Money Rehab with Nicole Lapin - "When Can I Cash Out Some of My Investments?" (Listener Question)

Episode Date: January 3, 2024

Money Rehab Jen is investing and seeing her money grow; now she wants to know... when can she actually benefit from those gains and take some money out of her brokerage account? Nicole shares tips investors can use for deciding when, and how much, to take out of their investments.

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every occasion, and every celebration. Be sure to check them out at justinwine.com and receive 20% off your order for a limited time. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. One of the things I love about doing this show is that I hear from people with all sorts of money questions from all walks of life with all different situations, from people with debt and bad credit to people who are newbie investors

with big dreams to even Wall Street bros. No one and nothing is off limits. No one is immune for money rehab. Today, I have a question from a money rehabber who has hit quite a few landmarks on her money journey. Not only is she goals, but she is also a good reminder that even if you have your financial life in so-called good shape, there is always room to learn and improve. Here she is. Hey, Nicole. My name is Jen Sunday. Wow, what an absolute honor it is to be able to ask a question on Money Rehab, the podcast of my hero, Nicole Lappin. I'm fangirling so hard right now. Okay, I digress. Here is my situation. I am trying to create additional revenue streams through investing in dividend stocks. I'm a new mom and I work full-time, so the time I used to dedicate to my side hustle is now spent elsewhere, at least for now. To date, I have solely chosen to reinvest

any dividend revenue I earn. Is there a ratio that you could recommend of how much I should set to reinvest versus how much I should set to pay out so that I have additional money coming in? Thank you. Jen, sis, I am so proud of you. You are absolutely killing it. Also, you just are the best and made my day. so you just are the best and made my day. But also, you have been setting aside money on creating an asset that can grow in value or be used as an income stream in times of need like now. High freaking five. Before I dig into your question, I want to add a little background to your question for anyone who's listening and is going, WTF is a dividend? I have algebra PTSD.

Here's the background. There are companies that give little pieces of their profits back to investors as a thank you for investing, but also to incentivize those investors to stay invested, literally. These little pieces of profits are called dividends. Some of these companies also offer what are called DRIPS. That stands for Dividend Reinvestment Plans, which also allows shareholders to automatically reinvest their dividends. In other words, instead of just taking the cash gift, reinvesting the cash back into the company in exchange for more stock. Drips are awesome because you can turn your dividends into essentially compound interest, which we absolutely love. And it's entirely a set it and forget it method so that you can grow the amount of stock that you own without needing to keep manually buying the stock yourself, which also means you get to skip

the transaction fees. Win, win, win. Jen has been doing this again. Yay. But the question is, when can you withdraw some cash from your investments and when should you just keep your investments invested? This is an age old question that even the pros ask themselves when they're doing their own financial health checkups. I'm going to first give you a fuzzy answer, but then don't worry, I'm going to get more specific. I do have to start with everyone's least favorite answer though. So when can you withdraw some cash from your investments? It really does depend. Because in order to know how much you can take out of your investments now, you need to take into consideration how much money you're going to need later. Let's take the lovely Jen as our example. Say she has $10,000 invested and

never ever invests another dime, but also doesn't take anything out of that investment and keeps reinvesting the dividends. If that investment grows at the same pace as the stock market has grown year over year, that $ grand will grow into 68 grand by the time her kiddo is 25. So if you need your brokerage account to be the source of money for your long term goals, helping your kid get married or having a sweet retirement, then you'll want your investments to be for your future and not your income. This is going to be the move for most of us. And this makes a whole lot of sense for two reasons. Number one, when we retire, we won't have any income. So we need a bundle of money for our expenses in retirement. And number two, because our money is worth more long term in our brokerage

accounts than it is in our bank accounts, because our money has more of an opportunity to grow when it's invested rather than when it's just sitting there in the bank. So Jennifer, how much you want to take out of your investments really depends on your current situation and your future goals. You clearly have both hands on the wheel when it comes to your finances, so I guess you probably have an awesome budget already. And actually, I would start there. Before you start thinking about taking any distributions from your investments,

