LOL! said:
You can "run the numbers" in your head. Let's say a year is 4% of assets and your return per year is 5%. That means .04 * .05 = 0.0020 or 0.2% of your assets will be taxable interest each year.
Or say you have $2MM total, that's $4,000 in interest. Since you will probably have $20000 of taxable dividends anyways, I don't think it's something to worry about.
I don't really follow that. Lets use the $2M portfolio you posited with an $80k draw per year. Lets also say my taxable funds are $750K of the $2M. If most of my dividend producing holdings are in IRAs/401Ks then I don't have $20,000 of "taxable" dividends. Most of that $20K will remain in the IRAs and will not be taxed until some far future date when I withdraw it.
The question relates to the years before I get to the IRAs when I would be withdrawing from from taxable funds if the market does well. If my taxable funds do not include cash, I would pull the proportionaltely small amount of distributions generated in the taxable accounts (probably far less than $20K) plus principle to make up the yearly $80k. The principal would include a portion of long term capital gains taxed at low CG rates. So, while the market does well this appears to be a great approach.
On the other hand, if keep my cash in taxable accounts, I will have to liquidate some taxable equities to produce them (and pay CGs on those) and I will have to pay tax immediately on the dividends those cash assets generate even though I don't want to use cash since the market is doing well. Also, I will now have less equities in taxable accounts to pull from - if the market continues to do well and I continue to pull equities rather than cash, I will run out of taxable assets sooner than if I left all taxable assets in equities. Again, in a good market that is a bad strategy - at least in hindsight.
Conversely, things flip flop to some degree in a down market. if I keep the 3-5 cash bucket in IRAs, I now have to pull pull the entire $80K from the IRAs at regular income tax rates. For me that will be pretty high. In the down market scenario if the cash were in taxable I would pull the dividends the taxable account generated plus a lot of cash to make up the $80K. All that extra cash would already have been taxed so it would be untaxed when used. So, if I knew I was facing a down market, I would prefer my cash to be over there.
But not knowing what the market will do I don't see a simple way to run those comparisons in my head to decide ahead of time what is the most optimal mix at the outset - all cash in taxable, all cash in IRAs, or some mix. If it is a wash, I would simply liquidate some of the equity portion of the IRAs and turn them into cash.
How about some answers about what people are planning to do with their cash (during retirement, not while accumulating). Are you keeping it in taxable, IRAs, a mix?