Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

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pubman
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Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by pubman »

I recently read the above-referenced article which addressed alternatives to the traditional 4% withdrawal rule, and also the logical order of which investment types/flows to first draw upon in retirement. But I was surprised to read their comment that "it is hard for the average investor to figure out on their own" and so the stated purpose of this article was "to explain how advisors can help their clients withdraw potentially more...".

First of all, I would like to think that most Vanguard investors are not "average". Most already know to first take your RMDs, then the yearly outflows from taxable accounts such as dividends, capital gains and interest. Some investors of course, need more guidance. But it appear to me that the intent of the article was to promote the for-fee Vanguard Personal Advisors Services by saying the average Vanguard investor is unable to handle his/her investments in retirement. Now if they meant that you could, without fee, draw upon a Flagship representative, or an occasional free meeting with a Certified Financial Planner, then fine. Perhaps I am a little too suspicious but I am interested in others take on this paper.
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Rob54keep
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by Rob54keep »

Interesting. I felt the same way after reviewing it. It hit me right between the eyes when I heard them say it was too complicated for most. Really??? Its not. Basically it's similar approach/advice that I've seen on MStar (floor & ceiling spending levels) and is basically setting up guardrails for your spending in retirement.
delamer
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by delamer »

I read the transcript of the podcast but have not read the article. It is a mistake to equate all Vanguard investors with Bogleheads or even assume that they are better than average.

Many people end up at Vanguard through their 401(k), not by active decision. And even those who have been persuaded to invest in index funds in IRA's may not be aware of all the factors that go into making good decisions about how to spend down their accounts.

The podcast didn't mention anything about Vanguard's advisory service but I am not clear why it would be in anyway shady for Vanguard to promote its services.
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by RyeWhiskey »

pubman wrote: First of all, I would like to think that most Vanguard investors are not "average". Most already know to first take your RMDs, then the yearly outflows from taxable accounts such as dividends, capital gains and interest.
It sounds somewhat like you're confusing the folks on this forum with "most Vanguard investors." It is a near-certainty that most active members of this forum are not "average" and won't require the use of a FA. This said, Vanguard is the largest mutual fund company in the world and, statistically speaking, the majority of Vanguard investors are almost certainly "average." I'll bet most do not know how to take RMDs and are not skilled in understanding tax impacts of investment decisions. I would absolutely trust Vanguard advisers with helping on these issues given their structure (similar to that of a credit union); after all, not everyone wants or needs to learn for themselves on the forum! For these folks it's probably better to pay a small fee, much lower than most, to avoid costly mistakes in the long run. :beer
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Stan Dup
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by Stan Dup »

pubman wrote: But it appear to me that the intent of the article was to promote the for-fee Vanguard Personal Advisors Services by saying the average Vanguard investor is unable to handle his/her investments in retirement.
It's a Profit Deal!!!! :D

https://www.youtube.com/watch?v=fKBRtdp2e98


Vanguard does have to make money in order to offer us services at a low cost.
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arcticpineapplecorp.
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A new approach to retirement spending

Post by arcticpineapplecorp. »

[Thread merged into here, see below. --admin LadyGeek]

I saw this article today at Vanguard and thought I'd share it (didn't see it here at bogleheads) link below. He talks about establishing a ceiling and a floor for withdrawals.

A couple of things...First, they mention the new whitepaper, "From assets to income: A goals-based approach to retirement spending" but can't seem to find it anywhere. Does anyone have a link to this? I'd like to read more on this than what was provided in the article (link below). Thanks.

Secondly, what does he mean by:
Exactly. That's the conventional wisdom, but we actually think there might be a better way to look at this. We would say [to] start with required minimum distributions, RMDs, since they're required by law anyway, and then spend your portfolio's taxable cash flows—so the dividends and interest that the portfolio are kicking off. They're already being taxed. If you reinvest them and spend them later, they're going to be double taxed.

And then, next—and this is where we deviate a little bit and it gets a little bit counterintuitive—we would say, actually, take a look at the taxable portfolio. Instead of spending those retirement accounts right away, look at that portfolio and spend from there. Keep your eyes on tax-loss harvesting or, at the very least, gain minimization when you're selling assets to generate that income.

