How the hell are we supposed to retire?

[w_b]

Non-Investment Account opinions wanted:

If dollar cost averaging, does it make sense to re-invest dividends, or not re-invest dividends? Assumption is at the end of the year the total amount invested is the same.

So two methods:
Situation #1 - X dollar cost average investments + Dividends re-invested = Z total yearly investments
Situation #2 - Y dollar cost average investments + Dividends not re-invested = Z total year investments

Is one of the above better than the other? Or a wash? My only reason for situation #2 possibly being better is it may make re-balancing easier and possibly less chance of being overweight one category of investments.

Paging @Patrick

It’s easier to auto reinvest, but yes you can do it yourself. I tend to not auto reinvest on things that pay infrequently like mutual funds. You are correct, it’s easier to precision rebalance manually, and no chance of getting overweight on good payers vs. lesser guys. If you let the cash build up then you lose some of the benefit of DCA, but, just because it’s not working for you while it’s sitting in cash.
Also, if I think I might be closing out a position soon ( very rare for me) I’ll likely stop reinvesting dividends to minimize/ eliminate any short term gains/ losses.

 

[Santapez]

It’s easier to auto reinvest, but yes you can do it yourself. I tend to not auto reinvest on things that pay infrequently like mutual funds. You are correct, it’s easier to precision rebalance manually, and no chance of getting overweight on good payers vs. lesser guys. If you let the cash build up then you lose some of the benefit of DCA, but, just because it’s not working for you while it’s sitting in cash.
Also, if I think I might be closing out a position soon ( very rare for me) I’ll likely stop reinvesting dividends to minimize/ eliminate any short term gains/ losses.

Kind of my thinking. And yeah, gotta keep an eye on the dividends as it's a variable amount.

 

[clarkenstein]

Kind of my thinking. And yeah, gotta keep an eye on the dividends as it's a variable amount.

Take taxes into consideration too - consider popping those cash payments into a Roth (if possible).

 

[Patrick]

Non-Investment Account opinions wanted:

If dollar cost averaging, does it make sense to re-invest dividends, or not re-invest dividends? Assumption is at the end of the year the total amount invested is the same.

So two methods:
Situation #1 - X dollar cost average investments + Dividends re-invested = Z total yearly investments
Situation #2 - Y dollar cost average investments + Dividends not re-invested = Z total year investments

Is one of the above better than the other? Or a wash? My only reason for situation #2 possibly being better is it may make re-balancing easier and possibly less chance of being overweight one category of investments.

Paging @Patrick

tough call - say there is a monthly div, reinvested into the fund that it came from.
does it become overweighted because it is doing well? or because of the reinvest?
probably because it is doing well.

If it is a pure $ cost avg, you are probably going to have to sell to re-balance, which might have different fees or tax
implication than a dividend. (is it after tax?) - reinvesting might mean more forced selling with cap gains rather than div.

interesting problem.
can you sim it on historical data?

is this picture correct?

 

[Santapez]

Take taxes into consideration too - consider popping those cash payments into a Roth (if possible).

My assumption above is all based on taxable account. Non taxable makes everything easier as there's no tax costs in selling to rebalance.

 

[Santapez]

tough call - say there is a monthly div, reinvested into the fund that it came from.
does it become overweighted because it is doing well? or because of the reinvest?
probably because it is doing well.

If it is a pure $ cost avg, you are probably going to have to sell to re-balance, which might have different fees or tax
implication than a dividend. (is it after tax?) - reinvesting might mean more forced selling with cap gains rather than div.

interesting problem.
can you sim it on historical data?

is this picture correct?
View attachment 141837

You know, I wasn't thinking about the selling aspect to rebalance. But I would think extra cash thrown into the investments could be allocated that way, if extra cash is thrown in. Maybe periodically use the dividends for that cash...

Maybe this is a decent reason to pick a balanced fund as opposed to individual...

 

[Patrick]

You know, I wasn't thinking about the selling aspect to rebalance. But I would think extra cash thrown into the investments could be allocated that way, if extra cash is thrown in. Maybe periodically use the dividends for that cash...

Maybe this is a decent reason to pick a balanced fund as opposed to individual...

that wouldn't really be $ cost averaging then ??
it would be funding the under-performers with the bulk of the new money to "catch up"
(i'd have to think more about if this makes a difference or not. def has tax implications to sell)

i know that i end up married to the stuff i buy - so that is why i've gone total mkt. less thinking!

