Author Topic: VTSAX dividend question and the 4% WD rate  (Read 3708 times)

ObsessedFIer

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VTSAX dividend question and the 4% WD rate
« on: August 17, 2017, 05:52:00 AM »
Hey all,

Long time lurker and MMM follower. This is probably a dumb question but I'm a little confused with how things work with the rate of return and the 1.89% dividend that the VTSAX fund pays.

I'm 28 and have no debt. I've been blessed with a very high income over the last few years  and have saved the majority/invested in a property that I flipped.

I have $0 in my 401k, IRA, HSA, etc. I know this sounds incredibly stupid, but I've cashed out and focused all of my efforts toward investing in things I want to invest in. The funds in the past have had very high fees and other things I didn't want to deal with.

My situation:
- 100% VTSAX with no other investments or debt. Currently at $650k VTSAX with a cash emergency fund.

What I'm confused about:
- For example, if I wanted to retire at $800,000 and pull 4%, would I have an additional 1.89% on top of that to live off? Or, could I pull 2.11% from my account and achieve the same 4% due to the dividend payment?

- At $800,000 I could pull $32,000 per year at 4%. Since I'm 100% in VTSAX, could I actually pull 5.89% and still be living by the same rules as the 4% WD rate?

I never really considered this until recently, very curious and would love to hear what everyone thinks. Thanks in advance.

nereo

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Re: VTSAX dividend question and the 4% WD rate
« Reply #1 on: August 17, 2017, 06:21:10 AM »
Welcome.  Hopefully we can straighten out some of your misconceptions here.

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I have $0 in my 401k, IRA, HSA, etc. I know this sounds incredibly stupid, but I've cashed out and focused all of my efforts toward investing in things I want to invest in. The funds in the past have had very high fees and other things I didn't want to deal with.
Urrrr.... yes, that was incredibly stupid.  Sorry for being harsh, but using your own words here.  401(k), IRA, HSA are all different buckets you can put your money in, but (especially with the IRA) you get to choose what you invest in.  The reason to do so is you pay massively less in taxes over time. 
You could put your IRA money into any stock, index fund, bond, or currency you wish - incuding VTSAX.
If too much time hasn't already elapsed I would fix your mistake NOW by putting that money back into those accounts in whatever investments you choose.  I believe (but am not certain) if it has been less than 60 days you can do this penalty free - though you still will need to file it on your taxes.

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if I wanted to retire at $800,000 and pull 4%, would I have an additional 1.89% on top of that to live off? Or, could I pull 2.11% from my account and achieve the same 4% due to the dividend payment?
No.  no no no no no.  You might want to first read up on the 4% rule.
these links may help:
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
http://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
https://www.bogleheads.org/wiki/Safe_withdrawal_rates
VERY briefly, the 4% "rule" came from an elegant economic study which looked at how a hypothetical portfolio of mostly stocks and some bonds would have survived every market period over roughly a century.  Turns out 4% is "safe enough" in the vast majority of conditions, including some rather nasty bear markets.  Its been vetted, examined, and torn apart to the Nth degree on this forum and elsewhere.
The yield of your investments is NOT added to your 4% WR - in a very real sense anything payed out in dividends is money that won't move the underlying stock higher -- it's zero sum.

That said, if oyu start looking closely at what is a "safe" WR you'll notice that in MOST time periods a 5% WR will survive 30+ years (about 72% of 30yr time periods going back 100+ years).  Whether that is "safe enough" for you depends on your risk tolerance and what kind of flexibility you have. 

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At $800,000 I could pull $32,000 per year at 4%. Since I'm 100% in VTSAX, could I actually pull 5.89% and still be living by the same rules as the 4% WD rate?
Again, no, for the reasons listed above.  A 4% WR, as used in the underlying trinity study (the original study which helped generate the 4% "rule) included dividends as part of the 4% WR.  Note that dividends also meander up and down over time, as companies change their yields depending on how much extra cash they generate, corporate tax rates and the prevailing economic winds about share price vs. dividends. We are in a historical period with fairly LOW dividends right now.  Through most of the 1970s & 80s the SP500 had a yield around 5% (!)

hope that helps - feel free to ask further questions.  Knowledge is power.

ObsessedFIer

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Re: VTSAX dividend question and the 4% WD rate
« Reply #2 on: August 17, 2017, 06:33:22 AM »
Hi nereo, thanks a lot for the detailed write-up, very much so appreciate it. I got opted/sold out of the 401k years ago so really the option moving forward is to get back into 401k/IRA/etc. It was a small sum of money at the time. I will read up on the 4% WD rate, I'm familiar with the trinity study but spaced it that the dividend payments are included in the analysis.

Not sure how much longer I will work full-time, from here I need to decide whether or not to invest in an IRA.

Hypothetically, if I wanted to FIRE in the next 3-5 years, what should my strategy be as far as IRA goes?

Aggie1999

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Re: VTSAX dividend question and the 4% WD rate
« Reply #3 on: August 17, 2017, 07:20:48 AM »
Hi nereo, thanks a lot for the detailed write-up, very much so appreciate it. I got opted/sold out of the 401k years ago so really the option moving forward is to get back into 401k/IRA/etc. It was a small sum of money at the time. I will read up on the 4% WD rate, I'm familiar with the trinity study but spaced it that the dividend payments are included in the analysis.

Not sure how much longer I will work full-time, from here I need to decide whether or not to invest in an IRA.

Hypothetically, if I wanted to FIRE in the next 3-5 years, what should my strategy be as far as IRA goes?

Sounds like you have a pretty high income so you probably don't qualify for a traditional IRA (somewhere around $60k cutoff). Find out if you qualify for a Roth IRA (somewhere around $120 cutoff). Put $5.5k in tIRA for 2017 if you qualify. If not, put in rIRA if you qualify. If not, put it in a tIRA as a non-deducation and immediately roll it over into a rIRA.

Second, take advantage of your 401k pre-tax. Even if the fees are high the company match should make up for the fees. I'm guessing you are probably in the 25% or higher tax rate. If so putting $18k in your 401k earns you an additional $4500 or more from tax saving every year! Then find out if your company 401k allows after-tax contributions and in-service withdraws. If so you can sock away up to ~$54k in the 401k every year. If the fees in the 401k are high make sure to roll the after-tax contributions out immediately into a rIRA on each contribution. Some pro-rata rules around this you need to understand.

Overall, remember any after tax contributions (be it Roth or plain after tax) to a retirement account can always be withdrawn tax and penalty free. Not advisable though because you can never get that tax advantaged money back into the retirement account.

BTW, congrats on the $650k savings at age 28. Impressive.

nereo

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Re: VTSAX dividend question and the 4% WD rate
« Reply #4 on: August 17, 2017, 07:34:11 AM »
...just adding to what Aggie1999 said

Anytime you leave a job, instead of "cashing out" a 401(k) you always have the option to roll it over into your IRA.  Doing this is independent from the contribution limits, and gives you the same tax sheltering benefits.
You can invest your IRA money in whatever you want, including low-cost index funds like the VTSAX (in fact, that's a very good thing to invest in IMO).

Yes, it still makes sense to contribute to your IRA right now, as much as you can, while you are still working. That money will grow tax-free for as long as it is there.  Over a few decades this can save you tens-of-thousands in taxes. Used correctly in retirement it can drastically lower your tax bill in the future (google Roth Pipeline for one example).