Living off dividends = to 0% WR?

[slowsaver]

I've realized that the interest and dividends coming from my taxable accounts has been larger than my average spending. Currently, all of them are automatically reinvesting.

I plan to retire at the end of this year. I want to switch my taxable accounts to send dividends to my checking and see if I can avoid selling my investments.

Would that mean my WR will be zero?

The reason I ask is because my portfolio will be growing more slowly without reinvestment. I'm wondering if firecalc models assume reinvestment of dividends.

I've been accumulating for so long now that the concept of taking money out is a bit confusing.

The other option I can think of is to keep automatic reinvestment, but then sell funds whose "bucket" has gotten too full, according to my AA. I don't like the "feel" of that as much as living off dividends, but maybe it's better over the long term?

Those of you who are already retired: do you reinvest your dividends, or spend them?

 

[SevenUp]

I want to switch my taxable accounts to send dividends to my checking and see if I can avoid selling my investments.

Would that mean my WR will be zero?

No, because all those dividends going to checking and then spent are withdrawals.

The other option I can think of is to keep automatic reinvestment, but then sell funds whose "bucket" has gotten too full, according to my AA. I don't like the "feel" of that as much as living off dividends, but maybe it's better over the long term?

Your withdrawal ratio is the same whether you withdraw dividends or sell the same dollar amount of shares and withdraw that.

 

[audreyh1]

Living off dividends = to 0% WR?

No it does not. You are withdrawing the dividends and that counts. Withdrawal rate models include dividends in their calculations.

FIREcalc models assume reinvestment of dividends in the sense that those models rebalance to a fixed asset allocation each year.

Like FIREcalc I use total return - portfolio growth which includes dividends and interest income. I actually don’t care where my spending money is coming from as each year I withdraw a fixed percentage and rebalance the remaining portfolio.

 

[CRLLS]

Most of us here follow the "money is fungible" school. It matters not where the withdrawal come from, whether it be dividends or selling stock (or fund shares), it is still a withdrawal.

However, following recent Net Worth discussions, you can call it whatever you want. If you want to call it 0 % withdrawals, I can see how you might justify the definition. That doesn't technically make it so though.

 

[slowsaver]

Ok, thanks that makes a lot of sense. So I took the yearly dividend and divided by my total balance. Seems my WR = 1.5%

Thanks for answering a dumb question.

 

[LateToFIRE]

You might want to also consider the most tax-efficient way to make your WD's. Seems to me that using the dividends for spending needs (rather than reinvest) would be more tax efficient. There's another recent thread on this topic.

 

[EastWest Gal]

Assuming the dividends are mostly or all qualified, it would be very tax efficient to use them for spending needs. If you reinvest, you still have to pay tax on them, then you also have to pay tax on equities you sell. Qualified dividends and long term capital gains are taxed at the same rate federally, and in your state (California), they're both taxed as ordinary income. Move the cash from the dividends from your brokerage to your checking account.

If you are going to use ACA for health insurance, selling some equities can increase your income through increasing your capital gains to stay off of Medicaid, and selling no equities can help you qualify for a premium tax credit. There is no cliff until 2026. Before the CARES act, I had planned to sell equities every other year and pay full freight for our health insurance and qualify for a tax credit every other year. That effectively would reduce our health insurance premiums 30-40%.

And congratulations on the upcoming retirement. The west part of my name comes from 39 years in Cailfornia (fifth generation) including 10 years private group medical practice in Silly Valley. The Bay Area still feels a bit like home.

 

[audreyh1]

If you are maintaining a specific asset allocation you will need to pull from somewhere to rebalance. Still not reinvesting any distributions works well to minimize what you need to sell to meet your withdrawal needs and rebalance at the same time.

 

[DuluthGA]

And congratulations on retiring this year and welcome to the club.

 

[pjigar]

Ok, thanks that makes a lot of sense. So I took the yearly dividend and divided by my total balance. Seems my WR = 1.5%

Thanks for answering a dumb question.

1.5% is ridiculously low WR so you have to start figuring out how to "blow your dough".

I have said a few times on this forum that we have a special need kid so we have always planned for "perpetual/generational" retirement. The WR rate we have settled is 3% which seem to preserve the original portfolio (in terms of real dollars) for decades. The WR for perpetual/generational retirement was 2.73% at some point towards the end of the lost decade. But we have made peace with 3% number and call it good.

 

[slowsaver]

Thanks for all the great tips! Especially the tax considerations.

I do have my eye on keeping my income in-line with ACA limits. As a married person in California, I the sweet spot seems to be around 60-70k income (which is around my spending level the last 10 years). I think interest and dividends will be on the low side of that range.

1.5% is ridiculously low WR so you have to start figuring out how to "blow your dough".

Well, let's say that I *think* I can live off dividends. Despite all my planning, I still feel like I may hit some surprises when I start doing all these "new" things: paying estimated taxes, buying my own health insurance, contributing to an HSA, and staying "entertained" for a (potentially) 50 year retirement while spending the same as before. Let's just say that I'll feel a lot more comfortable after I have the 1st year of retirement under my belt.

 

[audreyh1]

Contributions to an HSA aren’t spending. That’s just moving funds to a different account that can be used to cover medical expenses tax-free. If you want to keep HSA for longer term investment, then just draw from other investments to move there.

 

[Bikechuck]

Ok, thanks that makes a lot of sense. So I took the yearly dividend and divided by my total balance. Seems my WR = 1.5%

Thanks for answering a dumb question.

I don't think that it was a dumb question. Your question and the community's response is likely educational and helpful to many readers.

 

[Flyfish1]

Not a dumb question at all, and it's been raised here several times. I agree with pjigar, 1.5% WR is very low. You can afford to spend more than that and enjoy yourself...maybe not at Dave Ramsey WR though...

