11 Portfolio Solutions for Retired Investors
Financial advisers tackle real-life retirees’ questions about managing various types of retirement accounts and the assets within them.
Reaching retirement age might feel like crossing the finish line for most savers and investors -- a chance to finally stop chasing portfolio gains and comfortably spend down your assets accumulated over a lifetime of working. But for most retirees, the race isn’t really over. It’s simply shifted from a sprint to a test of endurance: Can you manage your money over decades of retirement such that it outlasts you?
Given the opportunity to mine financial planners’ brains for free financial insights, retirees just like you asked a variety of questions about the makeup of their retirement accounts and income-producing vehicles in our Maximize Your Money live chat on June 16. 20 planners from the National Association of Personal Finance Advisors answered nearly 120 questions throughout the day-long event. While each person’s financial circumstances are different, you can learn plenty from the financial challenges (and potential solutions) confronting your fellow retirees.
Here are 11 questions retirees are asking about their various retirement accounts and the assets within them -- and the advice they’re hearing back from financial advisers:
Converting Money From a Traditional IRA to a Roth, Part I
Q. I turned 70 this year. Does that mean I'm too old to convert assets from a regular IRA to a Roth?
A. The federal government will always allow you to pay income tax sooner rather than later, so, yes, you can still convert to a Roth. – Rodney James, Kanaly Trust, Houston
Converting Money From a Traditional IRA to a Roth, Part II
Q. I will be converting some traditional-IRA assets to my Roth IRA. Are there any basic guidelines on what assets (i.e., ones currently doing well, ones not currently well, etc.) make the most sense to transfer/convert?
A. The answer to your question gets to the heart of your specific investment risk profile. In other words, what are your goals and how much risk can you handle in an investment portfolio? It has little to do with the latest hot investment. I would encourage you to take a broader view of your investment goals and when you plan to take withdrawals. The answers to those questions should be your guide on what investments you choose for your Roth IRA. For many people nearing retirement age, an appropriate mix might be 60% stocks, 40% bonds, but again that's not advice for you. It's a typical retirement mix that tends to serve a wide swath of the population. – Walt Mozder, Syverson Strege and Company, West Des Moines, IA
Avoiding Taxes When Transferring a 401(k) to an IRA
Q. Can you tell me the best way, for tax purposes, to transfer money from your 401(k) that is in company stock, when you retire? Can it be transferred in kind to an IRA so you don't have to pay taxes on it?
A. You can always roll your 401(k) into a Rollover IRA upon retirement. If done correctly, this is a non-taxable event. Later distributions would be subject to tax. You might also be eligible for Net Unrealized Appreciation (NUA). This means you may be able to distribute the company stock from the 401(k). The basis in the stock would be subject to ordinary income, and the capital gains (difference between sales price and what you/employer paid for stock in 401(k)) would be subject to the preferred capital gains rate. This is very complicated, so make sure you fully understand the rules or work with a tax or financial advisor who understands the process and tax rules. – Jacob Kuebler, Bluestem Financial Advisers, Champaign, IL
Best Mutual Funds for Retirees With RMDs
Q. How should I withdraw required minimum distributions from my IRA, yet maintain the best mutual funds to earn my RMDs for next year?
A. Required minimum distributions typically amount to around 4% of tax-deferred (IRA and 401(k)) assets. I'd start by looking to liquidate the most overweight portion of your investments (too much in one fund or in one asset class?). A 4% withdrawal does not require a complete investment overhaul if your portfolio is in good shape. – Mark Wilson, Tarbox Group, Newport Beach, CA
Deductible vs. Non-Deductible Contributions in IRAs
Q. I find that I have not kept good records to be able to figure my deductible versus non-deductible dollars in IRAs, 401(k), etc. I am sure that some of the dollars invested were non-deductible, since my income was high. Is there anything I could do to make sure I'm not taxed twice?
A. Can you find the tax return for the last year you had a non-deductible contribution? If so, and if such contributions were reported correctly before that, Form 8606 should tell you what your basis is/was. If you don't have that, I'm wondering if the IRS has the magic number for you somewhere. Worth a phone call. I have to tell you that this is the reason I don't like non-deductible IRAs. There is no current tax savings, and the recordkeeping is onerous given it could be decades before you need the information. Yes, the money does grow tax-deferred, but, since different buckets of money are desirable in retirement, I just have my clients put the money in a taxable account. No reason to feel bad about where you are on this. The past is the past. Good luck! – Bobbie Munroe, Supporting Your Choices, Havana, FL
Giving Your RMD to Charity
Q. What would be best procedure to use my RMD to fund a charitable trust and avoid having the RMD add to gross income?
A. I think you're referring to the recent reinstatement of the Charitable IRA Rollover, which is different than funding a Charitable Remainder Trust. That's a whole different ball game. Normally, you can work with your investment custodian and your nonprofit of choice directly to ensure the transfer of funds in the appropriate manner. Rely on those professionals to help you. – Walt Mozder, Syverson Strege and Company, West Des Moines, IA
Safe Investments for Retirees
Q. We have a five-year, 3% MYGA (Multi-Year Guaranteed Annuity). How safe are MYGAs? Also what other safe investments can you recommend to a 68-year-old living off of savings and Social Security?