 

[Fire Lord Jim]

The first thing to address is the extent that dividends make up of total return. There are lot of figures out there, but roughly half of total return comes from dividends. So taking dividends out of the account cuts total return in half. Make sure that is your plan.

Next we consider what happens in a taxable account vs a tax-deferred one. Dividends in an IRA are taxed like wages. But in a taxable account, dividends are taxed at at a lower rate—usually 15%, but could be 0% as well. If you have no other income (I know, a big if) then the first $37,500 ($75,000) of dividends are taxed at zero. I can live on that amount of income, backfilling with principle spend down to meet my needs. (My strategy is to live like this, postpone social security until age 70, when receiving that monthly check blows away that big if above.)

I have bought my dividend aristocrats in my after-tax account, and used dividend reinvestment to max out my zero tax rate. I buy my non-dividend growth-type investments in my IRAs. (the match is not perfect, but the direction works.) This is an asset allocation refinement matching dividend income in an after-tax account to the zero taxed limits. I rebalance only inside the IRAs. Which means I will own the same stock in both pre-and aft- tax accounts, but can rebalance without tax leakage. My tax rate is zero. However, at the end of each year, I do a Roth conversion which then triggers tax. I size the conversion to the amount of tax I feel like paying. This works until age 72 when the RMDs again blow away the big if.

 

[Patrick]

The first thing to address is the extent that dividends make up of total return. There are lot of figures out there, but roughly half of total return comes from dividends. So taking dividends out of the account cuts total return in half. Make sure that is your plan.

Next we consider what happens in a taxable account vs a tax-deferred one. Dividends in an IRA are taxed like wages. But in a taxable account, dividends are taxed at at a lower rate—usually 15%, but could be 0% as well. If you have no other income (I know, a big if) then the first $37,500 ($75,000) of dividends are taxed at zero. I can live on that amount of income, backfilling with principle spend down to meet my needs. (My strategy is to live like this, postpone social security until age 70, when receiving that monthly check blows away that big if above.)

I have bought my dividend aristocrats in my after-tax account, and used dividend reinvestment to max out my zero tax rate. I buy my non-dividend growth-type investments in my IRAs. (the match is not perfect, but the direction works.) This is an asset allocation refinement matching dividend income in an after-tax account to the zero taxed limits. I rebalance only inside the IRAs. Which means I will own the same stock in both pre-and aft- tax accounts, but can rebalance without tax leakage. My tax rate is zero. However, at the end of each year, I do a Roth conversion which then triggers tax. I size the conversion to the amount of tax I feel like paying. This works until age 72 when the RMDs again blow away the big if.

interesting balancing strategy! well done.

 

[THATmanMANNY]

Note to self: revisit page 30 in approx 25 years

 

[JimN]

Note to self: revisit page 30 in approx 25 years

You'll probably need updated advice in 25 years that doesn't include social security.

 

[carvegybe]

The first thing to address is the extent that dividends make up of total return. There are lot of figures out there, but roughly half of total return comes from dividends. So taking dividends out of the account cuts total return in half. Make sure that is your plan.

Next we consider what happens in a taxable account vs a tax-deferred one. Dividends in an IRA are taxed like wages. But in a taxable account, dividends are taxed at at a lower rate—usually 15%, but could be 0% as well. If you have no other income (I know, a big if) then the first $37,500 ($75,000) of dividends are taxed at zero. I can live on that amount of income, backfilling with principle spend down to meet my needs. (My strategy is to live like this, postpone social security until age 70, when receiving that monthly check blows away that big if above.)

I have bought my dividend aristocrats in my after-tax account, and used dividend reinvestment to max out my zero tax rate. I buy my non-dividend growth-type investments in my IRAs. (the match is not perfect, but the direction works.) This is an asset allocation refinement matching dividend income in an after-tax account to the zero taxed limits. I rebalance only inside the IRAs. Which means I will own the same stock in both pre-and aft- tax accounts, but can rebalance without tax leakage. My tax rate is zero. However, at the end of each year, I do a Roth conversion which then triggers tax. I size the conversion to the amount of tax I feel like paying. This works until age 72 when the RMDs again blow away the big if.

Out of curiosity, what is a rough size of equity portfolio pre-selected for maximizing dividend payments to max out the 0% tax rate?

