Author Topic: What to live from when you put all money in index funds?  (Read 5014 times)

mrnotsomuchmoney

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What to live from when you put all money in index funds?
« on: January 26, 2015, 02:12:55 PM »
Simple questions on how MMM or any other similar early-retiree does it:

As far as I have understood you put as much of your money as possible in stock index funds, which are gaining average 7% per year, and its a great way to become richer.

Cool, but in contrary to single stocks which pay dividends the Vanguard index funds which MMM recommends accumulates its profits so you dont get anything from it (as far as I know) - so what does he actually live from? Selling shares of those index funds for an annual income?
« Last Edit: January 26, 2015, 02:15:53 PM by mrnotsomuchmoney »

frugalnacho

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Re: What to live from when you put all money in index funds?
« Reply #1 on: January 26, 2015, 02:15:05 PM »
The index funds pay dividends just like a single company stock does.    You can reinvest it, or have them cut you a check.

mrnotsomuchmoney

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Re: What to live from when you put all money in index funds?
« Reply #2 on: January 26, 2015, 02:21:39 PM »
As far as I know the Vanguard Global Stock Index Fund he uses accumulates instead of paying a dividend?

acorn

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Re: What to live from when you put all money in index funds?
« Reply #3 on: January 26, 2015, 02:25:13 PM »
Not sure which fund he's in but, Vanguard funds often have dividends. Check their website for each fund, under the Distributions tab.

https://personal.vanguard.com/us/funds/snapshot?FundId=0628&FundIntExt=INT#tab=4

He might be setting it to DRIP, where the dividends are automatically reinvested (which is also better for you if you're investing long-term anyway).
« Last Edit: January 26, 2015, 02:27:26 PM by acorn »

frugalnacho

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Re: What to live from when you put all money in index funds?
« Reply #4 on: January 26, 2015, 02:26:57 PM »
As far as I know the Vanguard Global Stock Index Fund he uses accumulates instead of paying a dividend?

You can choose to have dividend checks sent to you, or you can have them automatically reinvested.  You can do this for individual stocks, or for index funds.

Eric

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Re: What to live from when you put all money in index funds?
« Reply #5 on: January 26, 2015, 02:27:21 PM »
As far as I know the Vanguard Global Stock Index Fund he uses accumulates instead of paying a dividend?

Buying shares of an index fund is the same as buying shares of every single company in the index, albeit much simpler.  If there is a company in the index that pays a dividend, you'll receive it.

But a larger point should be made that there's basically no difference between receiving a dividend or selling shares to meet your income needs.  The stock price drops by the dividend payout amount on that date.

If you have stock worth $100 and it pays a $5 dividend, then you now have $95 worth of stock and $5 in your pocket.
If you have stock worth $100 but it pays no dividend, you sell $5 worth and you have $95 worth of stock and $5 in your pocket.


boarder42

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Re: What to live from when you put all money in index funds?
« Reply #6 on: January 26, 2015, 02:28:47 PM »
you can just sell shares... it works that way too.  not really an overly complicated concept to sell your shares... whether you own a stock that pays you dividends and has next to inflation based gains or a stock that goes up 7% on top of inflation  selling shares is pretty equivalent to a stock paying out a dividend.

boarder42

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Re: What to live from when you put all money in index funds?
« Reply #7 on: January 26, 2015, 02:29:08 PM »
eric said it better than i did.  but thats what i was getting at.

frugalnacho

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Re: What to live from when you put all money in index funds?
« Reply #8 on: January 26, 2015, 02:36:39 PM »
As far as I know the Vanguard Global Stock Index Fund he uses accumulates instead of paying a dividend?

Buying shares of an index fund is the same as buying shares of every single company in the index, albeit much simpler.  If there is a company in the index that pays a dividend, you'll receive it.

But a larger point should be made that there's basically no difference between receiving a dividend or selling shares to meet your income needs.  The stock price drops by the dividend payout amount on that date.

If you have stock worth $100 and it pays a $5 dividend, then you now have $95 worth of stock and $5 in your pocket.
If you have stock worth $100 but it pays no dividend, you sell $5 worth and you have $95 worth of stock and $5 in your pocket.

Or if you choose to reinvest dividends your $100 stock drops to $95, and then they use that $5 payout to buy more shares of that same stock or index fund.  So your total ownership in terms of dollars stays at $100, but you now have more shares.  You also then have to claim that $5 as dividend income (even if you reinvest it) and pay income tax on it that year.

mrnotsomuchmoney

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Re: What to live from when you put all money in index funds?
« Reply #9 on: January 26, 2015, 02:37:46 PM »
Thanks for all of your answers!


But a larger point should be made that there's basically no difference between receiving a dividend or selling shares to meet your income needs.  The stock price drops by the dividend payout amount on that date.


Isnt the difference that you have to pay fees for selling shares but do not pay fees for receiving dividends?

I am asking all this stuff because I found out my index fund does not pay dividends, only accumulates, and it is not possible to change to dividends. Didnt know before.

