Dividends and Capital Gains

Can someone elaborate on the two dividend and capital gain assumptions? There is little in the Help or Tutorial about them. A few questions and comments are below:

While current dividends could be estimated, they will change as assets are sold during retirement. How are the changes handled? One could sell non-dividend paying assets one year, dividend paying assets another year and a mixture in another year. And, obviously, assets have differing dividend rates.

Capital gains can vary wildly from year to year and there doesn't seem to be any way to account for that. Also, since there is no way to enter a basis, how are taxes handled when assets are sold during retirement?

What is the unrealized capital gain/loss about? Since they are not taxed, how is this used?

Comments

Can someone elaborate on the two dividend and capital gain assumptions? There is little in the Help or Tutorial about them. A few questions and comments are below:

While current dividends could be estimated, they will change as assets are sold during retirement. How are the changes handled? One could sell non-dividend paying assets one year, dividend paying assets another year and a mixture in another year. And, obviously, assets have differing dividend rates.

THE PROGRAM DOESN'T KEEP TRACK OF PARTICULAR ASSETS. RATHER ALL REGULAR ASSETS ARE USED TO SMOOTH YOUR LIVING STANDARD. WE DEAL WITH FUTURE CAPITAL GAINS AND DIVIDENDS BY ASSUMING THEY ARE REALIZED AND RECEIVED EACH YEAR IN AN AMOUNT BASED ON THE NOMINAL RATE OF RETURN ON REGULAR ASSETS THAT YOU SPECIFY UNDER ECONOMIC ASSUMPTIONS OR EFFECTIVELY SPECIFY BY TELLING US IN RUNNING THE MONTE CARLO WHAT ASSETS YOU WILL BE HOLDING THROUGH TIME.

Capital gains can vary wildly from year to year and there doesn't seem to be any way to account for that.

WHEN YOU RUN THE MONTE CARLO, THE PROGRAM CALCULATES WILDLY VARYING RETURNS FROM YEAR TO YEAR, DEPENDING ON WHAT YOU TELL IT YOU'LL BE HOLDING, AND ASSESSES TAXES BASED ON THE PARTICULAR WILD OR NOT SO WILD RETURN THE MONTE CARLO DRAW FOR THAT YEAR ENTAILS. SO WE ARE ACCOUNTING FOR "WILDLY VARYING" CAPITAL GAINS AND DIVIDEND YIELDS IN THE MONTE CARLO SIMULATIONS.

Also, since there is no way to enter a basis, how are taxes handled when assets are sold during retirement?

THERE IS A WAY, IN EFFECT, TO ENTER BASIS. GO TO TAX ASSUMPTIONS IN THE ASSUMPTIONS FOLDER. THE LAST FIELD ASKS YOU TO ENTER THE UNREALIZED CAPITAL GAINS ON YOUR EXISTING ASSETS. WE ASSUME THAT THESE UNREALIZED GAINS ARE REALIZED SMOOTHLY OVER TIME. OTHERWISE, GOING SMOOTHLY, WE ASSUME THAT NEW CAPITAL GAINS ARE REALIZED ON AN ANNUAL BASIS.

What is the unrealized capital gain/loss about? Since they are not taxed, how is this used?

I have the same question. I think I need a numerical example. If I have a portfolio of 60% stocks and 40% bonds yielding 2% div 4% cap gains and 3% interest, what would I put for the "Share of taxable regular asset income received as capital gains or dividends" assumption?

IIRC, you must have held the stocks for more than 1 year to get long term capital gains rates (the only one we know about), so assuming that the latter is the case, that's 20%.

Poking around a bit, I find that qualified dividends are taxed at capital gains rates if you've held the stock for 60 days out of the 121 days preceding the dividend. So if that's true, that should be another 50%.

Therefore, your %age of regular asset income received that is taxed at capital gains rates is:

(2 + 4) / (2 + 4 + 3) = 6/9 = 2/3 = 67% (more or less).

So, say you had 100K in regular assets. You would set the rate of return on regular assets to 9% nominal (or 5.82% if the rate of return needs to be real, assuming a 3% rate of inflation). You would set the %age of regular asset income received as capital gains & dividends to 67%.

I am a bit confused. I am playing around with the Assumptions/Taxes section.

I am trying to account for cost basis vs capital gains. As I increase the share/percent taxable, the amount I pay in taxes goes up as I expected. But I also see that the standard of living also goes up. I expect that increased taxes should equal decreased standard of living. What am I missing?

ESPlanner results are non-linear so this does happen from time to time. Taking a close look at the before and after reports comparing differences may enable you to zero in on the specific changes. Try looking at regular assets, the detailed report on taxes, and net worth as a guess on where to start.

Just thought you'd like to know, that ESPlanner was central to my conclusion that I really could afford to retire, a conclusion that my subsequent activities verified. In short, we are far from hurting and even fret over not having enough time to do all the things we want to do. Thanks for helping put us in such a wonderful quandary.

—John Harry Jorgenson, retired, former lawyer with the Federal Reserve Board of Governors

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