Retire on dividends & pay taxes with principal?

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Bongleur
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Retire on dividends & pay taxes with principal?

Post by Bongleur » Sat Jan 06, 2018 2:39 am

Anyone ever think about this and do backtesting to see what its most sensitive to? Idea is to have a steady income so you know the tax load for the future. A risk is matching inflation. Paying taxes from principal is a sinking fund situation - use it, don't lose it to the grave. There are some similarities to TIPS ladder strategies, bonds maturing to pay taxes from the returned principal. Dividend stocks sold for a loss in bad times to pay taxes bank capital losses to offset selling appreciated stocks in better times. Of course selling your dividend source is a flaw.

Buying 30y Treasuries when inflation is high (thus coupon is high) just before inflation goes away would be a lucky positive scenario.

I'm sort of cogitating on how some strategies might be better suited to highest tax bracket people, and others to mid-bracket people. I've not seen any analysis explicitly looking at that. It would help winnow down the choices to know that certain strategies are best for whatever bracket you intend to be in.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

AlohaJoe
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Re: Retire on dividends & pay taxes with principal?

Post by AlohaJoe » Sat Jan 06, 2018 6:08 am

Dividends don't give you steady income. Why would you assume something crazy like that?

The Wizard
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Re: Retire on dividends & pay taxes with principal?

Post by The Wizard » Sat Jan 06, 2018 9:02 am

AlohaJoe wrote:
Sat Jan 06, 2018 6:08 am
Dividends don't give you steady income. Why would you assume something crazy like that?
Blue chip dividends tend to increase from year to year, correct...
Last edited by The Wizard on Sat Jan 06, 2018 1:05 pm, edited 1 time in total.
Attempted new signature...

AlohaJoe
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Re: Retire on dividends & pay taxes with principal?

Post by AlohaJoe » Sat Jan 06, 2018 9:27 am

The Wizard wrote:
Sat Jan 06, 2018 9:02 am
AlohaJoe wrote:
Sat Jan 06, 2018 6:08 am
Dividends don't give you steady income. Why would you assume something crazy like that?
Blue chip dividend tend to increase from year to year, correct...
According to PortfolioVisualizer "living off dividends" would have meant going from $32,000 a year up to $57,000 and then down to $26,000 a year in the space of 7 years. Then it would take another 13 years to return to the $57,000 level.

If a retiree can actually get by on a 2.6% withdrawal then it doesn't matter whether they use dividends or any other strategy because they have plenty of money to retire on and every plan will work.

FinancialDave
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Re: Retire on dividends & pay taxes with principal?

Post by FinancialDave » Sat Jan 06, 2018 12:57 pm

AlohaJoe wrote:
Sat Jan 06, 2018 9:27 am


According to PortfolioVisualizer "living off dividends" would have meant going from $32,000 a year up to $57,000 and then down to $26,000 a year in the space of 7 years. Then it would take another 13 years to return to the $57,000 level.

If a retiree can actually get by on a 2.6% withdrawal then it doesn't matter whether they use dividends or any other strategy because they have plenty of money to retire on and every plan will work.
+1

What Joe said!
I love simulated data. It turns the impossible into the possible!

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Artsdoctor
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Re: Retire on dividends & pay taxes with principal?

Post by Artsdoctor » Sat Jan 06, 2018 1:03 pm

Bongleur wrote:
Sat Jan 06, 2018 2:39 am
Anyone ever think about this and do backtesting to see what its most sensitive to? Idea is to have a steady income so you know the tax load for the future. A risk is matching inflation. Paying taxes from principal is a sinking fund situation - use it, don't lose it to the grave. There are some similarities to TIPS ladder strategies, bonds maturing to pay taxes from the returned principal. Dividend stocks sold for a loss in bad times to pay taxes bank capital losses to offset selling appreciated stocks in better times. Of course selling your dividend source is a flaw.

Buying 30y Treasuries when inflation is high (thus coupon is high) just before inflation goes away would be a lucky positive scenario.