« Last Edit: January 26, 2015, 02:39:51 PM by mrnotsomuchmoney »

boarder42

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Re: What to live from when you put all money in index funds?
« Reply #10 on: January 26, 2015, 02:44:20 PM »
depends on your broker.  at vanguard there arent fees for withdrawing money aka selling shares. 

mrnotsomuchmoney

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Re: What to live from when you put all money in index funds?
« Reply #11 on: January 26, 2015, 02:50:37 PM »
Ah, I see. I am not from the US, so I do not use Vanguard - and therefore have to pay fees for selling shares...

Cookie78

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Re: What to live from when you put all money in index funds?
« Reply #12 on: January 26, 2015, 03:11:40 PM »
The index funds pay dividends just like a single company stock does.    You can reinvest it, or have them cut you a check.

Is this the same for ETFs? I just looked and the ETFs (VCN.TO) I bought a couple days ago pay Dividends quarterly, which I'd prefer to have reinvested. Do they ask you at that time whether you want to reinvest it or get a check, or do you have to let them know ahead of time?

wtjbatman

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Re: What to live from when you put all money in index funds?
« Reply #13 on: January 26, 2015, 03:20:01 PM »
The index funds pay dividends just like a single company stock does.    You can reinvest it, or have them cut you a check.

Is this the same for ETFs? I just looked and the ETFs (VCN.TO) I bought a couple days ago pay Dividends quarterly, which I'd prefer to have reinvested. Do they ask you at that time whether you want to reinvest it or get a check, or do you have to let them know ahead of time?

That depends on what brokerage you used to purchase the fund. Places like Vanguard and Sharebuilder let you check a box to either automatically reinvest the dividend or have the money diverted to a money market fund. Other brokerages, like TD Ameritrade, make you turn on dividend reinvestment for your entire account. With TD Ameritrade specifically you have to shoot an email/message to them, there is no box to check.

Cookie78

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Re: What to live from when you put all money in index funds?
« Reply #14 on: January 26, 2015, 03:23:08 PM »
The index funds pay dividends just like a single company stock does.    You can reinvest it, or have them cut you a check.

Is this the same for ETFs? I just looked and the ETFs (VCN.TO) I bought a couple days ago pay Dividends quarterly, which I'd prefer to have reinvested. Do they ask you at that time whether you want to reinvest it or get a check, or do you have to let them know ahead of time?

That depends on what brokerage you used to purchase the fund. Places like Vanguard and Sharebuilder let you check a box to either automatically reinvest the dividend or have the money diverted to a money market fund. Other brokerages, like TD Ameritrade, make you turn on dividend reinvestment for your entire account. With TD Ameritrade specifically you have to shoot an email/message to them, there is no box to check.

I will check first thing tomorrow. It's through Questrade.
Thanks. :)

wtjbatman

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Re: What to live from when you put all money in index funds?
« Reply #15 on: January 26, 2015, 03:46:20 PM »
I will check first thing tomorrow. It's through Questrade.
Thanks. :)

http://www.questrade.com/trading/services/DRIP

Looks pretty simple.

Cookie78

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Re: What to live from when you put all money in index funds?
« Reply #16 on: January 26, 2015, 05:06:04 PM »
I will check first thing tomorrow. It's through Questrade.
Thanks. :)

http://www.questrade.com/trading/services/DRIP

Looks pretty simple.

Yep! Quick paperwork, have to mail it in. Will do that tomorrow. Also learned today that dividends reinvested automatically do not count towards TFSA contribution room. :)

dividendman

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Re: What to live from when you put all money in index funds?
« Reply #17 on: January 26, 2015, 05:14:26 PM »
Yep! Quick paperwork, have to mail it in. Will do that tomorrow. Also learned today that dividends reinvested automatically do not count towards TFSA contribution room. :)

Nothing gained in your TFSA is going to count towards the contribution room. If your stock/ETF pays a dividend (or bond/ETF pays interest), it will land in your TFSA but will not take away contribution room, so that shouldn't be a concern.

Cookie78

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Re: What to live from when you put all money in index funds?
« Reply #18 on: January 26, 2015, 05:40:18 PM »
Yep! Quick paperwork, have to mail it in. Will do that tomorrow. Also learned today that dividends reinvested automatically do not count towards TFSA contribution room. :)

Nothing gained in your TFSA is going to count towards the contribution room. If your stock/ETF pays a dividend (or bond/ETF pays interest), it will land in your TFSA but will not take away contribution room, so that shouldn't be a concern.

Awesome.
A very good reason to send in the paperwork ASAP before they send me a check. :)


Cookie78

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Re: What to live from when you put all money in index funds?
« Reply #19 on: January 26, 2015, 07:49:00 PM »
As far as I know, Questrade does not ever send cheques for dividends. If you were not enrolled in DRIP, the dividend would just be added to the cash balance of your account. Using DRIP does allow you to avoid commissions if they would otherwise apply.

Ah, that works just as well. I just didn't want it taken out of the 'TFSA' account.

Thanks.