ACA MAGI: Living off of dividends vs LTCG

[RunningBum]

I said why in post #13. I'm not entirely wrong. It depends on factors that OP hasn't shared with us. If OP needs all of the $55K, while restructuring would still give $55K, it would whittle down the cash cow over the years. This may or may not be detrimental to the long-term health of the portfolio, especially in the event of a prolonged downturn. 24601NoMore gives a nice summation above.

My apologies if I sound impatient. I prefer not to debate things to death. I'm trying to be more succinct in my replies instead of posting novellas. You have to be careful when you're quoting someone and immediately say they're wrong, then start talking about OP in the 3rd person. It can make it appear directed at the person quoted.

OK, you're not entirely wrong, but you either don't understand total return as much as you think you do, or you are misrepresenting it.

The bolded part is a misrepresentation. It may whittle down your holdings, but your holdings might also grow. If there wasn't a good possibility of that happen, we "total return" folks would be investing in the high dividend payers because that would give the best total return. You and 24601 use the terms "whittle down" or "burning down", which is a very slanted view. I say we are eating some of the pie when we sell some holdings for cash flow, but the pie may be getting bigger while we are eating it.

I'll admit there is more risk in total return, because you are counting on growth. But with that risk is the possibility of greater returns. Investing in dividend payers is not without risk either.

 

[mrc758]

gwraighty: My thinking was: If LTCGs were somehow not included in MAGI, then I could simply sell stocks for an amount approximating the money I need to live on, rather than take dividends. Under that reasoning, I could have avoided the cliff, and gotten a subsidy. But I now have learned from this thread that such a strategy is a pipe dream. So I will go subsidy-less.

The good news is that in my area, a 58 year old guy's gold-level coverage is under $700/month, with 800 deductible and 5000 OOP max. Not a bad deal.

Every time I hit a losing strategy and have my pipe dream disappear into thin air, as now, I remember to be thankful that (a) I have many first-world problems; and (b) I have a forum like this to bounce ideas off of.

Thanks so much!

Dang. If you don't mind me asking in what area are you in? I just signed up for the ACA and the lowest Bronze plan for my wife and I is $1500/month.
Thanks
MRC

 

[24601NoMore]

You and 24601 use the terms "whittle down" or "burning down", which is a very slanted view. I say we are eating some of the pie when we sell some holdings for cash flow, but the pie may be getting bigger while we are eating it.

True, but while it probably goes without saying - the pie may also be getting smaller while you are eating it..especially with equity valuations near all time highs in terms of CAPE 10, forward P/E and other measures. The likelihood that the next decade won't be like the last in terms of equity (and bond, unfortunately) returns is quite high, IMHO, and the odds of a near-term and possibly large drop in equity markets are in many people's thinking increasingly high. It's been a very long bull run and I wouldn't want to be a large seller of equities when things start to go south, which is quite possible over the next several years if not sooner.

I modeled both cases (maximize income via dividend payers vs keep income under 4X FPL for subsidies) out over our remaining lifetime, and the net for us was that maximizing income yielded a "better" end result (ie: larger portfolio value in the end, all other assumptions constant) than keeping income under 4X FPL and pulling from taxable (regardless of what you call it) to cover the delta between the lower income stream and total expenses. The net reason is that I don't have to pull from the portfolio to pay the bills, but instead use a higher level of income generation to do so..and regardless of whether the pie grows or shrinks while you are eating it..if you aren't eating the pie to begin with, the pie will be bigger in the end either way.

All FWIW and YMMV..

 

[RunningBum]

Yes, much of what you say is true. I'm not a market timer so I don't switch strategies while the market seems high, in part because I have the bulk of my money in taxable and I don't want the taxable event on the gains I've accumulated. But I don't know that I'd switch to a growth strategy now. I'm just showing how it can be done since the OP was asking about minimizing MAGI by selling off some assets and taking cap gains to replace some of the dividends. It's up to the OP to decide which way to go, armed with the information he has learned from all in this thread.

But then you said this:

The net reason is that I don't have to pull from the portfolio to pay the bills, but instead use a higher level of income generation to do so..and regardless of whether the pie grows or shrinks while you are eating it..if you aren't eating the pie to begin with, the pie will be bigger in the end either way.

