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?
This is a little different than DRIP, which I mention below.
When you sign up for a brokerage account, 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 fund shares with the dividends.
Folks like dividend reinvestment because it is cheap, easy, automatic, and allows you to buy fractional shares through dollar-cost averaging, resulting in compounding growth.
What is DRIP?
DRIPs are dividend reinvestment plans offered by individual companies on their stocks. Mutual funds, ETFs, and low-cost brokerages don’t have DRIPs; they have automatic dividend reinvesting, which can be turned on or off.
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.
In accumulation, you can go all out, 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 figure out 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 reinvest dividends in these pre-tax retirement accounts automatically. 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
In taxable accounts, what you do with the dividends depends on your goals of investing.
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 do tax-loss harvesting, then turn off the automatic dividend reinvestment.
When to Stop Automatic Dividend Reinvestment
When you are 5-10 years from retirement, stop automatic dividend reinvestment.
This is when you transition from an accumulation asset allocation to a de-risked asset allocation.
In Summary: When in accumulation, reinvest dividends.
When in transition or drawdown, don’t! 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 just more than you want to know, then 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.