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Explorer ○○○

Turn off DRIP, live on that?

Currently in the accumulation phase, we have all the DRIPs turned on, so all Div/Int/CG/Distribs are reinvested into new shares, which helps to compound/grow the balances in our retirement funds.  One thought at retirement is to turn off the DRIPs on some accounts, and have all cash distributions flow into our spending account.  These accounts will have a 55/45 stock/bond allocation.  To keep this simple, forget taxes, and I have rounded the actual numbers to show the average return has been about 7% for the past 5 years.  We have had a couple good years, a couple flat/down years.  The total of the Div/Int/CG/Distribs has also averaged about 7%.  Instead of having to set up any automated sales or make decisions of what to sell, wouldn't it be easy to just have the former DRIPs all go to cash?  In essence, in a round about way, you are just pulling off the gains.  The number of shares would remain constant, so even if the market tanks 30%, or interest rates go up and bond fund valuations go down...your monthly/quarterly/annual payments should remain reasonably steady.  A down year might have reduced cash, but then it is made up as the market recovers.  Does anyone do this and does it make sense?  Let's say you have $500K in these funds throwing off 7%.  You need $35K/yr. for expenses.  Set up an initial $35K, draw monthly $3K, and the cash coming from the funds during the year keeps it full for the next year.  

16 Replies
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Explorer ○○○

Re: Turn off DRIP, live on that?

I plan to turn the DRIP off when I retire and take the cash.

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Frequent Contributor

Re: Turn off DRIP, live on that?

Lefty, 

This is what I am doing now. I’m still in the “accumulation” phase, but going on 61 later this year and planning on retiring w/in 2-3 years. I have already turned “off” reinvestment of dividends for our stocks and mutual funds/ ETF’s. Still reinvesting interest on bond funds. We’re very “light” on bonds/ fixed income, so I’m planning on moving this cash into bonds/ fixed income when rates are a little higher. Have about 16% in cash, 9% in bonds (all funds), and the rest (75%) is equity (stocks/ mutual funds/ ETF’s). 

We’re hoping that we can live off our interest/ dividends, plus SS (when we start drawing it), as well as a pension which will provide about 30% of our estimated needs. Advantage of living off dividends/ interest is that our cash flow should stay relatively stable (and slowly rise with dividend increases). We will still reinvest capital gains back into the funds.

Hoping that we can live off just the income (dividends/ interest), and save the principal for the kids/ heirs. Also, it’s a way to “self insure” for potential Long term care issues. 

Win
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Explorer ○

Re: Turn off DRIP, live on that?

You have just laid out one of the primary principles of the income method vs the growth method of investing.

Some folks use mixed funds/growth stocks/ etc - and sell enough each year to satisfy withdrawal/RMD requirements.

I started retirement with this philosophy - and after much work on these boards - decided I didn't want to be forced to 'eat my seed corn' during a severe downturn.  (TaylorZR, are you still here?)

Thus I build a port of mostly divi (hopefully and growth) stocks, with other income vehicles - pfd, CEFs, bond funds, etc.

Really depends on how much you need income from the investments.  I need 4% or so each year from my IRA's, and the income has covered my withdrawals so far.  At age 73, my RMD's will eventually force me to withdraw more than I need, and I will move the excess to a taxable brokerage account.

Hope this helps,  good luck,   Retired in SC

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Frequent Contributor

Re: Turn off DRIP, live on that?

         Lefty - that makes perfect sense to me. Our whole TIRA is CEF’s and we’re up to monthly auto depositing  50% of that income now into our cash account and auto invest the excess. Doesn’t mean you have to spend it.

          Our whole taxable account is on reinvestment in different types of growth and relatively safer investments. We’ve had a muni fund on reinvestment since about 1978. We dipped into it for housing, automobiles and college etc. over the years. We do keep a little cash aside (5-10%) in both accounts for market dip shopping.

 

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Explorer ○○○

Re: Turn off DRIP, live on that?

Thanks for the responses.  I am talking about ALL cash paid out by funds monthly, quarterly, annually...dividends, interest, and capital gains.  Seems easier to me...your number of shares are still there, yes they go down in value then build back up (hopefully).  But that way you are not having to constantly decide what fund or asset class to sell off.  

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Follower ○○○

Re: Turn off DRIP, live on that?

Lefty - I retired early at the age of 56.  At that time, I was reinvesting all of the dividends and CG's as they were dispersed.  After a few years, I decided that if I was going to pay tax on the dividends and CG's, I might as well take the money instead of reinvesting and turned DRIP off.  I place all dividends and CG's into my money market account and move that money to checking as needed.  The value of my portfolio has continued to go up but of course, could go down just as easily.  Regardless, I still have all the shares and haven't needed to sell anything.  No regrets here for having done so.

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Frequent Contributor

Re: Turn off DRIP, live on that?