 

[OldShooter]

... Thanks for answering a dumb question.

Not a dumb question. This discussion comes along here fairly often and there are people who think that dividends are somehow free money. Have the stock, get a dividend, still have the stock -- certainly feels like free money. The fact that the value of the stock is diminished by the amount of the dividend is often well obscured by daily market action.

A couple of other things to consider when looking at dividend stocks: First, companies that have lots of profitable investment opportunities tend to not pay dividends, so to a degree a dividend sends the message that the company lacks opportunities. Second, stock buybacks are a more tax-efficient way for the company to distribute money to the shareholders -- a dividend focus overlooks these companies. (Both of those observations come with pros and cons that I won't detail but you can Google to learn more. Here for example: https://www.investopedia.com/articles/active-trading/073015/dividend-versus-buyback-which-better.asp)

 

[SevenUp]

Thanks for all the great tips! Especially the tax considerations.

I do have my eye on keeping my income in-line with ACA limits.

Roth Conversion and Capital Gains On ACA Health Insurance is a good article on that topic.

 

[Time2]

1.5% is ridiculously low WR so you have to start figuring out how to "blow your dough"

Lucky for him, there is a thread for that!

 

[bloom2708]

What if all your money happened to be in taxable and happened to be in the Federal Money Market fund (5.29% SEC Yield)?

Is that considered interest or a dividend? With a bond or stock fund, the share value drops by the dividend, but not with a MM.

Would your withdrawal rate be 0% or 5.29% if you sent the interest to your checking account? Not that it matters, but there is no forced withdrawal with interest.

All semantics, so probably doesn't matter.

 

[Exchme]

What if all your money happened to be in taxable and happened to be in the Federal Money Market fund (5.29% SEC Yield)?

Is that considered interest or a dividend? With a bond or stock fund, the share value drops by the dividend, but not with a MM.

Would your withdrawal rate be 0% or 5.29% if you sent the interest to your checking account? Not that it matters, but there is no forced withdrawal with interest.

All semantics, so probably doesn't matter.

Any use of your portfolio to support yourself was a withdrawal in the studies that have been done on portfolio survivability. Studies obviously adjusted for inflation, so with inflation running at 3.6%, your real yield is 1.7%, so not so exciting.

 

[OldShooter]

... Is that considered interest or a dividend? With a bond or stock fund, the share value drops by the dividend, but not with a MM. Would your withdrawal rate be 0% or 5.29% if you sent the interest to your checking account? Not that it matters, but there is no forced withdrawal with interest. ...

I don't generally worry about WRs but I think divs and interest are just fungible money and both are part of a portfolio's total return. So they go into the portfolio like any other return and become part of the denominator when calculating a WR.

 

[ncbill]

Dividends can be a SWAN choice.

But versus broad market indices, dividend indices have historically underperformed.

Plenty of discussion of the above over on Bogleheads.

Not to mention the forced realization of income with a dividend strategy, which affects ACA subsidies and the 'headroom' to do Roth conversions.

The latter mean I'm not pursuing such right now, but may well switch for the SWAN aspect after completing Roth conversions & starting Medicare.

 

[Retired Expat]

No it does not. You are withdrawing the dividends and that counts. Withdrawal rate models include dividends in their calculations.

FIREcalc models assume reinvestment of dividends in the sense that those models rebalance to a fixed asset allocation each year.

Like FIREcalc I use total return - portfolio growth which includes dividends and interest income. I actually don’t care where my spending money is coming from as each year I withdraw a fixed percentage and rebalance the remaining portfolio.

I find it all depends how you view your investments and the money that generate. We have a bit of real estate and things like Fire calc don’t do well handling them. There is the income they generate and the final sale with hopefully appreciation. I personally don’t consider anything that creates a “paycheck” replacement as a withdrawl. But I do reduce the return on investment aspect of the calculator. So if dividends are giving you a 5% return and the stock is appreciating 3% a year, as far as the calculator is concerned your investment return is only 3%…


But let me ask this question. Do you consider a pension payment, or an annuity payment part of your WR? I personally only consider it a withdrawal if it reduces my investment account… the idea being to never run out of money, so if you don’t touch the principle of your investment account your WR is zero.. of course, don’t forget to consider fees and taxes and asset valuations, inflation etc


I basically live off of my passive income and in my annual reviews with my FA he usually says my WR is zero.

 

[SevenUp]

But let me ask this question. Do you consider a pension payment, or an annuity payment part of your WR?

No.

I personally only consider it a withdrawal if it reduces my investment account…

Yes, the literature for Safe withdrawal rates bases those rates on withdrawals from invested assets.

Things that don't come from your invested assets, such as pensions, annuitized payments, Soc. Sec., etc., may decrease the withdrawal rate you need but aren't a direct part of the usual "withdrawal rate" calculation.

 

[Badger]

We have been taking RMD for a few years now. I let the dividends and interest sweep into cash accounts in the IRA to be used for RMD instead of selling the MFs. I also sweep the dividends from the taxable stocks into a cash account. I stopped buying anymore MFs in the IRA and the taxable stocks just to keep things simple for me. I also wanted to avoid building more sources of IRA income that would increase my RMD and therefore my taxable income. The RMD cash is being place into various CDs now that rates are up a bit. I know that they will also be taxed but this is to safeguard the money with FDIC.
We live on the rest of the taxable dividends, SS, and small pensions. There are probably other ways to do this but this is working for us at the moment.

Cheers!

 

[thepalmersinking]

You can also sell covered calls and get extra income on top of your dividend. If it’s in a taxable account, Be sure to pick way out of the money calls if you do not want the stock to be called away.