Trying to understand 'investment income'

[Carpediem]

I didn't want to hijack the discussion in the "Help me with stock dividends" thread so I'm posting my question about investment income here. My situation is that almost all our retirement savings is in a tIRA - Wellington and Wellesley funds. Below are the payouts at the end of December. My question is this: which of the payouts below can I receive as 'income'? Is it just the dividends? Or are LT and ST cap gains also considered 'income' and are spendable? (If so, how do you receive cap gains?)

I'm trying to get an idea of how much annual income I might receive from our tIRA when we retire.

Thank you.


12/23/2016 Wellington Fund Admiral Long-term capital gain 152.136 $67.76 $10,308.71
12/23/2016 Wellington Fund Admiral Short-term capital gain 17.016 $67.76 $1,153.03
12/23/2016 Wellington Fund Admiral Dividend Received 64.444 $67.76 $4,366.72
12/23/2016 Wellesley Income Fund Adm Long-term capital gain 24.641 $61.67 $1,519.61
12/23/2016 Wellesley Income Fund Adm Short-term capital gain 0.895 $61.67 $55.18
12/23/2016 Wellesley Income Fund Adm Dividend Received 21.859 $61.67 $1,348.02

 

[harley]

If I'm understanding your question correctly, you don't have to worry about any of that. If it's in a tIRA, then when you withdraw any money it will be taxed at your regular tax rate. What happens inside the IRA doesn't matter. When you withdraw it it's all basically cash.

 

[Carpediem]

If I'm understanding your question correctly, you don't have to worry about any of that. If it's in a tIRA, then when you withdraw any money it will be taxed at your regular tax rate. What happens inside the IRA doesn't matter. When you withdraw it it's all basically cash.

What I'm wondering is if I change the setting on my tIRA to 'receive dividends' (instead of reinvesting them), will I only receive the dividend amounts ($4366 + $1348) shown in my post above? If so, is there a way to receive CGs as income (without selling shares) or do they automatically get reinvested?

 

[haha]

What I'm wondering is if I change the setting on my tIRA to 'receive dividends' (instead of reinvesting them), will I only receive the dividend amounts ($4366 + $1348) shown in my post above? If so, is there a way to receive CGs as income (without selling shares) or do they automatically get reinvested?

Since presumably these funds are held in a brokerage account, if you can't find an answer to your question on the broker's website, ask the broker. Also you could let the payouts get reinvested and then whenever you want just sell some shares to exactly meet your cash needs. If it is in a TIRA, I can't think why you might want to avoid selling shares. But I am not a large mutual fund investor, and my TIRA is small, so maybe there is a reason that someone else or you can explain.

Ha

 

[pb4uski]

Basically, you get 4 kinds of "income" from a mutual fund... dividends, short-term capital gain distributions, long-term capital gain distributions and appreciation.

Let's use Wellington (Admiral - VWENX) for 2016 as an example.. and use 1 share.

On 12/31/2015, a share of Wellington was worth $63.54 and on 12/31/2016 a share was worth $67.45. In addition, during 2016, Wellington paid $1.782 per share of dividends, and in December 2016 paid a $0.1278 short-term capital gain distribution and a $1.1426 long-term capital gain distribution.

So if you owned 1 share of Wellington in 2016, you would have received $3.0524 of distrbutions.. plus the share appreciated $3.91. I think most people would say that you had $3.0524 of "income" and $6.9624 of total return.

In your case, since you hold it in a tax-deferred IRA, none of it is income for tax purposes unless you withdraw it... for example, if you have your IRA set up to take dividends and capital gain distributions in cash then your income for tax purposes would be $3.0534... but if you reinvest distributions then your taxable income would be nil (assuming no other withdrawals).

OTOH, if you hold the share in a taxable account, then your taxable income would be $3.0534 whether you take the distributions in cash or reinvest them.

I hope this isn't too confusing.

 

[exnavynuke]

Vanguard's article here I think covers your questions https://personal.vanguard.com/us/insights/article/cap-gains-explained-112015

 

[nun]

Others have answered the different types of gains that something like Wellesley and Wellington distributes and their level. When saving for retirement most people will reinvest all those distributions. However, when retired lots of folks choose not to reinvest and they have the gains deposited into a cash account and spend it. If you use a money market account inside a tIRA you'll pay income tax on the withdrawals. If the funds are in a regular brokerage account you'll pay dividend and capital gains tax.

 

[Carpediem]

Thank you for the replies. So my VG tIRA produced an approx total of $18,750 in retirement income for Q4/2016 using the numbers I posted originally, right?

12/23/2016 Wellington Fund Admiral Long-term capital gain $10,308.71
12/23/2016 Wellington Fund Admiral Short-term capital gain $1,153.03
12/23/2016 Wellington Fund Admiral Dividend Received $4,366.72

12/23/2016 Wellesley Income Fund Adm Long-term capital gain $1,519.61
12/23/2016 Wellesley Income Fund Adm Short-term capital gain $55.18
12/23/2016 Wellesley Income Fund Adm Dividend Received $1,348.02


And based on the feedback, it sounds like this is money that I can choose to receive in cash (versus having it reinvesting), correct?

