How do I model an Income Stream from stock dividends

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Last Post by John 6 years ago

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John

(@ims814)

New Member Customer

Joined: 6 years ago

Posts: 2

Topic starter February 9, 2021 9:33 am

I purchase so called "dividend aristocrats" and have the stock portfolio in my Roth to avoid taxes. I do not reinvest the dividends but receive them in cash and want to represent them as income in the Pralana model. I manage the investments to generate the income stream so the income is predictable, grows over time and is inheritable. I believe there are quite a few retirees who live off their income so it seems reasonable to represent in the model. Further, if the dividend income is not tax free, it does affect MAGI for medicare costs as well as the amount of social security that is taxed so dividend income does seems very much like a typical income stream in the model.

What do you think of entering my annual dividend and interest total in the income table under the category of “other income streams”? I notice you mention “trust income” in the manual as a possible item for “other income” and that led to this idea.

Will this mess up the account account growth calculations and how can I adjust so I don't double count?

If not then where might I put this type of income?

I am not finding a way to set dividends as “not reinvested” or a more defined place to put the recurring amount.

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Income Stream Stock Dividends

Stuart Matthews

(@smatthews51)

Member Admin

Joined: 6 years ago

Posts: 618

February 10, 2021 10:02 am

John,

As you've correctly ascertained, PRC assumes that interest and dividends are reinvested. As a workaround, I think your idea about using the Other Income streams on the Income page is a good one. Using that option, you can specify the annual income amount, the annual growth rate and whether the income is tax-free or taxed as ordinary income or long term capital gains. If you select "ordinary income" it'll be included in the MAGI for Medicare costs and taxation of Social Security benefits. If you elect to use this option, though, you will need to make a corresponding reduction in the growth of your Roth account and this could be a bit problematic. The potential issue is that rates of return (ROR) are specified at the asset class level and the account-level ROR is an aggregation of these based on the asset allocation of each account. So, if a given asset class (for example, stocks) is used in both your tax-deferred and your Roth accounts, you can't really adjust the ROR for the stock asset class to effect a reduced ROR at the Roth account level to model the dividends that are taken in cash without inappropriately affecting the returns of the tax-deferred account. Therefore, I think the way to go would be to define one or more additional asset classes such that they are not allocated to both the Roth account and other accounts. That way, you could reduce the ROR for the assets mapped to the Roth account without perturbing the aggregate returns on the other accounts. With that mechanism in place, then you'd just have to determine how much to derate the ROR for each Roth asset class to account for the dividends being modeled via the Other Income stream.

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John

(@ims814)

New Member Customer

Joined: 6 years ago

Posts: 2

Topic starter February 10, 2021 12:13 pm

Stuart, thank you! I made these adjustments. I updated the Income page to reflect non-taxable income (from ROTH stock dividends) and I adjusted asset classes, asset taxation, asset allocation, and Historic Data accordingly for the new asset class recognizing the reduced ROR at the ROTH account level as you suggested. I like the result in that I can now see on the Income page the projected non-taxable income from ROTH dividends. It is important to me to view total income in my elder years in light of survivor social security reduction due to spouse death. The decrease in Social Security payments in that scenario needs to be compensated somewhere to maintain total income and either that happens via increasing dividends or some type of annuity. The resolution of that question is seen in my new income page data. Also, this approach to reveal non-taxable income is useful to monitor Medicare MAGI thresholds by managing non-taxable income against the sale of taxable assets or Traditional IRA withdrawals. All in all, a great addition to my income view!

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