NO! Not always! Dividend stocks can lose money too. The pie can still get smaller even if you don't touch it. And dividends can be cut. Someone in another recent thread tried to tout the "dividend aristocrats" as proof that they don't get cut, but that list has changed often as former aristocrats cut their dividends. You are trying to say there is no risk in a dividend income stream strategy, and that simply isn't true! Less risk than growth, yes. No risk, no.

 

[jimbee]

Yes, much of what you say is true. I'm not a market timer so I don't switch strategies while the market seems high...

?

http://www.early-retirement.org/forums/f44/sold-all-my-stocks-90933.html

 

[24601NoMore]

NO! Not always! Dividend stocks can lose money too. The pie can still get smaller even if you don't touch it. And dividends can be cut. Someone in another recent thread tried to tout the "dividend aristocrats" as proof that they don't get cut, but that list has changed often as former aristocrats cut their dividends. You are trying to say there is no risk in a dividend income stream strategy, and that simply isn't true! Less risk than growth, yes. No risk, no.

I think you may have misunderstood my point..

If you have two buckets of money - say, investments and cash/fixed income (CDs, MM, etc) and only use dividends from the cash/FI bucket to pay the bills - the investments bucket will always be higher in the end than if you sell from it intermittently ("eating the pie") to pay all or some of the bills.

ETA - separate topic, but FWIW I'm painfully aware of dividend paying stocks that cut the divvy. Took it hard on the chin with CTL in the past year..plenty of risk in individual dividend paying stocks. Just ask the people who own/owned GE or any number of other dividend paying stocks. That said, I do think there are strong dividend payers like VZ, CVX, O, WELL and others out there that have a much better track record and that I have a lot more confidence in than a GE or CTL..

 

[24601NoMore]

The pie can still get smaller even if you don't touch it. And dividends can be cut.

Of course..but my point was that if you are "eating" the pie (ie: selling from your portfolio), that portfolio will always be smaller in the end than if you did not sell from it to pay the bills..doesn't matter if the market goes up or goes down..if you start with $X and the market (say, increases) by Y%, then your new balance $X * (1 + Y%). If you sell $Z, it's ($X - $Z) * (1 + Y%). Always smaller if you are eating the pie vs living off another income source.

 

[BeachOrCity]

It’s kind of hard to start now but what you really need (ed) was some tax diversification. Roth 401k and Ira. Pre tax and post tax. Also some real estate throwing off depreciation losses.

If you are as close as you say, I would tell you a good tax accountant should be able to guide you for your specific situation. This may include taking a larger withdraw in 2020 to be subsidy eligible in 2021 for example.

 

[Mo Money]

Dang. If you don't mind me asking in what area are you in? I just signed up for the ACA and the lowest Bronze plan for my wife and I is $1500/month.

Thanks

MRC

Pittsburgh

 

[pb4uski]

.... I'll admit there is more risk in total return, because you are counting on growth. ...

I wouldn't agree with that.

 

[pb4uski]

Of course..but my point was that if you are "eating" the pie (ie: selling from your portfolio), that portfolio will always be smaller in the end than if you did not sell from it to pay the bills..doesn't matter if the market goes up or goes down..if you start with $X and the market (say, increases) by Y%, then your new balance $X * (1 + Y%). If you sell $Z, it's ($X - $Z) * (1 + Y%). Always smaller if you are eating the pie vs living off another income source.

Absolutely not. It doesn't work that way.

Let's say that you have two $1m portfolios that each earn 10% annually. Portfolio 1 yields 2% in dividends and portfolio 2 yields 4% in dividends... and withdrawals are 4% at the beginning of each year starting at the end of year 1. After 10 years....

	Portfolio 1					Portfolio 2
	Dividends	Appreciation	Withdrawals	Balance		Dividends	Appreciation	Withdrawals	Balance
0				1,000,000					1,000,000
1	20,000	80,000	-40,000	1,060,000		40,000	60,000	-40,000	1,060,000
2	21,200	84,800	-42,400	1,123,600		42,400	63,600	-42,400	1,123,600
3	22,472	89,888	-44,944	1,191,016		44,944	67,416	-44,944	1,191,016
4	23,820	95,281	-47,641	1,262,477		47,641	71,461	-47,641	1,262,477
5	25,250	100,998	-50,499	1,338,226		50,499	75,749	-50,499	1,338,226
6	26,765	107,058	-53,529	1,418,519		53,529	80,294	-53,529	1,418,519
7	28,370	113,482	-56,741	1,503,630		56,741	85,111	-56,741	1,503,630
8	30,073	120,290	-60,145	1,593,848		60,145	90,218	-60,145	1,593,848
9	31,877	127,508	-63,754	1,689,479		63,754	95,631	-63,754	1,689,479
10	33,790	135,158	-67,579	1,790,848		67,579	101,369	-67,579	1,790,848

 

[24601NoMore]

Absolutely not. It doesn't work that way.