And then, finally, once that portfolio is depleted, we would then turn our eyes to the tax-advantaged accounts, so the 401(k)s, IRAs, Roth IRAs, etc., and deplete those last."
What part of the portfolio is he talking about when he says "taxable cash flows"? Does he mean dividends and interest out of taxable accounts? Because he mentions RMDs (that's clearly non Roth 401ks/IRAs, then dividends/interest (doesn't say where from), then taxable, then retirement accounts. So are the dividends and interest to be spent out of ALL accounts as it comes in (from both taxable and tax deferred) or one or the other? I found this part not crystal clear.

You can listen to the audio or read the transcript:
https://personal.vanguard.com/us/insigh ... cast:slot1

Enjoy!
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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siamond
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Re: A new approach to retirement spending

Post by siamond »

Yes, this makes sense, and I don't see that there is anything unusual about it.

I didn't read the article, but I would guess that the context is a tax-deferred account (e.g. 401k/tIRA), and a taxable account (e.g. regular securities invested, with a given cost basis).

Then RMDs would come from the tax-deferred account, and dividends come from the taxable account, no choice, so better spend that first. Then, if more spending budget is required, withdrawing the additional money from the taxable account will be taxed as capital gains (only the gains, not the full amount, cf. cost basis), hence more advantageous than further withdrawing from the tax-deferred account and be taxed as ordinary income.

With a bit of luck and sound tax management, this could even end up with a 0% marginal tax rate, i.e. no federal taxes at all. State taxes will vary.

(as to dividends in the tax-deferred account, they will be automatically re-invested, their taxation being deferred).
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celia
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Re: A new approach to retirement spending

Post by celia »

It makes sense that it means interest and dividends in taxable. (In tax-deferred retirement accounts, everything comes out as withdrawals that are fully taxed--No specual tax rates.)

However, I disagree with the generic advice to spend your taxable assets first. That is best for some people, but not others. What one should do is to project their income and tax rate up to age 72. They may be surprised down the road if they don't look there before they get there!
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: A new approach to retirement spending

Post by randomguy »

arcticpineapplecorp. wrote:I saw this article today at Vanguard and thought I'd share it (didn't see it here at bogleheads) link below. He talks about establishing a ceiling and a floor for withdrawals.

A couple of things...First, they mention the new whitepaper, "From assets to income: A goals-based approach to retirement spending" but can't seem to find it anywhere. Does anyone have a link to this? I'd like to read more on this than what was provided in the article (link below). Thanks.

Secondly, what does he mean by:
Exactly. That's the conventional wisdom, but we actually think there might be a better way to look at this. We would say [to] start with required minimum distributions, RMDs, since they're required by law anyway, and then spend your portfolio's taxable cash flows—so the dividends and interest that the portfolio are kicking off. They're already being taxed. If you reinvest them and spend them later, they're going to be double taxed.

And then, next—and this is where we deviate a little bit and it gets a little bit counterintuitive—we would say, actually, take a look at the taxable portfolio. Instead of spending those retirement accounts right away, look at that portfolio and spend from there. Keep your eyes on tax-loss harvesting or, at the very least, gain minimization when you're selling assets to generate that income.

And then, finally, once that portfolio is depleted, we would then turn our eyes to the tax-advantaged accounts, so the 401(k)s, IRAs, Roth IRAs, etc., and deplete those last."
What part of the portfolio is he talking about when he says "taxable cash flows"? Does he mean dividends and interest out of taxable accounts? Because he mentions RMDs (that's clearly non Roth 401ks/IRAs, then dividends/interest (doesn't say where from), then taxable, then retirement accounts. So are the dividends and interest to be spent out of ALL accounts as it comes in (from both taxable and tax deferred) or one or the other? I found this part not crystal clear.

You can listen to the audio or read the transcript:
https://personal.vanguard.com/us/insigh ... cast:slot1

Enjoy!
I would love to hear the logic on why he thinks those dividends/interest would be double taxed.
Basic math
200 dollars in div income
30 bucks in taxes
170 invest back in the fund.
When will I ever pay taxes on that 170 bucks?
Simple answer is never.

You might pay 2x as much in taxes now but you will pay less in the future.

In general I find vanguard tax advice to be close to useless. Spending taxable first is rarely the right strategy for minimizing taxes.
kiddoc
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Re: A new approach to retirement spending

Post by kiddoc »

celia wrote: However, I disagree with the generic advice to spend your taxable assets first. That is best for some people, but not others. What one should do is to project their income and tax rate up to age 72. They may be surprised down the road if they don't look there before they get there!
Couldn't agree more.
Frankly, I am not sure what's so new about this approach. Tax planning has gone hand in hand with retirement spending forever.
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delamer
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Re: A new approach to retirement spending

Post by delamer »

There is a thread started earlier discussing this article from a different angle.

viewtopic.php?f=1&t=199203&newpost=3047324
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arcticpineapplecorp.
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Re: A new approach to retirement spending

Post by arcticpineapplecorp. »

Thanks, I thought he meant take dividends/interest out of taxable because there's no effect if they're reinvested in tax deferred accounts. What do others think about what randomguy said that dividends/interest aren't double taxed when reinvested (in a taxable account)?

