Here’s the next installment of age-based investment tips for 2009 focusing on investors ages 55 to 75 from Ross Marino, CFP and branch manager at Raymond James Financial Services in Wilmington, N.C.
Use today’s portfolio value for planning. Do not assume you will see the values from October, 2008 anytime soon.
Adjust your withdrawals to reflect current values. If you were taking 5% annually out of your portfolio 12 months ago, then take 5% annually based on today’s value. Keeping your annual dollar amount the same means you would be withdrawing a higher percentage.
$100k X 5% = $5,000
$60,000 X 8.33% = $5,000
If you keep withdrawing $5,000 annually after a 40% decline in your portfolio, you would be withdrawing over 8% of the value. That is unsustainable in most environments.
Review asset allocation and percentages. Investors may consider the following:
Moving some assets from lower-yielding debt investments to higher-yielding (increases risk and volatility)
Consider higher-yielding equity investments
Consider tax-advantaged bonds. Yields may be the same or higher than comparable taxable bonds.
Be careful with pro-rata selling. For example, if you own a balanced 50/50 investment, you theoretically have 50% in equities and 50% in debt (bonds). If you withdraw money from that investment, half of your money is coming from the equity and half from the debt. Many investors do not want to sell any equities now, but still need income. Here is a strategy to allow the equities time to recover.
Have all debt pay dividends, capital gains, and/or interest to cash. Meaning, do not reinvest any distributions or interest payments.
For cash flow needs in excess of the income generated by the portfolio, consider selling the lowest-risk debt investments first, and allow the higher-risk investments time to recover. Watch your allocations closely. By drawing down your debt and letting your equity remain invested, the equity portion will become a larger portion of your portfolio. Also, liquidating lower risk investments increases the overall risk of your portfolio.
If your money is in one investment which owns debt and equity, divide into separate investments. Literally split apart the investment into two parts (debt and equity) so you can draw down the debt portion first. In taxable accounts, this will create tax consequences. If the investments are lower than the purchase price, you may receive an additional tax benefit. If higher, taxes may increase. Always consult a tax advisor before considering any trades.
If you have not rebalanced recently, your equity position may be well below your initial target. By drawing down your debt, you are rebalancing through withdrawals.
For investors who are going to retire in the next 1-2 years, consider building a low-risk position.
Direct future contributions to a low-risk investment, such as a stable value investment. This is the money you will probably access as soon as you retire. This could build a short term investment which may be used during your first year or two of retirement. This helps you see the money you will use as soon as you retire and allows your current retirement account time to recover before you start selling and withdrawing money.
Since you expect to retire and start taking withdrawals, it is prudent to segregate that money into a lower risk investment. Keep in mind there is no assurance that this or any strategy will ultimately be successful or protect against loss.
Marino's disclaimer: Strategies discussed may not be suitable for all investors.