I realize there are differences in tax consequences but I'm not focused on that right now. I just want to get some idea of what my annual retirement income might be for planning purposes.

 

[harley]

You're still missing the point. Your retirement income is whatever you take out of your investments, which in this case is your IRA. With each individual MF in the IRA you can specify whether you want the dividends/interest/capital gains reinvested or not. It's (probably) not a setting on your IRA, it's a setting on the individual MF. If what you are looking for is how much your investments will pay off each year to create a bucket of cash you can withdraw without selling any shares, then yes, it was your $18K last quarter. But it's not going to be automatically paid out to you from the IRA, it's going to sit in (probably) a MM account in your IRA. You will then have to withdraw it, all or part, before you will have it to spend.


If you want to use the amount of dividends/interest/capital gains you get as your income, that's fine. But it doesn't have to be. It's all your choice.

 

[NW-Bound]

You're still missing the point. Your retirement income is whatever you take out of your investments, which in this case is your IRA...

If you want to use the amount of dividends/interest/capital gains you get as your income, that's fine. But it doesn't have to be. It's all your choice.

+1

If you take out the whole enchilada in one year and pay tax on it, that's your income. Or it can be zero.

If one needs to know what the sustainable investment income is, then the question is about investment gain. He can take the portfolio value at year end, subtract from it the beginning value AND also an amount equal to the inflation. That portfolio growth is your investment gain for that year, whether anything is reinvested or not is immaterial.

The problem is that this "gain" varies from year to year, and can and did turn into huge losses some years. So, what is then the average? Hah, now that's something nobody knows, because we know what it was in the past, but not what it will be in the future.

 

[pb4uski]

harley is right... you're still missing the point. While the distributions that you received were ~$18,750... in addition, in both the case of Wellesley and Wellington the shares appreciated (value the end of they year was higher than at the beginning of the year by more than the $18,750 of distributions received. While appreciation is typically lumpier than distributions, it can easily be monetized and used for living expenses by just selling a few shares and distributing the proceeds.

 

[RetireAge50]

The capital gains are not relevant in an IRA so if you want to live off the dividends only use that number. Otherwise just tell them to send you more money, the capital gains mean nothing so pick any amount.

 

[NW-Bound]

I realize there are differences in tax consequences but I'm not focused on that right now. I just want to get some idea of what my annual retirement income might be for planning purposes.

As I mentioned, the OP was really thinking about what he could sustainably draw from his IRA, although he needs to realize also that there's no tax difference anyway.

One withdraws $10K, he pays whatever tax on that $10K, no matter if that $10K comes from dividends, capital gains, or principal.

His stash shrinks by 50% in that year, and the MFs pay no dividends, he draws $10K, he pays tax on $10K.

If it is from a taxable or after-tax account, not an IRA, then one does consider different tax treatments.

 

[Carpediem]

Okay, I think I finally get it. Sorry for being so dunce about this stuff. Thank you all for your patience and your help.

 

[LOL!]

This has probably been stated a million times, but I don't see it coming through here:

If you have a $500,000 IRA holding W & W and they pay out $18,750 in a single day that you have sent to your checking account, then you will have $18,750 in your checking account and $481,250 in your IRA. Your IRA will NOT be valued at $500,000 at the end of that day.

Here is something else:

If you have a $500,000 IRA holding W & W and they don't pay out anything in a single day, but you sell $18,750 worth of shares and send the $18,750 to your checking account, then you will have $18,750 in your checking account and $481,250 in your IRA. Your IRA will NOT be valued at $500,000 at the end of that day.

My point is that it is TOTALLY MEANINGLESS to think of INCOME or DIVIDENDS or CAPITAL GAINS DISTRIBUTIONS coming out of a mutual fund. Any total value of your shares includes embedded value for income, dividends, and capital gains distributions, so when money comes out, the value of your holding is less. You can call it income, dividends, and/or capital gains, but you can also call it plain old money.

One's annual retirement income can be anything they want it to be from a pair of funds like W & W: just take money out until one runs out of money.

 

[pb4uski]

^^^^ well put

 

[Carpediem]

This has probably been stated a million times, but I don't see it coming through here:.....

Thank you!

 

[NW-Bound]

There's a reason some people think of dividends as being different than cap gain distributions. In their mind, they think of this analogy.

I have a chicken, and it lays an egg for me. If I only eat the egg and do not harm the chicken, I can eat eggs forever.

The problem is that they forget that the chicken will die off some day, the same as some companies do and did die off.

A mutual fund or even an index fund has more than one stock, and it invests in new stocks to replace the old ones that die off. So, it's not just one chicken, but a flock of them. Some hens are young and have not laid eggs yet, and some are productive hens but are on the way down. Hopefully, they will take turn and produce a constant amount of eggs.

