Retirement Cash Instead of Income
By Steve Gillman
The following retirement cash idea is not so much a way to
make money as a way to pay less in taxes when your funds are
distributed after you retire. It is based on the fact that you
are taxed not on what you take out of your retirement account,
but the income and capital gains you get. Before
I explain that further, lets start with a quick look at why most
retirees look for income from their investments.
Buying dividend-paying stocks is a common strategy for retirees
for a couple reasons. First, wherever the price of the stocks
go, if the companies are solid the income keeps coming in. This
provides some protection, since even if a company eventually
goes bankrupt an investor who has held the stock for many years
may have received everything back that he paid - in the form
of dividends. Also, if he owns stocks that do not pay dividends
he may have to sell some companies he likes to pay for living
expenses - even when the price is down and will likely go back
In general, a company that pays a dividend has a stock that
is less volatile. This makes sense if you think about it. A rumor
could send a $40 stock down to $20, but this becomes less likely
if the company is paying out a $2 annual dividend, since the
yield would jump to 10% at that lower price, prompting many to
buy the stock and so keep the price from falling too far. In
fact, in today's market, if the company is sound, long before
the stock dipped to even $30 - which gives buyers a 6.6% yield
- investors would likely jump in.
However, this doesn't make a dividend paying company a better
buy in the long run. It simply means the price won't swing around
as much. Historically, companies that pay dividends don't do
any better than those which do not - in the long run. In the
short run they tend to do better during bear markets and worse
during good markets. We should also keep in mind that many of
today's largest companies would not be so large if they frittered
away their money in dividends rather than reinvesting it into
Now, if you are mentally prepared for greater volatility,
there is a reason to buy companies which do not pay dividends.
I'll explain with an example. Suppose you have $600,000 invested
in the stock market, and most of it is in dividend-paying stocks.
Your stocks average about 4% gains annually, and you collect
4% in dividend income, or $24,000 each year. That's an 8% return
overall. Tax laws change a lot lately, but if at the time you
read this dividends are treated as ordinary income, and you are
paying the current top tax rate of 35%, you only get to keep
$15,600 of the distributions you receive.
Now suppose your $600,000 is in stocks of companies which
do not pay dividends, and you get the same 8% overall return
on average. Of course the actual return from year to year will
vary widely, and every year some of your stocks are likely to
be losers. So you have some stocks that have gone up 20%, and
others that have dropped by that much, and so on, but the value
of your portfolio grows by an average of 8% annually. Now, what
happens when you take out $24,000 each year for living expenses?
Well, if you sell only stocks that have gone down in value
you owe nothing for taxes, so you get to keep the entire $24,000.
That's $8,400 more retirement cash in your pocket. Meanwhile
your account grows in value by $24,000 too, just as in the other
scenario (in the long run - we're talking averages here). Of
course, the stocks that have gone up in value will be subject
to capital gains someday - if and when you sell them. Plan well
and you'll pass that problem on to your heirs.
How Much Can You Make?
This question can't be honestly answered except in the most
general terms. The markets go up and down, and this is not meant
as a strategy to make a higher return on the investments themselves,
but to make more after taxes.
Ways to Make More | Related Opportunities
You don't actually have to sell only losing stock investments
for this strategy to work. You just have to be sure that you
don't have a net gain on the stocks you sell. In other words,
you might sell stocks that you think are over-priced for a gain
of $4,000, and as long as you sell others that have lost $4,000
or more to offset those gains, you'll have no net capital gain
to pay tax on.
If you decide that you want more income from your portfolio,
you can choose to sell out-of-the-money options on your stocks.
Many savvy investors do this to boost their returns, but you
might also have to sell if the stock price rises to above the
option exercise price. Also, the option income will be treated
like ordinary income for tax purposes. There is a link to a page
that covers selling call options at the bottom of this page.
Qualifications / Requirements
If you have an investment account at a brokerage you're ready
If you already have a retirement account with a stock broker,
you can start shifting into non-dividend stocks in order to use
this retirement cash strategy.
Why Buy a Stock Without Dividends? - A look
at what makes a stock worth something even when it doesn't pay
- One of the best places online for tracking stock prices, and
gathering information on companies.
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Other Relevant Pages
Sell Call Options to Boost
Fully Diversified Investments
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