Income Management

What is it?
Asset allocation is how you divide your investments between different asset classes (i.e. stocks, bonds and cash). It is an investment strategy that aims to balance risk and reward by maintaining a portfolio according to an individual’s risk tolerance. Once you retire, you are not “accumulating” assets, but are now “decumulating”. This will affect your asset allocation.

Why does it matter?
Retirement requires a totally different approach to asset allocation. The allocation of your assets in your portfolio should match and constantly adjust to your situation and tolerance for risk. As you “decumulate” your nest egg, your withdrawals will impact your asset allocation if you don’t actively manage it. It is also important to look at the assets at the total household level versus looking at the allocation of each individual account.

How do people get it wrong?
Retirees, for example, may ignore the impact of withdrawals on their intended asset allocation. As they draw income from their portfolio, they may end up with too much in bonds in their portfolio, which can undermine their income potential. Similarly, retirees may be assuming too much risk by being heavily concentrated in equities or high risk bonds. A smart strategy will tell you specifically what you need to sell or buy to return your portfolio to the right allocation.

What is it?
Asset location is not only about thoughtfully placing your retirement savings in the right type of accounts, but also where and when you withdrawal from these accounts in retirement. Examples may include “tax-deferred” (i.e. 401k, IRA, etc..), “tax-exempt” (Roth IRA) or “taxable” (i.e. savings, brokerage, etc…). Similarly, some investments are more tax-efficient (tax-free municipal bonds) than others.

Why does it matter?
You can minimize your tax liability each year in retirement if you know which holding and which account you should liquidate for income. A smart strategy considers not only the security, but also the types of accounts you have. In addition, retirees may consider putting their most tax -efficient investments in the taxable accounts and the least tax-efficient in a tax deferred account.

How do people get it wrong?
Some may have a large percent of tax-inefficient investments in their taxable accounts. Others may overlook the benefits of using a Roth IRA and miss an opportunity to have another critical income source in retirement. Retirees should also consider the location of assets based on the household, not just the account level.

What is it?
Rebalancing is about adjusting your portfolio to a preferred level of asset allocation after market conditions or income withdrawals take the portfolio “out of balance”. Rebalancing involves buying or selling some of your holdings to return the portfolio to the desired allocation. Retirees are in the “decumulation” phase and must carefully manage their asset allocation when they make a withdrawal.

Why does it matter?
In retirement you must be more diligent about your portfolio. Without a periodic rebalancing effort, your portfolio will eventually stray from your preferred asset allocation strategy, thus increasing your level of risk or reducing the amount of income you want to generate in retirement.

How do people get it wrong?
Retirees may neglect this important step and get off track from their plan because their portfolio is no longer in balance. The right income strategy includes rebalancing at the household level and ensures asset location and allocation are appropriate for the retirees risk tolerance.

What is it?
Tax minimization is about making smart decisions to reduce your exposure to taxes throughout retirement so you can keep more of your money. This can include the timing of both income and expenditures, selection of investments, types of retirement accounts, as well as taking advantage of capital gains/losses.

Why does it matter?
Each time you liquidate a holding it can become a taxable event. Paying taxes is inevitable, however retirees have to be highly sensitive to the many ways taxes can divert the income needed in retirement. The more taxes you pay, the more cash you will need to pull from your retirement savings, putting you at risk of running out of money.

How do people get it wrong?
Retirees can overlook opportunities to reduce the tax burden by evaluating multiple strategies to generate income. Financial advisors don’t always focus on the tax impact of a retiree’s withdrawal strategy or may lack the expertise. Using the computing power of software will help you assess thousands of different strategies before identifying the best option.