ask yourself, is 15% of your income going to your endgame still? Do you have an emergency fund? Have you tweaked your budget since becoming a mom like are you starting a college fund for your baby such as a 529 will you be staying home with your baby for a full year or will you be paying for daycare in three months is your health insurance gonna change i mean a new baby means a new budget full stop you are are funding for two now, so your emergency fund needs to include a whole other human now. But even though you're adding new expenses, maybe you're taking some away as well. As you mentioned, your side hustle is on pause, so does that mean you're cutting down on expenses that you can reallocate? Maybe you're spending

less on gas. Maybe that can go to diapers. Making sure you know your new budget inside and out will help you understand whether you need another income stream to afford your new life or whether you just want another income stream. Knowing that difference is an essential step because before you can think about whether or not you can take distributions from your investments, you need to know why you want to do so. All right. I promised you I would get more specific, so here it goes. One way you can approach taking distributions from your investments is through the 8% rule. The 8% rule is that you can withdraw 8% of your brokerage account and still have a pretty fair likelihood that your nest egg will start intact. And that works because the stock market has historically returned about 8% year over year. So if you take 8% year over year.

So if you take 8% out of your brokerage account, you'll be withdrawing from the interest and not the principal. Let's go through an example for the numbers people listening. Let's keep using that 10 grand for easy math. Assuming an 8% growth rate, at the end of one year, you'll have $10,800 in your account. If you follow the 8% rule and take 8% from your account, you'll get $800 and you'll keep the remaining $10K invested. So your principal, the $10,000, remains, but you are just taking out the interest. Here are a couple things, though, to be wary about with this approach. First, the stock market is not certain. Returns are not guaranteed. No, the 8% rate of return is not just a number I pulled out of you know where. It is the historical average, but it is not guaranteed.

In any given year, your earnings could be much less than 8% and you could even net lose money. The second thing you need to be wary of, and hot take, I think this is the most important, if you take all of the interest that you have earned out of your brokerage account every year, you will never get the benefit of the beautiful, amazing, stunning, gorgeous, sensational force of compound interest. I do not have enough adjectives in my vocabulary to even describe my love for compound interest. When it works in your favor. Remember that example when I said Jen could turn $10,000 into $68,000 in 25 years if she doesn't take any distributions? Well, if she takes an 8% distribution every year in 25

years, she will just have made $10,800 instead of $68,000. I'm going to let that sink in for a sec. Of course, there are some middle-of-the-road options that are between the 8% rule and taking zero distributions forever and ever. For example, financial advisors typically tell retirees that they should only spend 4% of their retirement account per year in retirement. And that's in part because retirement portfolios typically aren't earning 8% because they hold more conservative investments and therefore only typically throw out a 4% to 5% yield. Jen, even though you're not thinking about retirement just yet, it is a good idea to borrow from this playbook and take a lower

percentage than 8% if you're going to take anything at all. Because again, this calculation is going to be dependent on your goals and how you think your life is going to shake out. If you're expecting to come into some sort of inheritance in 30 years, or your mortgage will be paid off and you're going to have more money to play around with your long-term investments are less critical and you can withdraw more now but in most cases the best financial move is to limit any withdrawals from your investments and if you're looking for another source of income look at just that income jen you mentioned that you hit pause on your side hustle. Well, maybe you want to find someone who can press play again on that side hustle and maybe split the profits with them. And that way you can have some extra income coming in now without needing to take it away

from your future self. For today's tip, you can take straight to the bank. If hearing Jen's story inspired you to start investing for some more passive income, the stock market isn't your only option. You could also check out treasuries or CD ladders. These are lower risk investment vehicles that will regularly provide you with returns. And unlike the stock market, with CDs and treasuries, your yield is guaranteed. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even

have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.