     Lefty - if you are a TR investor just make sure you have an opportunity for principle growth. That’s why we backed up Mr. Market with dividend reinvestment on half. The downside is more risk was required so we went with 8% or so CEF’s.with the other half. Compounding of dividends over time glosses over many bad markets. Like others have mentioned with current spending our principle value keeps going up, in a long bull market. That probably won’t always be the case.

      You can’t auto reinvest CEF’s so our decision was easy. CEF’s off, everything else reinvested or converted to CEF’s if/as needed. Been like that for about ten years, just monitoring.

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Explorer ○○○

Re: Turn off DRIP, live on that?

WE retired 01/04  no pensions just what we saved in IRA's ,SEP's , ROTHS, & cash we're 76 yo , started RMD's @ 70 1/2  now drawing 4.2% per yr. our ACCT's are up 38% since we started W/D's haven't changed anything, still about 50/50 stks. bonds. just keep reinvesting divvy's.    TERRY

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Participant ○○

Re: Turn off DRIP, live on that?

Lefty, you are proposing exactly what we do.  We are both retired and are invested completely in dividend-paying stocks.  Dividends are paid into a Money Market fund, and regular transfers are scheduled to give us the money we need to live on.  We each have a pension and have SS, that plus the dividends is all we need.  We don't have to worry about selling stocks during a downturn.  Indeed, during the financial meltdown, the amount I received in dividends barely budged.  

Good luck to you!

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Follower ○○

Re: Turn off DRIP, live on that?

You are very unlikely to be able to generate a steady 7% dividend. If you are currently getting 7% it is either more risky assets which are likely to drop distributions in a downturn, or the distribution is a combination of dividend and capital gains - meaning it it returning principle even if the number of shares remains constant, I more realistic number is 3-4%.

That being said, dividends will be a key component of my pending retirement in 1-3 years. Here's what I plan on doing:

I have 4 components to my portfolio (call them buckets if you like): 1) cash, 2) dividend producing investments, 3) fixed income, and 3) growth (aka traditional passive or active funds which do not concentrate on dividends).

I plan on breaking my spending into 2 categories: 1) fixed, 2) discretionary. The fixed income are expenses which do not vary and must be met every month. This include taxes, utilities, food, insurance, etc. Discretionary includes expenses I can eliminate or cut way back on. Things like travel, shopping, eating out, entertainment, etc.

My plan is to have my dividends pay for my fixed expenses, and growth pay for discretionary.

Growth assets are primarily parked in retirement accounts. I'll withdraw those as necessary when it seem like a good time to convert to cash (taxes for these will be allocated from the distribution). If we have a down market, I can used the fixed income bucket to pick up the slack. In a prolonged down market I can cut back on discretionary spending. 

Dividend paying assets are in both retirement and taxable brokerage accounts. Right now, I reinvest the dividends. Once retired, I'll start taking these to pay for expenses. These dividends are primarily blue chip, utilities, or high quality reits (I mainly own individual stocks, but ETF's are probably best for most - your income will be less predictable from month to month, but requires far less monitoring). Dividends will flow into cash. 

All spending comes from cash. I'll just make sure that the dividends cover my fixed expenses. Taking distributions will be planned to cover other expenses.

Ideally, over time my dividend paying portfolio will remain constant (number of shareds, the value and income should go up...over time). Growth assets will be slowly liquidated, and fixed income will grow or remain constant.

I can't tell you how this has worked out since I have not started yet, but I have spent a good part of the last decade thinking about it. It's certainly more complicated than either: 1) living off income, or 2) slowing liquidating a constant rebalanced portfolio. I was never completely comfortable with either approach. This is kind of a combination of both.

(I should note, btw, that I have more than enough to have a good retirement. I fall in the super saver category, and came form parents with the same mindset. If I had just enough, I might go with a more time tested, standard approach.)

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Explorer ○○○

Re: Turn off DRIP, live on that?

ProxySteve, thank you for your detailed response.  IYou are talking dividends and interest only, which would be 2-4% as you stated.   My 7% number includes capital gains as well.  If you look at the historical dollars thrown off by FBALX (Fidelity Balanced) for example, it has averaged around 7% total cash per year, as have many other funds.  Instead of letting the DRIP buy more shares, then having to try to decide what to sell to draw your 4% (stocks? bonds? reits?)...the income concept is to let this flow into the cash bucket.  Spend your 3-4% budgeted amount, and accumulate the rest to either cover down years or use for extra funds.  Meanwhile, your number of shares remains the same.  If the market goes down, you are not selling shares at a loss.  If it goes way up, you can sell some into bonds or cash to protect it or create more monthly cash flow.

 

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Frequent Contributor

Re: Turn off DRIP, live on that?

