Author Topic: Are your SWR, dividends, and rebalancing part of a single strategy?  (Read 4094 times)

Franklin

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I was wondering if there was a good strategy for taking your SWR in coordination with dividends and rebalancing each year.  Does anyone have success with this?



Gin1984

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #1 on: November 30, 2016, 07:50:49 AM »
Franklin, I am not sure I understand your question.  Do you mean taking your dividends 1st than selling what you need to, to rebalance to get up to the 4% #?

Franklin

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #2 on: November 30, 2016, 08:07:42 AM »
Franklin, I am not sure I understand your question.  Do you mean taking your dividends 1st than selling what you need to, to rebalance to get up to the 4% #?

Sorry Gin, I'll give you an example.

For simplicity sake, let's say everything happens in December - a 4% withdrawal of my portfolio for next year's expenses, rebalance of my portfolio to my AA, and $15K in dividends.

Rebalance:  Should I sell my winners down to my AA and fund my withdrawal.
Dividends:  Should I fund my withdrawal instead of reinvesting?

I feel like all three should move in a coordinated fashion.  However, I'm also aware that historical gains are based on rebalancing your portfolio and reinvesting your dividends.  So I'm hoping there is a fluid mathematical solution. 

arebelspy

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #3 on: December 04, 2016, 06:34:28 AM »
Are you not doing a Roth pipeline, but all from taxable?

That's immediately relevant, naturally.
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Metric Mouse

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #4 on: December 04, 2016, 07:30:00 AM »
Franklin, I am not sure I understand your question.  Do you mean taking your dividends 1st than selling what you need to, to rebalance to get up to the 4% #?

Sorry Gin, I'll give you an example.

For simplicity sake, let's say everything happens in December - a 4% withdrawal of my portfolio for next year's expenses, rebalance of my portfolio to my AA, and $15K in dividends.

Rebalance:  Should I sell my winners down to my AA and fund my withdrawal.
Dividends:  Should I fund my withdrawal instead of reinvesting?

I feel like all three should move in a coordinated fashion.  However, I'm also aware that historical gains are based on rebalancing your portfolio and reinvesting your dividends.  So I'm hoping there is a fluid mathematical solution.

Why would you re-invest your dividends just to sell those shares for income?

arebelspy

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #5 on: December 04, 2016, 07:40:59 AM »
Franklin, I am not sure I understand your question.  Do you mean taking your dividends 1st than selling what you need to, to rebalance to get up to the 4% #?

Sorry Gin, I'll give you an example.

For simplicity sake, let's say everything happens in December - a 4% withdrawal of my portfolio for next year's expenses, rebalance of my portfolio to my AA, and $15K in dividends.

Rebalance:  Should I sell my winners down to my AA and fund my withdrawal.
Dividends:  Should I fund my withdrawal instead of reinvesting?

I feel like all three should move in a coordinated fashion.  However, I'm also aware that historical gains are based on rebalancing your portfolio and reinvesting your dividends.  So I'm hoping there is a fluid mathematical solution.

Why would you re-invest your dividends just to sell those shares for income?

Here's one potential reason: Because reinvesting puts them back in the companies that made them, whereas sales likely are spread evenly across all companies.  So your companies doing better become a bigger part of your portfolio.

That's even assuming they all pay dividends, which brings us to a second reason: By taking the dividends, you're short changing the companies that pay dividends, and the ones that don't pay become a bigger slice of your portfolio.

Fake numbers: Say you have 3% dividends you keep as cash, and then sell 1% of everything to make your 4% total.  You just took 1% from non-dividend paying companies, but 4% from dividend paying ones; the non-paying ones grow to be a bigger part of your portfolio quickly.  That's probably not what you're intending.  By reinvesting them, then taking 4% from every one, you keep it "even."

This obviously doesn't apply if your portfolio is silly simple, like a single total market index fund, where you can keep the dividends and sell to make your total without affecting something like the above.  But it's something to consider if you have multiple stocks (as it sounds like the OP does, given their "winners" comment).
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
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Metric Mouse

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #6 on: December 04, 2016, 08:00:38 AM »
Selling X% of everything off the top would not be the proper way to rebalance, in my opinion.

arebelspy

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #7 on: December 04, 2016, 08:18:12 AM »
Selling X% of everything off the top would not be the proper way to rebalance, in my opinion.

Nor would just taking dividends off the top, and then trying from there, was my point.

OP was asking how to balance all of these factors.  I was explaining why you might reinvest dividends, first.  I was not saying the next step has to be "sell X% of everything."

There are reasons you might not choose that as a first step, as well.  But also reasons why you might.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

MustacheAndaHalf

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #8 on: December 04, 2016, 08:52:14 AM »
Most people in retirement have withdrawal rates over 2%, which is what stocks (dividends) and bonds (interest) are yielding.  So all of the bond interest and stock dividends won't be enough to cover expenses.  If you're using total stock, total bond and total international your main decision is what to sell, and how much.

