Maximizing Your Retirement Portfolio Potential

You've made your contributions, cut corners, and planned to save as much as you could to have the best standard of living in your golden years. However, most importantly, you wanted to remove any concerns about paying for retirement.

Your day has come to leave work forever and draw on the money you've worked hard to save. Like so many other people, though, you begin to realize that the end goal of retirement is really just a whole new beginning. In your youth decades earlier, it seemed that all you had to do was plan for retirement. After that, somehow, it would all just figure itself out.

While the savings are done and the markets have worked their magic, now comes the task of determining the best way to allocate your retirement portfolio to cover your living expenses – and to do so in a way to maximize your retirement portfolio.

Retirement Portfolio
Courtesy of CNBC.com

Step 1: Determining Current Tax Structure


If you're like most retirees, chances are you've accrued savings with a million different methods. The situation becomes even more complicated for married couples, since one may have savings in one retirement account tied to her age, while their spouse, a few years older, has a retirement portfolio that is tied to his age.

Many people hope to produce retirement income with the help of different investments within one large retirement portfolio. These investments may have different tax structures. For example, a mutual fund held in your name but outside of a 401k or IRA is taxable. So are any brokerage accounts or other non-tax protected assets.

Generally speaking, it is best to use up these taxable portions of your retirement portfolio before making use of other tax advantaged assets. The idea is simple: use taxable savings as retirement income for as long as possible to allow other tax-free accounts to grow without a tax burden. More simply: your taxable assets are your weakest link.

Another consideration is that taxable assets rarely have any strings attached. Thus, should you happen to be one of the few privileged people retiring young, these taxable assets can be liquidated without incurring early withdrawal penalties.

Step 2: Consolidating Your Investments


A retirement portfolio often has both IRA and 401k investments. Typically, consolidating these two into one retirement portfolio simplifies your accounting and offers better investment choice. Most frequently, IRAs have a better selection of choices and better “self-directed” plans for a wider menu of investment choices. Plus, IRAs are not employee-sponsored, which means the ties are officially disconnected between your employer and your retirement. While there are a number of guidelines and laws protecting 401ks from employer involvement or changes, it’s best to keep your post-retirement life separated from your employed life.

Step 3: Retirement Income and Expenses


At this point, it has been determined which assets will be drawn from first (the taxable assets) and which will be left to grow. Also, the balance of your retirement portfolios has been combined for easy accounting and planning, since their tax structure is essentially the same.

At step three, investors should be concerned with determining their retirement income and expenses, and how their retirement portfolio can reach these needs. The process here is determined mostly by your own tax bracket and income, as well as the amount of money you've saved in different retirement accounts.

Generally speaking, taxable assets should be used on products designed to reduce or make more consistent your retirement income. For example, a retiree with $100,000 in mutual funds outside their 401k/IRA could slowly sell off these mutual funds to use for living expenses and direct some toward tax advantaged purchases. One common purchase is long-term care insurance, which provides support should you need later in life to be placed in a nursing home or receive at-home attention. Another common purchase right at retirement is a pre-planned funeral and burial. While the topic is at first quite morbid, it allows you to lock in future expenses and removes the burden from your children or surviving family members to plan the funeral.

While living on this taxed portion of a retirement portfolio, the tax-free cash should be used to create a retirement income. Retirement income products, such as an immediate annuity, can be purchased through an IRA, generating no tax burden at the time of transfer, but some income taxes as the annuity is paid out. In order to avoid immediate taxes, a direct transfer rollover allows IRA savings to be moved to an annuity, which begins paying a retirement income immediately after purchase.

Purchasing an annuity through an IRA has one final benefit. While it may be advantageous to live on taxable savings for as long as possible, the IRS requires that starting at 70.5 years old, retirees take at least some retirement income from their IRA or 401k. At this age, the minimum distribution is just over three percent of the account balance. By purchasing an annuity, the income can be used as part of the distribution of retirement income, allowing the rest of the account to grow tax-free.

Invest in a CPA


The above presents a generalized plan for making the most of your retirement portfolio and creating the best tax-advantaged retirement income possible. However, without diving into the specific variables that follow each person, it is impossible to devise a plan that makes the most of retirement income and savings.

The best investment decision retirees can make with their retirement portfolio would be to see both a fee-based CPA and financial planner who can work together to evaluate your needs. Many financial planning businesses have both CPAs and CFPs on staff, who for an hourly price, sit down to discuss your options and plan for each variable in your life. Perhaps most importantly, fee-based CPAs and CFPs do not sell investments of their own. Instead, they are paid for their recommendations, which should give you the peace of mind of knowing they're providing advice worth paying for – and not providing a sales pitch.
Tim Ord
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