Lefty,

After thinking about this whole concept (living off portfolio income), My one concern with spending ALL of ones income (dividends, interest, capital gains) is that one will (potentially) not be growing one’s portfolio. Theoretically this would be a “withdrawal rate” of ~7%, which is way too high in my humble opinion. If the Mutual funds/ ETF’s/ Individual stocks do NOT grow their distributions, the purchasing power of ones’ portfolio will decline over time. May not be a huge issue for many retirees in their late 70’s or 80’s, but for someone (like myself) planning on retiring in their early 60’s, that could be an issue. Not there yet, but pretty close (nearly 61).

My plan is to have all investments (individual stocks, ETF’s, Mutual funds) pay all dividends/ interest in CASH. Any capital gains thrown off will be reinvested. I’m planning on living on a withdrawal rate of less than 4%, just to be “safe” and not have to worry about running out of money in old age. May have to “occasionally” tap some capital gains, as my portfolio “income” is closer to 3%. But, will try to sticks to that amount barring a major expense. Another option is to pay capital gains in cash, but try to “steer” that into areas that have (temporarily) sold off, in essence to “rebalance” using capital gains. 

Win
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Explorer ○○○

Re: Turn off DRIP, live on that?

Win1177, I agree 100%, see my post above yours!  While you pulling out the divs/income, you are also pulling out a chunk of the gains.  Same as you, my plan is to let that 6-7% "withdrawal" flow in to a MM account.  Then have my 4% withdrawal to pay bills automatically come out of that.  Keep a couple years of cash in the MM to cover down years, fluctuations, or major expenses.  Adjust as you go to what happens.

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Follower ○○

Re: Turn off DRIP, live on that?

Help....Although I am not a broker, I have been investing for many years but this big DILEMMA still haunts.I have about 30 stocks, a few ETF's..Sooo...DRIP OR NOT TO DRIP? (e.g., I paid $98. for AAPL, $38. for KO, $95.PEP. $48 for XLK, $49.for VOO, etc , etc...When AAPL hits $400.00, who still DRIPS. BTW, I have XLP.XLK,XLV,AAPL (with DRIP) for my grandson whose value had doubled over 4 years. I stopped DRIP on my stocks 2 years ago thinking I'll wait for a big drop (or some drop) to buy (which I missed on march 2020). Please advise or let me know what you all do.. I watched my husband buy RXI @ $89 years ago..and the other day his LOSS was -$38..because the value has increased so much that it reinvests over $120+...BTW..I do understand that DRIP on KO has made us a fortune over many years. I must lack understanding and would really appreciate some feedback...Thanks for reading!!!!

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Explorer ○○○

Re: Turn off DRIP, live on that?


@Suzie wrote:

Help....Although I am not a broker, I have been investing for many years but this big DILEMMA still haunts.I have about 30 stocks, a few ETF's..Sooo...DRIP OR NOT TO DRIP? (e.g., I paid $98. for AAPL, $38. for KO, $95.PEP. $48 for XLK, $49.for VOO, etc , etc...When AAPL hits $400.00, who still DRIPS. BTW, I have XLP.XLK,XLV,AAPL (with DRIP) for my grandson whose value had doubled over 4 years. I stopped DRIP on my stocks 2 years ago thinking I'll wait for a big drop (or some drop) to buy (which I missed on march 2020). Please advise or let me know what you all do.. I watched my husband buy RXI @ $89 years ago..and the other day his LOSS was -$38..because the value has increased so much that it reinvests over $120+...BTW..I do understand that DRIP on KO has made us a fortune over many years. I must lack understanding and would really appreciate some feedback...Thanks for reading!!!!


DRIP ON if in accumulation phase.

DRIP OFF if in withdrawal phase.

If looking for total return and focused on capital appreciation (for example to bequest these equities to your heirs) then you should leave DRIP ON.  It will be more advantageous for tax/cost basis reasons (generally) but please check with an ethical financial professional on your particular situation and corresponding state rules.

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Participant ○○

Re: Turn off DRIP, live on that?


@steelpony10 wrote:

     Lefty - if you are a TR investor just make sure you have an opportunity for principle growth. That’s why we backed up Mr. Market with dividend reinvestment on half. The downside is more risk was required so we went with 8% or so CEF’s.with the other half. Compounding of dividends over time glosses over many bad markets. Like others have mentioned with current spending our principle value keeps going up, in a long bull market. That probably won’t always be the case.

      You can’t auto reinvest CEF’s so our decision was easy. CEF’s off, everything else reinvested or converted to CEF’s if/as needed. Been like that for about ten years, just monitoring.


Earlier this year, I asked Fidelity and Schwab to re-invest my Pimco CEF  (PDI, PCI, PTY, and PK0) distributions and that seems to work. The shares are purchased about the 5th or 6th business  of each month and ownership backdated to the 1st day. I also believe they're purchased at a 10% discount. I take it then that other CEF houses don't do that?

Yep. DRIP been very good when we were saving. Still use it in retirement too. 

 

 

 

 

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