Actually, it does. For instance..

Investment Portfolio Starting Value: $1M
Example annual return: 10% (total return - dividends, LTCG, STCG plus Capital Appreciation)
Annual Expenses (income needed): $60K

Scenario A ("eat the pie"):
$1M less $60K = $940K * 1.1 = $1,034M

Scenario B ("eat a different pie"):
$1M less $0 = $1M * 1.1 = $1.1M

That's what I was attempting to say..if you eat from the pie, it will ALWAYS be smaller than if you do not eat from it. Said another way..generate income from a different source and leave the pie be.

Modeling this out over the rest of OP's remaining expected lifespan is the only way to tell whether getting INCOME down under 4X FPL (and therefore, getting ACA subsidies) while eating more pie (needed to cover expenses) is better than maximizing income to cover more expenses while reducing pie consumption but also losing said ACA subsidies.

 

[RunningBum]

?

http://www.early-retirement.org/forums/f44/sold-all-my-stocks-90933.html

That's Running_Man, not me, RunningBum.

 

[RunningBum]

Actually, it does. For instance..

Investment Portfolio Starting Value: $1M
Example annual return: 10% (total return - dividends, LTCG, STCG plus Capital Appreciation)
Annual Expenses (income needed): $60K

Scenario A ("eat the pie"):
$1M less $60K = $940K * 1.1 = $1,034M

Scenario B ("eat a different pie"):
$1M less $0 = $1M * 1.1 = $1.1M

That's what I was attempting to say..if you eat from the pie, it will ALWAYS be smaller than if you do not eat from it. Said another way..generate income from a different source and leave the pie be.

Modeling this out over the rest of OP's remaining expected lifespan is the only way to tell whether getting INCOME down under 4X FPL (and therefore, getting ACA subsidies) while eating more pie (needed to cover expenses) is better than maximizing income to cover more expenses while reducing pie consumption but also losing said ACA subsidies.

That's meaningless and not at all what we're talking about. It's two different portfolios. One is high dividend based, the other is growth or total return based. They will have different income flows and growth rates. That's what you need to compare.

 

[jimbee]

That's Running_Man, not me, RunningBum.

Sorry, I need new glasses.

 

[RunningBum]

Sorry, I need new glasses.

Somebody else made that same mistake once before. Apparently we have running in common, but not investment styles.

 

[RunningBum]

I wouldn't agree with that.

How about "more volatility"?

 

[MarieIG]

Absolutely not. It doesn't work that way.

Let's say that you have two $1m portfolios that each earn 10% annually. Portfolio 1 yields 2% in dividends and portfolio 2 yields 4% in dividends... and withdrawals are 4% at the beginning of each year starting at the end of year 1. After 10 years....

	Portfolio 1					Portfolio 2
	Dividends	Appreciation	Withdrawals	Balance		Dividends	Appreciation	Withdrawals	Balance
0				1,000,000					1,000,000
1	20,000	80,000	-40,000	1,060,000		40,000	60,000	-40,000	1,060,000
2	21,200	84,800	-42,400	1,123,600		42,400	63,600	-42,400	1,123,600
3	22,472	89,888	-44,944	1,191,016		44,944	67,416	-44,944	1,191,016
4	23,820	95,281	-47,641	1,262,477		47,641	71,461	-47,641	1,262,477
5	25,250	100,998	-50,499	1,338,226		50,499	75,749	-50,499	1,338,226
6	26,765	107,058	-53,529	1,418,519		53,529	80,294	-53,529	1,418,519
7	28,370	113,482	-56,741	1,503,630		56,741	85,111	-56,741	1,503,630
8	30,073	120,290	-60,145	1,593,848		60,145	90,218	-60,145	1,593,848
9	31,877	127,508	-63,754	1,689,479		63,754	95,631	-63,754	1,689,479
10	33,790	135,158	-67,579	1,790,848		67,579	101,369	-67,579	1,790,848

I am FINALLY starting to get this. Took long enough.

