mutual funds and most likely still see the remaining fund grow over time. But your income stream will be highly unpredictable. Capital gains distributions usually go to zero or close the year of or after after a major bear market, then climb until the next bear market. Also the year of the nasty bear market you can get a capital gain distribution even though the fund itself shows a loss for the year. For many this is a rude surprise.
It is easiest to just take all the distributions if they meet your income needs. But maybe you should think about how to best for you handle things when/if they don’t. How does this relate to your long term goals of where your money goes when you die versus the spending you would like to maintain now? It comes down to priorities and goals.
If you don’t really need the income and are just paying taxes on it, this doesn’t matter except for the taxes of course.
I’ve been working pretty hard to significantly reduce the capital gains distributions in my taxable accounts for taxes owed and IRMAA reasons. I’m now mostly in index mutual funds in my taxable accounts and these are paying 0% capital gains distributions this year and did last year. I’m much happier about that. Normally they pay a very low percentage 1-2%.