A. Annuities are as safe as the insurance company backing the product. Cash accounts covered by FDIC insurance and US Bonds are generally considered the safest investments. – Jacob Kuebler, Bluestem Financial Advisers, Champaign, IL
Sheltering Bonds in IRAs?
Q. I plan to retire at 60 with a pension and wait until age 70 to take Social Security. During those 10 years, I will need to supplement the pension by spending down a taxable account. If the overall allocation of all accounts (taxable, 401(k), IRA) is 60% stock, does it make sense to shelter all the bonds in the IRAs?
A1. You may consider how much you are taking from your IRAs vs. your taxable accounts each year to minimize your tax bill. I generally think asset location (which account holds which assets) is less important than managing your overall asset allocation. If you spend from one account exclusively, it can be difficult to keep an appropriate overall asset allocation. – Rodney James, Kanaly Trust, Houston
A2. You want to have a diversified mix of assets within each of your accounts. Depending on your tax bracket, you could consider holding tax-free municipal bonds in your taxable account. Holding some bonds in your taxable account would give you flexibility to take distributions from the account and avoid selling equities in a down market. – Mark Coffey, Summit Financial Strategies, Columbus, Ohio
Buying Into REITs
Q. I am long retired and have all the tax-free and tax-deferred options but still incur a hefty tax bill. I am looking for diversification, but would buying into the REIT world be very harmful to me as regards taxes?
A. My retired clients often face two large expenses -- taxes and medical care or coverage. REITs pay out income by design; that income comes as dividends, and they are generally not qualified dividends, which means in a taxable account, you may pay more. They can be effective in an overall plan; however, based on the very limited information we have here, you may wish to review it with your planner. – Bonnie Sewell, American Capital Planners, Leesburg, VA
Immediate vs. Indexed Annuities
Q. How good are immediate annuities versus the indexed ones to supplement a retirement income?
A1. Be very wary of annuities, because they can potentially be very expensive. In concept, immediate annuities are good; however, it is important to note that you give up a lot of control, because you are basically handing over a lump sum of money in exchange for a cash-flow. Again, conceptually, good, but what if you need a portion of that lump sum at some point?
Indexed annuities, again, can be expensive and have many moving parts that tend to favor the company offering the annuity, such as limited upside along with limited downside. Be very wary of these. – Michael Gibney, Highland Financial Advisers, Riverdale, NJ
A2. For the average investor, there is so much to understand about how these products work. Personally, I'm not a fan of annuities for many reasons. They may serve certain people who are fearful of stock market volatility, but if you work with an adviser or have even a basic understanding of investment markets, you can retain control of your money and still draw income for years. I don't like how insurance companies tend to write the rules that allow for them to change things on the fly to make sure their profit margin is maintained. Be careful. – Walt Mozder, Syverson Strege and Company, West Des Moines, IA
A3. Immediate annuities can sometimes be a good option for a limited portion of one's retirement. They can help insure against the risk that you may live longer than you plan. The longer you live and collect on them, the better deal they become; the shorter you live, the less of a good financial deal they may be. They also tend to be pretty clear and fairly easy to understand. You give the insurance company $X as a lump sum, and they will pay you $Y/month for as long as you live. They are also quite inflexible; once you've done this, you generally can't change your mind and get your money back if a huge expense or some other life event comes up. They also tend to be unhelpful in protecting against inflation since the the payment you receive generally stays the same, while inflation creeps up for the rest of your life.
Indexed annuities tend to be very hard for the average consumer (or insurance agent, frankly) to fully understand. They tend to pay agents high commissions, tend to sound as if they will earn more than one could reasonably expect from this kind of investment, and they frequently have harsh surrender charges. Although, in theory the concept may not be wholly bad, I have not yet seen an indexed annuity that I would feel comfortable recommending to my clients. – Timothy J. Lapean, Thoughtful Financial Planning, Minneapolis
Investing in Gold
Q. I am 73 and have IRA accounts, about 65% stock index funds and 35% bond index funds, all with Vanguard. Should I put 5% into gold, either in funds or ETFs, to hedge against a market crash. Or should I put the 5% into gold coins? I am 73.
A. Pricing for individual gold coins can vary significantly across dealers. Purchasing gold in the form of an ETF or mutual fund can provide immediate liquidity and access to the gold market without the added costs. – Grace Kvantas, Financial Symmetry, Raleigh, NC