I recently heard that one way to retire is to accumulate enough wealth and then invest in a high dividend portfolio. That way, you can live off the dividends and not have to sell your stocks. So you don't have to worry about outliving your assets, etc. I like the idea of this so I could leave things to my children, charities, etc.
Right now, I have most of my money invested in an assortment of stocks that aren't high dividend. My understanding is that high dividend stocks don't grow as much (because they're paying larger dividends rather than re-investing in the company), so it's better to invest in growth funds until you're older.
But, when I get to the point of retirement and want to change my investment makeup, won't I end up paying a lot of capital gains tax? For example, imagine if I invested $100k in a mutual fund over my career and it grows to $250k by the time I retire. Now I want to change my portfolio to a high dividend one. My understanding is that I'll need to sell my mutual fund, pay capital gains on the $150k, and then invest in the high dividends. But then when I live off the dividends, I'll have to pay tax on the dividends (just like I would have if I originally invested my $100k in a high dividend fund).
So overall, is there any way to determine whether it's better to
- Just invest in a high dividend fund from the get-go, so you only ever pay the dividend tax and don't pay the capital gains tax
- Keep investing in higher yield funds until you retire, because those will grow substantially more than the high dividend funds to the point that the capital gains tax still doesn't make your end result less
Also, my understanding is that for retirement accounts (401k and traditional IRAs) this doesn't matter because you don't pay tax until you withdraw so you can rebalance as much as you like. Is this correct?