Is income automatically reinvested?

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pjddjp
Posts: 18
Joined: Thu Dec 21, 2017 10:40 am

Is income automatically reinvested?

Post by pjddjp »

Hi,
This may seem like an obvious question, but I can't find anything about it on the help pages.
If I have retirement income that exceeds my spending, is the surplus automatically reinvested at my specified investment return rate & STD?
Congratulations - this program is fabulous.
Thanks!
Danny

jimr
Posts: 634
Joined: Thu Feb 28, 2008 6:48 pm

Re: Is income automatically reinvested?

Post by jimr »

Danny - First I'm glad you're finding the program useful and thanks for the kudos.

The short answer to your question is yes, income is automatically reinvested. The longer answer is that the program doesn't distinguish between investment income and investment growth as both are lumped together in the rate of return that you specify.

This also means that the "investment tax rate" input should be the average rate of taxation expected on all investment income, taking into account the mix of interest, dividends, and capital gains, and the tax rate for each.

pjddjp
Posts: 18
Joined: Thu Dec 21, 2017 10:40 am

Re: Is income automatically reinvested?

Post by pjddjp »

Thank you so much.

pjddjp
Posts: 18
Joined: Thu Dec 21, 2017 10:40 am

Re: Is income automatically reinvested?

Post by pjddjp »

Hi Again,
Really appreciate this application and your support.
Can you tell me, how often does the model assume investments are traded and taxed?
Thanks again,
Danny

jimr
Posts: 634
Joined: Thu Feb 28, 2008 6:48 pm

Re: Is income automatically reinvested?

Post by jimr »

Portfolio returns are reinvested yearly. In the taxable portfolio, investment taxes are deducted from portfolio returns before the returns are reinvested into the portfolio.

Basically, the model assumes that the portfolio always has a cost basis of 100% of its value.

pjddjp
Posts: 18
Joined: Thu Dec 21, 2017 10:40 am

Re: Is income automatically reinvested?

Post by pjddjp »

Never mind about my last question - sorry - I found the answer on the Help pages:

The Investment Tax Rate determines the rate at which each year’s portfolio gains (from taxable investments) will be taxed. The simulation assumes that taxes on all gains in the taxable portfolio are paid in full each year and no taxes are deferred. This assumption will be incorrect in the case of a low turnover portfolio or when a plan starts out with a significant amount of deferred gains in taxable accounts. To compensate for these cases, it may be necessary to reclassify some percent of taxable investments as tax deferred investments or to run some experiments with different investment tax rates to see how sensitive the plan is to this input. Also, taxes are “credited” to the portfolio (instead of debited) in years where the portfolio return is negative. This is to prevent double taxing gains as the portfolio value fluctuates.

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