Author Topic: Taking Dividends Into Account at Retirement  (Read 1772 times)

LongBeachLion

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Taking Dividends Into Account at Retirement
« on: January 28, 2014, 11:55:51 AM »
I've read a lot of posts on the 4% rule and have tried many of the calculators posted on this site.  With that said, I haven't seen dividends being taken into account in most cases.  Are dividends taken into account with the 4% rule?

Let's say I currently spend $50,000 per year in expenses.  I make $15,000 per year, after taxes, in dividends.  If one currently rolls those dividends back into the fund, it greatly helps their investment portfolio.  After retirement, I would assume most people, if needed, would take their dividends as distributions.  Just using logic, I would think I could subtract the $15,000, from the $50,000 and then I would need to withdraw $35,000 per year from my investment portfolio. 

If I'm thinking about this in the correct manner, then the total investment portfolio does not need to be as large when taking into account dividend distributions.

Any feedback would be appreciated!

nordlead

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Re: Taking Dividends Into Account at Retirement
« Reply #1 on: January 28, 2014, 12:03:30 PM »
The 4% rule accounts for dividends.

Assuming 1) that this is a tax advantaged account (Roth or traditional), and 2) that all dividends are re-invested in the asset they came from, then...

just ignore dividends, as they don't matter to total portfolio growth. Every time a dividend is paid out, the value of the asset drops the corresponding amount (baring some level of noise, an index mutual fund will show an obvious drop, but an individual stock might have the drop hidden in the noise, and there are some papers saying it isn't perfectly efficient, but close enough for this discussion). If a Company valued at $11/share pays a $1 dividend, then the share price drops by $1 to $10. You still have $11 of assets, but you were forced to transfer $1 out of company value into real dollars. If you reinvest the money, then you still own $11 of the company and nothing changed except now you own 1.1 stocks instead of 1.

If assumption 1 is wrong, then you have an additional tax drag on your investment as you are forced to realize gains at intervals you may not desire. With that said, if you are in retirement then you just spend the dividends and there is no additional tax drag since you had to realize the gain anyways to spend it.

LongBeachLion

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Re: Taking Dividends Into Account at Retirement
« Reply #2 on: January 28, 2014, 12:12:49 PM »
The 4% rule accounts for dividends.

Assuming 1) that this is a tax advantaged account (Roth or traditional), and 2) that all dividends are re-invested in the asset they came from, then...

just ignore dividends, as they don't matter to total portfolio growth. Every time a dividend is paid out, the value of the asset drops the corresponding amount (baring some level of noise, an index mutual fund will show an obvious drop, but an individual stock might have the drop hidden in the noise, and there are some papers saying it isn't perfectly efficient, but close enough for this discussion). If a Company valued at $11/share pays a $1 dividend, then the share price drops by $1 to $10. You still have $11 of assets, but you were forced to transfer $1 out of company value into real dollars. If you reinvest the money, then you still own $11 of the company and nothing changed except now you own 1.1 stocks instead of 1.

If assumption 1 is wrong, then you have an additional tax drag on your investment as you are forced to realize gains at intervals you may not desire. With that said, if you are in retirement then you just spend the dividends and there is no additional tax drag since you had to realize the gain anyways to spend it.

Awesome!  Thanks so much for the clarification.

wtjbatman

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Re: Taking Dividends Into Account at Retirement
« Reply #3 on: January 28, 2014, 10:12:44 PM »
But if you're in retirement, and if it's a taxable account, collect the dividends and either reinvest where you choose, or if you practice dividend investing, live off them and never touch the principal :)