You may stop working upon retirement, but don’t stop working your retirement investments.
Mandatory distributions, growth on investment income, balanced portfolios, charitable giving, beneficiaries and annuities are just some of topics to address in an impending or post retirement era, says David Jackson, Vice President and Senior Financial Advisor of FirstMerit Financial Services.
“The biggest mistake a financial advisor or investor can make is being too conservative,” he explains. “Investors really need to maintain their purchasing power.”
Jackson says a conservative portfolio could include primarily fixed income securities with targeted allocations to stocks, commodities, private equity and real estate investments for the balance. The key is to control volatility and provide a portfolio that will maintain a clients’ purchasing power over an extended period of time.
Before rebalancing a portfolio for post-retirement, investors should work closely with a licensed financial advisor to put together a strategic plan. Jackson says these plans should be developed about three to five years before the retiree’s distribution phase, depending on the portfolio allocation. A financial advisor, he says, helps investors avoid making emotional mistakes, which are more common in retirement. Investors tend to follow trends, overreacting to changes in the stock market—buying high and selling low. While advisors can’t predict the market, they have the benefit of knowledge and experience to take a rational approach to investments.
Balancing act
“There needs to be a structured plan in place for when hiccups happen,” Jackson says. “That’s why it is so important to continually monitor and as needed rebalance a retiree’s portfolio. The wrong allocation can sink investments depending on the market.”
Monitoring to ensure the right investment mix is an ongoing process to take advantage of market opportunities, he says.
Jackson also cautions against withdrawing a retirement investment account at one time. Historically, taking distributions over one’s life expectancy is a far better way to go. The portfolio has a longer term over which to work, and income taxes may be minimized. But check with your tax advisor to be sure because everyone’s situation is different.
Note: Diversification, rebalancing, and/or asset allocation do not guarantee a profit, nor do they eliminate the risk of loss of principal. Additionally, there can be no assurance that any strategy or technique will be successful.
Tax-free giving
Retirees are obligated to take distributions from certain IRAs when they reach 70 ½ years. However, some retirees find they may not need the IRA distribution or they know they will never need all the money saved in their IRA. Charitable giving is an option to consider, says Jim Roseman, Vice President, Business Development Officer at FirstMerit Wealth Management Services.
While a typical IRA distribution withdrawal is taxable, a charity distribution is not. Current law allows individuals 70 ½ or older to donate up to $100,000 each year from their IRAs without having to pay any income tax, Roseman says.
“Care should be taken here, as in some cases, it may make sense to take the distribution into income and receive an income tax deduction on their personal return,” he says. “If a person has a pledge to fulfill, some combination of their personal assets and the IRA distributions may be the way to get the best result.”
To learn more about post-retirement investing, email David Jackson at [email protected] or Jim Roseman at [email protected].
The opinions and information contained in this message have been derived from sources believed to be accurate and reliable, but FirstMerit Bank, N.A. makes no representation as to their timeliness or completeness. This message does not constitute individual investment, legal or tax advice. All opinions are reflective of judgments made on the original date of publication and do not constitute a guarantee of present or future financial market conditions.
Sidebar – Hitting the books
Looking for more information on the distribution phase of retirement? Read on:
- The Bogleheads’ Guide to Retirement Planning by Taylor Larimore, Mel Lindauer, Richard A. Ferri and Laura F. Dogu. The Bogleheads are investors who follow the principles of John C. Bogle, founder and former CEO of the Vanguard Group. They advise on various retirement planning issues, including the types of saving accounts and retirement plans, and how to avoid taxes.
- Retirement Income Redesigned: Master Plans for Distribution: An Adviser’s Guide for Funding Boomers’ Best Years by Bloomberg Financial. Edited by Harold Evensky and Deena B. Katz. This collection of articles from various experts provides investment and retirement wisdom, including strategies for increasing retirement cash flow, and the pros and cons of reverse mortgages.
- Unveiling the Retirement Myth: Advanced Retirement Planning Based on Market History by Jim C. Otar. This book highlights myths and untruths about retirement and provides advice on everything from diversification to withdrawal rates.
- Your Complete Retirement Planning Road Map: A Comprehensive Action Plan for Securing IRAs, 401(k)s, and Other Retirement Plans for Yourself and Your Family by Ed Slott. A well-known financial expert, Slott speaks extensively on the distribution phase and includes information on inheritance, divorce and other less frequently discussed issues.
- The Bell Lap: The 8 Biggest Mistakes to Avoid as You Approach Retirement by Joseph R. Hearn. The author guides readers through various stages of the all-important distribution phase.
