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Is income automatically reinvested?
Posted: Sat Jul 11, 2020 9:47 am
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
Re: Is income automatically reinvested?
Posted: Sat Jul 11, 2020 11:10 am
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.
Re: Is income automatically reinvested?
Posted: Sat Jul 11, 2020 2:35 pm
by pjddjp
Thank you so much.
Re: Is income automatically reinvested?
Posted: Tue Jul 21, 2020 8:12 pm
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
Re: Is income automatically reinvested?
Posted: Tue Jul 21, 2020 8:16 pm
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.
Re: Is income automatically reinvested?
Posted: Tue Jul 21, 2020 8:44 pm
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.