But even if one just eats eggs and no chicken wings, the egg production is not steady but ebbs and flows. Once in a while, a bird flu arrives and wipes out many hens. Your egg production is down, your number of hens is down. It takes time to rebuild the flock when that happens. You need to stop eating eggs, and hatch them for replacement.

Some people raise chicken for meat in addition to eggs. So, they raise a breed that is not intended for egg production but grows fast. If they successfully hatch and raise more chicken, there's nothing wrong with eating chicken meat (selling shares), if their flock after culling stays the same size as that of the egg farmer.

And so, investment income can be eggs, or chicken meat. It depends on what breed of chicken one raises, and most people have both.

 

[nun]

Thank you for the replies. So my VG tIRA produced an approx total of $18,750 in retirement income for Q4/2016 using the numbers I posted originally, right?

12/23/2016 Wellington Fund Admiral Long-term capital gain $10,308.71
12/23/2016 Wellington Fund Admiral Short-term capital gain $1,153.03
12/23/2016 Wellington Fund Admiral Dividend Received $4,366.72

12/23/2016 Wellesley Income Fund Adm Long-term capital gain $1,519.61
12/23/2016 Wellesley Income Fund Adm Short-term capital gain $55.18
12/23/2016 Wellesley Income Fund Adm Dividend Received $1,348.02


And based on the feedback, it sounds like this is money that I can choose to receive in cash (versus having it reinvesting), correct?

I realize there are differences in tax consequences but I'm not focused on that right now. I just want to get some idea of what my annual retirement income might be for planning purposes.

All you really need to know is that a balanced fund like Wellesley or Wellington will probably allow you to safely withdraw an index linked 4% of it's value every year for a 30 year retirement.....that 4% is your income whether it comes from dividends, capital gains distributions or sale of shares. You can take out any amount that you like, but that 4% a year is a good start for a retirement income.

 

[pb4uski]

Good point... the OP could just put their tIRA into W or W or both, set up an automatic monthly redemption that goes to their local bank account equal to 3% (or even 4%) of the beginning value divided by 12 months and go off and have fun... and just adjust with automatic withdrawal annually thereafter for inflation.

Actually, I haven't found it necessary to adjust my withdrawals for inflation so an annual adjustment would be optional IME.

 

[Carpediem]

This thread has definitely been a good education for me. Thanks to all.

 

[Cheesehead]

Good point... the OP could just put their tIRA into W or W or both, set up an automatic monthly redemption that goes to their local bank account equal to 3% (or even 4%) of the beginning value divided by 12 months and go off and have fun... and just adjust with automatic withdrawal annually thereafter for inflation.

Actually, I haven't found it necessary to adjust my withdrawals for inflation so an annual adjustment would be optional IME.

This is exciting! I'm in the same boat, plan to put 80% of the Nest Egg in a W&W split, and fill out the paperwork to withdraw what would be a 3% annual WR. But...how does one figure for inflation? Let's say the funds averaged 5% for the year and inflation was 2%, I withdrew 3%. So then I have a wash? The Nest Egg is the same amount as when I started, right? And what if inflation were higher, do I reduce my annual WR the next year to compensate?

The reason I don't want to do what I have always done, be in pure index funds, is I want the expertise of W&W to handle it for me now. I'm willing to pay a little more. Thanks

 

[pb4uski]

Let's say you start with $1 million and withdraw $30k in the first year and in that first year inflation is 2%, the second year you withdraw $30,600 ($30,000 * (1+2%)). Then repeat.. the following year... if inflation in the second year is 2.5% then the third year withdrawal is $31,365 ($30,600 * (1+2.5%)).

Regarding the balance... it is whatever it is.

While this is the way it would work in theory, as a practical matter many of us do it a bit differently.

 

[marko]

This has probably been stated a million times, but I don't see it coming through here:

My point is that it is TOTALLY MEANINGLESS to think of INCOME or DIVIDENDS or CAPITAL GAINS DISTRIBUTIONS coming out of a mutual fund. Any total value of your shares includes embedded value for income, dividends, and capital gains distributions, so when money comes out, the value of your holding is less. You can call it income, dividends, and/or capital gains, but you can also call it plain old money.

.

You're right on. I think a lot of people equate dividends and CG with interest.

They're not of course, but at the same time I think they do give some people (myself included) a sense of a predictable income regardless of the dynamics that provides it.

For me, I like the idea of a regular, fairly predictable 'income' from my funds. Depositing my dividends into a holding account (both inside and outside my IRA) allows me to maintain a cash buffer without the worry of having to decide what/when shares to sell when I need cash for expenses.

 

[Dash man]

These folks have done a good job of answering your immediate question, but you also need to do some long term planning to ensure your funds will last through your retirement and to minimize Uncle Sam's share when you turn 70 1/2 and Required Minimum Distributions (RMD) kick in, possibly forcing you to increase your annual distributions with severe tax penalties if you don't. Try to estimate what your income will be including Social Security and your RMD. You may find it to your advantage to do some earlier withdrawals to put into an after tax brokerage account or Roth IRA. In other words, pay a possibly lower tax rate now than you may pay once RMDs begin.