Stop Reinvesting Dividends When You Retire
Some people think you should always reinvest dividends. Others think perhaps there are times when you should stop reinvesting dividends when you retire.
When should you stop reinvesting dividends before you retire?
What is Dividend Reinvestment?
First, what is dividend reinvestment?
When you sign up for a brokerage account and invest funds, you decide what to do with your dividends. You can either take them as cash (which gets deposited into your sweep account), or you can automatically buy more shares with the dividends.
Folks like dividend reinvestment because it is cheap, easy, and automatic. It also allows you to buy fractional shares through dollar-cost averaging, resulting in compounding growth.
Reasons for Dividend Reinvestment
Automatic is the key. You take better advantage of compound growth when you reinvest dividends.
In addition, there is less cash drag. Instead of spending time in the sweep account earning less than cash rates, reinvested dividends compound and earn dividends on the dividends.
Reasons not to Reinvest
There are a few reasons to stop autoinvesting. Around retirement, the first is control of your asset allocation.
You can go all out in accumulation, but there is a time for temperance before you retire. About five years before you stop relying on human capital for most of your spending, you can adjust your asset allocation. In anticipation, stop re-investing dividends and determine what to do with the accumulated cash. Use it to get to your pre-retirement asset allocation goal.
Should I Reinvest Dividends?
If you want to know if you should or should not reinvest dividends, we need to learn more about the account type you are dealing with.
Account Type and Dividend Reinvestment
Retirement Accounts
Since no tax liabilities are associated with buying, selling, capital gains, or dividends in retirement accounts, it is optimal to automatically reinvest dividends in these pre-tax retirement accounts. Lack of cash drag is one of the most significant advantages; you are always fully invested. Learn more about your 401k, 403b, 401a, and 457 retirement accounts, where you should usually continue to reinvest dividends.
Brokerage/Taxable Accounts
What you do with the dividends in taxable accounts depends on your investing goals.
Automatic dividend reinvestment is best if you are a low-maintenance, hands-off, or infrequent investor.
If you contribute monthly to different taxable investments or want to harvest tax losses, turn off automatic dividend reinvestment.
When to Stop Automatic Dividend Reinvestment
Stop automatic dividend reinvestment when you are 5ish years from retirement.
This is when you transition from an accumulation asset allocation to a de-risked asset allocation.
In Summary: When in accumulation, reinvest dividends.
Don’t do it when in transition or drawdown! Remember, money is fungible, so it is all the same. It doesn’t care where it came from, where it is going, or what account it is in. Money is Money!
Do what is easiest for you and what makes sense. There is no real advantage one way or another that you can predict in advance. If this is more than you want to know, reinvest dividends, and don’t worry about it.
It’s only an issue because you are given a choice whether to do it or not, rather than a choice that makes all that big of a difference.