 

[pb4uski]

Actually, it does. For instance..

Investment Portfolio Starting Value: $1M
Example annual return: 10% (total return - dividends, LTCG, STCG plus Capital Appreciation)
Annual Expenses (income needed): $60K

Scenario A ("eat the pie"):
$1M less $60K = $940K * 1.1 = $1,034M

Scenario B ("eat a different pie"):
$1M less $0 = $1M * 1.1 = $1.1M

That's what I was attempting to say..if you eat from the pie, it will ALWAYS be smaller than if you do not eat from it. Said another way..generate income from a different source and leave the pie be.

Modeling this out over the rest of OP's remaining expected lifespan is the only way to tell whether getting INCOME down under 4X FPL (and therefore, getting ACA subsidies) while eating more pie (needed to cover expenses) is better than maximizing income to cover more expenses while reducing pie consumption but also losing said ACA subsidies.

You clearly don't understand what total return is. Total return is dividends and appreciation. Your scenario A has a 10% return and your scenario B portfolio has a 16% return so your comparing apples and oranges.

 

[pb4uski]

I am FINALLY starting to get this. Took long enough.

Great! Perhaps you can explain it to 24601, because he obviously doesn't get it.

 

[MarieIG]

Great! Perhaps you can explain it to 24601, because he obviously doesn't get it.

Maybe not. I don't eat pie.

 

[24601NoMore]

You clearly don't understand what total return is. Total return is dividends and appreciation. Your scenario A has a 10% return and your scenario B portfolio has a 16% return so your comparing apples and oranges.

Respectfully disagree, but let's just leave it at that. I was attempting to help OP, not get into a long back and forth on this.

ETA - I completely understand what total return is. Perhaps you weren't entirely clear on my example.

 

[RunningBum]

ETA - I completely understand what total return is. Perhaps you weren't entirely clear on my example.

Your example shows a 10% price increase and no dividends for A (10% total return) vs. a 10% price increase + 6% dividends (16% total return) on the other. You either don't understand total return, or are intentionally giving a very biased example. Your example is possible but very very unlikely. pb4's example is pretty typical. The total return is the same, with more dividends in one and more growth in the other.

--------------------

OP, if you'd like some help, I suggest posting what stock holdings you have, ideally with amount, if you are comfortable. It may not be easy to drop $5000+ and replace it with unrealized growth, but it's worth a look.

 

[24601NoMore]

Your example shows a 10% price increase and no dividends for A (10% total return) vs. a 10% price increase + 6% dividends (16% total return) on the other.

My example assumes a 10% total return from the portfolio in both scenarios. The $$s to cover the expenses shown ($60K) are coming from a totally different source (in my case, a second cash/CD portfolio that generates income). That's the whole point of the example. The example is PURELY to show that if you spend down from the investment portfolio, the investment portfolio value will be less than if you do not spend from it - regardless if the market goes up, down, or stays level.

The jey point I was attempting to make is that there's no shortcut to figuring out if keeping income < 4X FPL is a "better" option than maximizing income and foregoing the subsidy. FOR US, maximizing income and foregoing the subsidy netted a larger balance on BOTH portfolios (investments and cash/CDs) than keeping our income < 4X FPL and taking the subsidies. That's because staying under 4X FPL meant that we would not be generating enough income to pay the bills, and instead would have to pull from one or the other portfolio to do so.

I'd still suggest OP model out both scenarios year by year through remaining life expectancy to see which option yields a better end result. You can't look at it in the context of only one year and instead need to see the impact that the decision to limit income to get subsidies will have on your end result by looking at portfolio growth, income stream and expenses on a year by year basis, through age 95 or whatever age you choose to model through.

 

[RunningBum]

My example assumes a 10% total return from the portfolio in both scenarios. The $$s to cover the expenses shown ($60K) are coming from a totally different source (in my case, a second cash/CD portfolio that generates income). That's the whole point of the example. The example is PURELY to show that if you spend down from the investment portfolio, the investment portfolio value will be less than if you do not spend from it - regardless if the market goes up, down, or stays level.

I'm nearly speechless. You think it's valid to compare partial portfolios, ignoring that you're draining that previously unmentioned second cash/CD portfolio? I'm done with you.

My offer to help the OP stands.