That makes sense but is he saying you first pay the tax when it's paid as a dividend/interest and then if it's reinvested in shares which increase you're paying taxes a second time but in the form of a capital gains tax (when sold in the future) on those shares bought with reinvested dividends/interest? Is that what he means?
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Re: A new approach to retirement spending

Post by celia »

We would say [to] start with required minimum distributions, RMDs, since they're required by law anyway, and then spend your portfolio's taxable cash flows—so the dividends and interest that the portfolio are kicking off. They're already being taxed. If you reinvest them and spend them later, they're going to be double taxed.
The italics is wrong.

Interest and dividends are taxed (in taxable accounts) in the year they are earned. If they are re-invested, they become principal for following years. This is the same as if you added new money to your account to buy more shares.

The increased shares will earn more in interest or dividends the following year, and only that year's interest or dividends are taxed the next year, NOT interest and dividends for both years!

What a horrid statement!
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: A new approach to retirement spending

Post by celia »

arcticpineapplecorp. wrote:That makes sense but is he saying you first pay the tax when it's paid as a dividend/interest and then if it's reinvested in shares which increase you're paying taxes a second time but in the form of a capital gains tax (when sold in the future) on those shares bought with reinvested dividends/interest? Is that what he means?
Even if it means that, the capital gains are an additional growth, the same as if he invested new dollars instead of re-investing. Who wants to invest and NOT have their money grow?

Re-investing is just using dollars to buy more shares. It doesn't matter where those dollars came from.

(I think the speaker--who I didn't listen to--is too focused on spending. Hey, let's just spend the yearly "allowance" whether we need it or not. Forget about future needs or taxes. Live for today!)

Retirees are allowed to save too!
Last edited by celia on Fri Sep 09, 2016 8:10 pm, edited 2 times in total.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
delamer
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Re: A new approach to retirement spending

Post by delamer »

arcticpineapplecorp. wrote:Thanks, I thought he meant take dividends/interest out of taxable because there's no effect if they're reinvested in tax deferred accounts. What do others think about what randomguy said that dividends/interest aren't double taxed when reinvested (in a taxable account)?

That makes sense but is he saying you first pay the tax when it's paid as a dividend/interest and then if it's reinvested in shares which increase you're paying taxes a second time but in the form of a capital gains tax (when sold in the future) on those shares bought with reinvested dividends/interest? Is that what he means?
How would you reinvest dividends/interest from a taxable account into a tax-deferred account?
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celia
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Re: A new approach to retirement spending

Post by celia »

I'm pretty sure OP meant interest and dividends in tax-deferred are just dollars with no current tax impact.

Put a period after "taxable".
Change "they're" to "interest and dividends in tax-deferred".

Do you agree with:
"take dividends/interest out of taxable. There's no [current year] effect if dividends/interest are reinvested in tax deferred."?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
delamer
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Re: A new approach to retirement spending

Post by delamer »

celia wrote:I'm pretty sure OP meant interest and dividends in tax-deferred are just dollars with no current tax impact.

Put a period after "taxable".
Change "they're" to "interest and dividends in tax-deferred".

Do you agree with:
"take dividends/interest out of taxable. There's no [current year] effect if dividends/interest are reinvested in tax deferred."?

Yes, I see what you mean.
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Re: A new approach to retirement spending

Post by gkaplan »

This thread looks like a duplicate of the following thread:


viewtopic.php?p=3047174#p3047174
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celia
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by celia »

The referenced article is also discussed here:
viewtopic.php?p=3047689#p3047689

BTW, I acknowledge I am not an "average" person and I am proud of it.
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by LadyGeek »

I merged arcticpineapplecorp.'s thread into here. The combined thread is now in the Personal Finance (Not Investing) forum (retirement spending).

The Vanguard promo A new approach to retirement spending only discusses a general approach for minimizing taxes.