You sell enough to live on, because that's the point of the portfolio.  And then if needed you can rebalance by selling more to buy the lowest gaining asset class (typically selling stocks to buy more bonds).

Metric Mouse

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #9 on: December 04, 2016, 08:54:26 AM »
Most people in retirement have withdrawal rates over 2%, which is what stocks (dividends) and bonds (interest) are yielding.  So all of the bond interest and stock dividends won't be enough to cover expenses.  If you're using total stock, total bond and total international your main decision is what to sell, and how much.

You sell enough to live on, because that's the point of the portfolio.  And then if needed you can rebalance by selling more to buy the lowest gaining asset class (typically selling stocks to buy more bonds).

Or selling the highest earning stocks to buy other stocks.

Franklin

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #10 on: December 05, 2016, 08:37:55 AM »
Are you not doing a Roth pipeline, but all from taxable?

That's immediately relevant, naturally.

Still working, but retiring in 4 years at the age of 55.  I will not be doing a Roth pipeline.  I have a 401k, Roth, HSA, and taxable.  My AA is spread collectively across all accounts (but unevenly for tax efficiency.)  Still working on my withdrawal strategy in general, this topic being one part of it.

arebelspy

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #11 on: December 05, 2016, 03:47:40 PM »
Can you explain why you wouldn't do a Roth conversions, when you have taxable money to live off of, and it's still available?

Might as well use up that cheap tax space to get money from the 401k to the Roth, to save on taxes over your lifetime...

You definitely want a detailed withdrawal strategy based on your assets and how they're held.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Metric Mouse

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #12 on: December 05, 2016, 08:17:57 PM »
So what is your basic plan for withdrawals at the moment?

Franklin

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #13 on: December 06, 2016, 08:15:53 AM »
I didn't considered the Roth Pipeline because I think I have nullified its advantage.  You tell me if you see any gaps.

I have a "Golden Parachute" coming to me at 55 that is the equivalent of 5 years living expenses.  So I'll spend that amount first.  At 60 I'll start drawing down my 401k, wait until 70 for social security, and finally spend my Roth last (maybe pass it along to my kids if I haven't exhausted it).  I'll leave my HSA for medical, knowing that I have other options with it as I age.  That is the plan so far. 

arebelspy

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #14 on: December 06, 2016, 08:34:49 AM »
What will your taxes look like from 55-60?  Can you rollover some there to get some tax free (or discounted) money.

The Roth rollover isn't just to access funds before 59.5, it's also to use up low taxed space to get funds tax free later.

If you're living off a big chunk for 5 years with minimal taxes, that's the perfect time to roll over to fill the 0-15% bracket.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Franklin

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #15 on: December 06, 2016, 09:01:36 AM »
In tax year 55 I will have my salary plus lump sum parachute, so I expect to get nailed hard with taxes.  No chance of deferring the lump sum until 56.  However, from 56 to 60 I will have no income other than dividends and possibly capital gains if I sell a stock.  So you may be right.  I just have to analyze the tax advantage of a pipeline over the advantage of tax deferred gains had I not withdrawn the money.  Good food for thought!

arebelspy

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #16 on: December 06, 2016, 03:39:09 PM »
In tax year 55 I will have my salary plus lump sum parachute, so I expect to get nailed hard with taxes.  No chance of deferring the lump sum until 56.  However, from 56 to 60 I will have no income other than dividends and possibly capital gains if I sell a stock.  So you may be right.  I just have to analyze the tax advantage of a pipeline over the advantage of tax deferred gains had I not withdrawn the money.  Good food for thought!
Not withdrawing defers the gains. Rolling over you pay the gains at a super low rate, then makes the gains tax free forever!

Definitely worth doing a rollover those years. :)
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Franklin

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #17 on: December 07, 2016, 06:41:08 AM »
In tax year 55 I will have my salary plus lump sum parachute, so I expect to get nailed hard with taxes.  No chance of deferring the lump sum until 56.  However, from 56 to 60 I will have no income other than dividends and possibly capital gains if I sell a stock.  So you may be right.  I just have to analyze the tax advantage of a pipeline over the advantage of tax deferred gains had I not withdrawn the money.  Good food for thought!
Not withdrawing defers the gains. Rolling over you pay the gains at a super low rate, then makes the gains tax free forever!

Definitely worth doing a rollover those years. :)

Lightbulb just went on:)

arebelspy

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #18 on: December 07, 2016, 11:18:10 AM »
Yay!  :)

You can still continue with the rest of the plan you outlined, you'll just end with more in the Roth and less in traditional, having moved the money out of traditional when it was cheaper to do so, to get it into the Roth and get the gains tax free forever.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

twell1

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Re: Are your SWR, dividends, and rebalancing part of a single strategy?
« Reply #19 on: December 07, 2016, 01:49:48 PM »
Is there a link or literature to the Roth Pipeline strategy?

Rubic

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