I'm sort of cogitating on how some strategies might be better suited to highest tax bracket people, and others to mid-bracket people. I've not seen any analysis explicitly looking at that. It would help winnow down the choices to know that certain strategies are best for whatever bracket you intend to be in.
I think you're playing some "mental accounting" games here. Money is fungible and your expenses include everything from food . . . to taxes. You're going to have to pay all of those expenses from somewhere and it doesn't matter if it's from dividends or principal.

dbr
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Re: Retire on dividends & pay taxes with principal?

Post by dbr » Sat Jan 06, 2018 1:19 pm

The division of withdrawal across spending dividends and "invading" principle is a flawed concept that leads to bad thinking. I would discard this whole line of thinking.

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CyclingDuo
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Re: Retire on dividends & pay taxes with principal?

Post by CyclingDuo » Sat Jan 06, 2018 2:48 pm

Bongleur wrote:
Sat Jan 06, 2018 2:39 am
Anyone ever think about this and do backtesting to see what its most sensitive to? Idea is to have a steady income so you know the tax load for the future. A risk is matching inflation. Paying taxes from principal is a sinking fund situation - use it, don't lose it to the grave. There are some similarities to TIPS ladder strategies, bonds maturing to pay taxes from the returned principal. Dividend stocks sold for a loss in bad times to pay taxes bank capital losses to offset selling appreciated stocks in better times. Of course selling your dividend source is a flaw.

Buying 30y Treasuries when inflation is high (thus coupon is high) just before inflation goes away would be a lucky positive scenario.

I'm sort of cogitating on how some strategies might be better suited to highest tax bracket people, and others to mid-bracket people. I've not seen any analysis explicitly looking at that. It would help winnow down the choices to know that certain strategies are best for whatever bracket you intend to be in.
Or just have a large enough portfolio of preferred stock (or PFF/PGX); CEF's, common stock; treasuries, and REITS to throw off enough dividends to pay all of your expenses and all of your taxes as well as enough extra in case something comes up. :moneybag
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Bongleur
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Re: Retire on dividends & pay taxes with principal?

Post by Bongleur » Sat Jan 06, 2018 7:42 pm

Concept is to set an amount of spendable (real) income for every year. If you generate more it gets invested not spent.

If it were possible to create a perfect bond ladder using TIPS one could find out how much real income you could generate by putting all capital into TIPs. Spendable is what is left after taxes -- which you must presume something about, such as not becoming more than 10% more costly than your current tax burden.

Then you can craft the ladder to have any amount of real income each year. Or create equal income every year, or increase after 10 years to anticipate higher medical bills etc.

Trying to do the same with regular bonds is difficult. Just late night ruminations.

Using dividend stocks or mutual funds has variable income, but you would re-invest anything above your pre-determined spending limit.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

gilgamesh
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Re: Retire on dividends & pay taxes with principal?

Post by gilgamesh » Sat Jan 06, 2018 8:01 pm

dbr wrote:
Sat Jan 06, 2018 1:19 pm
The division of withdrawal across spending dividends and "invading" principle is a flawed concept that leads to bad thinking. I would discard this whole line of thinking.
But this flawed concept is advocated by so many that I'm afraid yours and my caution will just fall on deaf ears... but I agree with you.

TN_Boy
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Re: Retire on dividends & pay taxes with principal?

Post by TN_Boy » Sat Jan 06, 2018 8:05 pm

AlohaJoe wrote:
Sat Jan 06, 2018 9:27 am
The Wizard wrote:
Sat Jan 06, 2018 9:02 am
AlohaJoe wrote:
Sat Jan 06, 2018 6:08 am
Dividends don't give you steady income. Why would you assume something crazy like that?
Blue chip dividend tend to increase from year to year, correct...
According to PortfolioVisualizer "living off dividends" would have meant going from $32,000 a year up to $57,000 and then down to $26,000 a year in the space of 7 years. Then it would take another 13 years to return to the $57,000 level.

If a retiree can actually get by on a 2.6% withdrawal then it doesn't matter whether they use dividends or any other strategy because they have plenty of money to retire on and every plan will work.
It still surprises me how many people do not get the point AlohaJoe is making in the last sentence.

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