This wiki article series covers this topic better: Retirement spending, it's a deep-dive into how you should plan your spending in retirement.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
sport
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by sport »

There is a reason to spend taxable distributions instead of reinvesting them, if you need spending money. If the distributions are reinvested, they raise the cost basis of the fund holding. Then, if you decide to withdraw from that fund, there will be taxes due on the gains. It is not double taxation, it is taxes that did not need to be paid now.
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by freebeer »

sport wrote:There is a reason to spend taxable distributions instead of reinvesting them, if you need spending money. If the distributions are reinvested, they raise the cost basis of the fund holding. Then, if you decide to withdraw from that fund, there will be taxes due on the gains. It is not double taxation, it is taxes that did not need to be paid now.
I think about this differently. There is a reason to preferentially spend taxable funds that don't have any accumulated capital gains, of which recent taxable distributions not yet reinvested are one example. But you may for example have taxable bonds that don't have any accumulated capital gains either and it would be equivalent to reinvest taxable distributions in your stock fund and spend by withdrawing from your bond fund. And if that helps you rebalance, even better. Best of all is if you can take your spending in a way that accomplishes tax loss harvesting. So I think it's too simplistic to say "spend taxable distributions first" - that may not be the best strategy from tax and total return perspectives.

I also (separate topic) think the article and some of the commentary confuse RMDs (from tax-deferred accounts) and spending. An RMD is not a spending event it's an event that moves money from tax-deferred to taxable, less taxes. Again whether to spend the proceeds of a given RMD is a totally separate question and per above it may be better to reinvest it and spend from elsewhere to better accomplish rebalancing, tax-loss harvesting, etc.

But - this is all hypothetical, as I'm still in accumulation mode. Any different ideas?
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by sport »

freebeer wrote:
sport wrote:There is a reason to spend taxable distributions instead of reinvesting them, if you need spending money. If the distributions are reinvested, they raise the cost basis of the fund holding. Then, if you decide to withdraw from that fund, there will be taxes due on the gains. It is not double taxation, it is taxes that did not need to be paid now.
I think about this differently. There is a reason to preferentially spend taxable funds that don't have any accumulated capital gains, of which recent taxable distributions not yet reinvested are one example. But you may for example have taxable bonds that don't have any accumulated capital gains either and it would be equivalent to reinvest taxable distributions in your stock fund and spend by withdrawing from your bond fund. And if that helps you rebalance, even better. Best of all is if you can take your spending in a way that accomplishes tax loss harvesting. So I think it's too simplistic to say "spend taxable distributions first" - that may not be the best strategy from tax and total return perspectives.

I also (separate topic) think the article and some of the commentary confuse RMDs (from tax-deferred accounts) and spending. An RMD is not a spending event it's an event that moves money from tax-deferred to taxable, less taxes. Again whether to spend the proceeds of a given RMD is a totally separate question and per above it may be better to reinvest it and spend from elsewhere to better accomplish rebalancing, tax-loss harvesting, etc.

But - this is all hypothetical, as I'm still in accumulation mode. Any different ideas?
I think what you are saying about taxable distributions is correct. However, you are combining distributions, asset allocation, and tax loss harvesting into one consideration. I would think this is beyond the capability of most retirees. Taxable distributions are "cash in hand". So, spending these, if you need spending money, cannot be wrong. The other things, of course, should be considered. However many (most?) retirees will not. It is certainly better to spend taxable distributions that it is to reinvest them in a fund with gains, and then make withdrawals from that same fund for spending money.
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arcticpineapplecorp.
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by arcticpineapplecorp. »

Thanks everyone. Yes, Celia, thank's for the correction in grammar. That is what I meant. And if I understand correcly, if you reinvest the dividends (in taxable) that you pay taxes on when the dividend is received, then you could pay cap gains taxes in the future on the new shares bought with the dividends received. I think vanguard could have made that a bit clearer. I mean there are different rates at which dividends and cap gains are taxed. And also, even if you take the dividends as cash...where do you put them? A savings account/CD/Money market acct, etc.? Those earn interest right? Those earnings are taxable too. So aren't you always going to pay taxes on divdends received twice unless you actually spend the dividends or put them under the mattress or in a non-interest bearing account?
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by sport »

