Previously, we discussed the psychological difficulties that retirees may encounter as they strive for a comfortable retirement. We will now concentrate on the challenges of creating and managing a portfolio and the measures that retirees can take to overcome these challenges.
Portfolio Positioning
When planning for retirement, investors should adjust their portfolio strategy from a focus on growth to a focus on preserving capital. This is because, during retirement, investment decisions become more crucial as there is less opportunity to recover from any mistakes. While an aggressive approach could provide higher returns, it also comes with higher risk, especially when fresh capital from earned income is no longer available.
To mitigate risk during retirement, it is recommended to maintain a portion of your portfolio in bonds, fixed investments, and cash equivalents, enough to cover 3-5 years of expected cash flow needs (ideally ten years). When investing in stocks, choosing companies with proven business models, consistent free cash flow generation, and a history of paying dividends is important. It is also essential to fully understand these companies and how they perform in different market conditions.
Tax-Efficient Withdrawals
As a retiree, it can be challenging to navigate the tax consequences that accompany various retirement and brokerage accounts. The goal is to withdraw the necessary funds required to maintain your lifestyle in the most tax-efficient way possible. A retiree’s portfolio typically includes a combination of the following:
- Pre-Tax retirement accounts (401k’s, IRAs, etc.)
- Post-Tax/Tax-Free accounts (Roth IRA)
- Taxable brokerage accounts (Joint and Individual brokerage accounts)
To calculate the tax-efficient withdrawal amount specific to your circumstances, it is recommended to first gather the following information: 1) determine your overall cash flow need, 2) identify any outside sources of cash flow such as Social Security or Pensions, and 3) calculate the cash flow needed from the portfolio to fill the gap between your overall need and outside sources. From there, familiarize yourself with tax brackets (See 2023 Federal Tax Brackets here. Then, structure your withdrawals from the various accounts in a way that keeps your ordinary income tax rate at the lowest possible level while still meeting your needs.
Structuring a withdrawal strategy that maximizes your tax efficiency should be based on your current financial situation. Be sure to seek the advice of a Certified Financial Planner™ or tax professional for help with your unique circumstances since every investor’s situation is different.
For more helpful content delivered directly to your inbox, sign up for our newsletter at the bottom of the page.
Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC –(“Welch“), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. Please remember that if you are a Welch client, it remains your responsibility to advise Welch, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch‘s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch‘s website or blog or incorporated herein, and takes no responsibility.