 

[Fire Lord Jim]

Out of curiosity, what is a rough size of equity portfolio pre-selected for maximizing dividend payments to max out the 0% tax rate?

Married or single? The $37,500 is for single, $75,000 for married is the maximum zero taxed dividend.

Growth or chasing yield? Exxon has a 10% dividend but doesn't grow much. Walmart has a 1.5% dividend and grows. Assuming married, $750k of XOM fills your bucket, but it takes $5 million of WMT to get the same $75,000 of dividends. In the above hypothetical, once you have more than $750k of high dividend payers, you can diversify from yield to growth as dividends above that amount are taxed similar to capital gains.

 

[JimN]

Exxon has a 10% dividend but doesn't grow much.

To be fair, their dividend is only 10% because they've been doing the opposite of growing for the past few years.

 

[Patrick]

Married or single? The $37,500 is for single, $75,000 for married is the maximum zero taxed dividend.

Growth or chasing yield? Exxon has a 10% dividend but doesn't grow much. Walmart has a 1.5% dividend and grows. Assuming married, $750k of XOM fills your bucket, but it takes $5 million of WMT to get the same $75,000 of dividends. In the above hypothetical, once you have more than $750k of high dividend payers, you can diversify from yield to growth as dividends above that amount are taxed similar to capital gains.

isn't the tax rate based on earned income?
So making earned income below $75k, and $1M in dividends would still result in a 0% div tax rate.
Even very high RMDs might stay below that, because other sources of earned income would go down.

it would be 0 up until about $1.7M in retirement fund at 70.5 + slop
and 15% up to about $10M in retirement fund

while i don't like paying taxes, i wish i paid $1M a year, cause......

thank you Mr Buffet, who explained why he pays less tax than his executive assistant.

 

[Fire Lord Jim]

To be fair, their dividend is only 10% because they've been doing the opposite of growing for the past few years.

Exactly. Chasing yield is a bad strategy when the equity delivers capital losses. I used it as an extreme.

 

[Fire Lord Jim]

isn't the tax rate based on earned income?
So making earned income below $75k, and $1M in dividends would still result in a 0% div tax rate.

thank you Mr Buffet, who explained why he pays less tax than his executive assistant.

Not earned income. It is based on dividend income.
Consider this. You have no income other than $75k in dividends. The dividends are taxed at zero.
Now you get some other income. The dividend income "floats" to the top. It is no longer taxed at zero. That other income uses up your lower tax brackets, and then we add in the dividend income. Here's where the Roth conversion hurts. You pay tax on the Roth, and you float your existing dividends out from the zero bracket.

 

[Patrick]

Not earned income. It is based on dividend income.
Consider this. You have no income other than $75k in dividends. The dividends are taxed at zero.
Now you get some other income. The dividend income "floats" to the top. It is no longer taxed at zero. That other income uses up your lower tax brackets, and then we add in the dividend income. Here's where the Roth conversion hurts. You pay tax on the Roth, and you float your existing dividends out from the zero bracket.

Got it - based on "taxable income" - and the tax rates vary by class of taxable income.

ie, above $75k rate goes from 0 to 15% rate on dividends.....
LTG seems to be in the same 0/15/20% with slightly different limits
etc

thanks - I haven't moved into the "income" stage yet. Got a little more time to go.

 

[Santapez]

that wouldn't really be $ cost averaging then ??
it would be funding the under-performers with the bulk of the new money to "catch up"
(i'd have to think more about if this makes a difference or not. def has tax implications to sell)

i know that i end up married to the stuff i buy - so that is why i've gone total mkt. less thinking!

Sort of yes, sort of no. What I'm saying is if you get 10k on average in dividends a year, to take that 10k as money that isn't automatically re-invested into the funds they come from, but either figure that 10k added back into the funds at the pre-determined ratio along with the other automatic investments, or periodically take that cash and re-invest so that you're balancing.

Re-balancing is rather hard in non-retirement accounts as you don't want to sell to re-balance and deal with the taxes. So it's easier to take cash and invest it into the funds as required to have the balance you require. Maybe every 3-4 monthrs take the dividend cash and invest it in a way to re-balance?

I may be over thinking it. This was a thought exercise, not something I actually worry about.

 

[ebarker9]

This thread is a great example of why my retirement strategy is to do mostly the things that don't require me to obsess over this stuff every day.