arcticpineapplecorp. wrote:Thanks everyone. Yes, Celia, thank's for the correction in grammar. That is what I meant. And if I understand correcly, if you reinvest the dividends (in taxable) that you pay taxes on when the dividend is received, then you could pay cap gains taxes in the future on the new shares bought with the dividends received. I think vanguard could have made that a bit clearer. I mean there are different rates at which dividends and cap gains are taxed. And also, even if you take the dividends as cash...where do you put them? A savings account/CD/Money market acct, etc.? Those earn interest right? Those earnings are taxable too. So aren't you always going to pay taxes on divdends received twice unless you actually spend the dividends or put them under the mattress or in a non-interest bearing account?
arcticp,
You still do not have it quite right.
Consider a taxable stock fund that is worth 10K with a basis of 5K. This means that any withdrawal you take from that account will be 50% taxable. Now, lets say the fund pays a dividend of $1. That is taxable at your tax rate no matter what you do with that dollar. If you reinvest the dollar, it is now part of the fund. If you then withdraw that dollar, 50 cents of it will be taxable in addition to the tax you already paid on that dollar. This is all true, even if there are no further gains for that fund.
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by Levett »

Respectfully, Lady Geek, why not incorporate surveys of retirement satisfaction into a Wiki on retirement spending? This would be my kind of "deep dive."

Retirement satisfaction is where the rubber meets the road.

http://crr.bc.edu/wp-content/uploads/2005/02/ib_28.pdf

https://www.towerswatson.com/en-US/Insi ... -Happiness

I invite all to add to the list.

Lev
delamer
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by delamer »

I am not sure if you are confusing principal and earnings, or just not expressing yourself well. Let's follow the example you mentioned, of putting dividends into a savings account.

Say you earn $1,000 in qualified dividends in a taxable account in Year 1. So you pay $150 in capital gains taxes (assuming 15% bracket). You then put the remaining $850 in a savings account.

In Year 2, you earn 1% in interest on the savings account, or $8.50. The taxes you pay in Year 2 are on the $8.50, or $2.13 if you are in the 25% marginal bracket. Note that you are not paying taxes on the whole $850 invested. You will never have to pay taxes on the $850 principal, just on any interest generated by principal. So there is no double taxation of the initial dividends.

Alternatively, let's say you invest the $850 net from Year 1 in a stock that pays a qualified dividend of $160 in Year 2. You will pay $24 in capital gains tax in Year 2 on the dividends but no tax on the principal. If you reinvest the $160 dividend and sell your investment for $1010 (coincidently) in Year 3, then you will owe no tax because your cost basis is $850+$160.

Again, no double taxation in any of the above scenarios.
Last edited by delamer on Sat Sep 10, 2016 4:59 pm, edited 1 time in total.
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by neilpilot »

delamer wrote:
Say you earn $1,000 in qualified dividends in a taxable account in Year 1. So you pay $150 in capital gains taxes (assuming 15% bracket). You then put the remaining $850 in a savings account.

In Year 2, you earn 1% in interest on the savings account, or $85.
1%=$8.50!
delamer
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by delamer »

neilpilot wrote:
delamer wrote:
Say you earn $1,000 in qualified dividends in a taxable account in Year 1. So you pay $150 in capital gains taxes (assuming 15% bracket). You then put the remaining $850 in a savings account.

In Year 2, you earn 1% in interest on the savings account, or $85.
1%=$8.50!

Oops! Wishful thinking; I will correct the post.
velcro
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Re: Vanguard 8/17/16 Article: "A New Approach to Retirement Spending"

Post by velcro »

If anyone is interested, a very similar paper to the one referenced in the article can be found here
http://www.vanguard.com/pdf/s823.pdf
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Re: A new approach to retirement spending

Post by OutInThirteen »

delamer wrote:How would you reinvest dividends/interest from a taxable account into a tax-deferred account?
All you need is earned income equal to or greater than the amount you wanted to reinvest. I do a small amount of consulting as a part-time employee in a field that is interesting to me. In addition to contributions to my SIMPLE IRA account (basically 92.65% of my pay), I can contribute up to $6,500 in my Traditional (only if not old enough to need to take RMDs) and/or Roth IRA.
delamer
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Re: A new approach to retirement spending

Post by delamer »

OutInThirteen wrote:
delamer wrote:How would you reinvest dividends/interest from a taxable account into a tax-deferred account?
All you need is earned income equal to or greater than the amount you wanted to reinvest. I do a small amount of consulting as a part-time employee in a field that is interesting to me. In addition to contributions to my SIMPLE IRA account (basically 92.65% of my pay), I can contribute up to $6,500 in my Traditional (only if not old enough to need to take RMDs) and/or Roth IRA.
It was already explained that the original post misstated what was meant. And while from your point-of-view you may be using your dividends, in fact you can only do so because you have earned income. So it is just mental accounting. Without the earned income it isn't possible.
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