back

Getting Going: Rethink Money Strategies During Retirement Years

By: Jonathan Clements

Wall Street Journal, August 18, 2002

You've given up the paycheck. Now, it's time to throw out your old ideas about money management.

Think about the financial notions that served you so well during your working years. Guess what? They may not prove nearly so helpful now that you are retired.

In particular, you may want to rethink the way you look at your assets and focus less on shrinking your portfolio's tax bill.

Running Up the Tab

When people are in the work force, the last thing they want to do is pay more in taxes. Indeed, to minimize Uncle Sam's take, investors stash money in tax-deferred retirement accounts and pick tax-efficient investments for their taxable account.

But once your paycheck is gone, consider tossing out these strategies. You need to draw income off your portfolio anyway, so a little tax inefficiency isn't such a bad thing.

To that end, you may want to favor taxable bonds over tax-free municipals, and you shouldn't be too bothered if your stock funds make big income and capital-gains distributions. In fact, you may want to deliberately realize extra gains each year, to take advantage of your low tax bracket. With your paycheck gone, you can collect a hefty amount of investment gains and still get taxed at a relatively modest rate.

Suppose you are married with no dependents. If you take the standard deduction, you can earn $60,550 each year and still be in the 15% tax bracket. If you are both age 65 or older, that sum is nudged up by $900 for each of you, to $62,350.

Realizing a fistful of gains early in retirement makes particular sense if you expect to be in the 27% or higher tax bracket later on. For instance, you may get pushed into a higher tax bracket once you turn age 70 1/2 and start taking required minimum distributions from your individual retirement account.

To avoid getting taxed at a higher rate later, you might begin taking money out of your IRA while you are in your 60s even though such withdrawals aren't legally required; that way, your total tax tab over many years could be lower. If you don't need the money to cover living expenses, you can reinvest the cash in investments held in your taxable account.

Better still, consider converting part or all of your IRA to a Roth IRA. That will trigger income taxes on the taxable sum converted. But thereafter, everything coming out of the Roth will be tax-free. Moreover, you will ease headaches caused by IRA minimum-distribution requirements, because Roth IRAs aren't governed by these rules.

Adding Up Your Assets

While you are rethinking your attitude toward taxes, you should also change the way you look at your portfolio. During your working years, you might have thought of your portfolio as simply your stocks, bonds and cash investments.

But once retired, you should take a broader view of your portfolio, encompassing not only traditional investments, but also your house, Social Security, pension income, immediate annuities and earnings from part-time work. The reason: When counting your retirement assets, you want to include anything that puts cash in your pocket.

For instance, William Reichenstein, an investments professor at Baylor University in Waco, Texas, suggests thinking of Social Security retirement benefits, pension income and immediate annuities as similar to owning bonds. All three provide a predictable stream of income, just as bonds do.

"The traditional approach to financial planning would ignore these assets," Prof. Reichenstein says. "But in many cases, they're a retiree's most valuable assets."

Got a pension that pays $10,000 a year? To generate that sort of income, you would need to invest $200,000 in bonds yielding 5%. To be sure, the $10,000 pension isn't worth the full $200,000. How come? Unlike bonds, your pension doesn't have a principal value.

Still, I would figure your company pension into your portfolio mix. Indeed, if you have a pension, you may want to be more aggressive with the rest of your portfolio, rather than settling for the 50% stock-50% bond mix that investment advisers often recommend for retirees.

Similarly, if you plan to work part time, you may want to count that in your portfolio calculations. Just as you might need $200,000 in bonds to replicate the $10,000 you get from a company pension, so you might need $100,000 in bonds to generate the $5,000 you earn from part-time work.

You might also want to include part of your home's value among your retirement assets. How much should you count? If you plan to trade down to a smaller place or take out a reverse mortgage, I would count the home equity that will be freed up.

You can even apply this sort of math to your debts. "Every $5,000 of mortgage payments or credit-card payments or auto-loan payments that you eliminate is like having another $100,000," says Michael Maloon, an investment adviser in San Ramon, Calif.

Seen your nest egg hit hard by the market decline? With your portfolio's value slashed, you shouldn't withdraw so much from your nest egg each year. Instead, look at ways to compensate for that loss.

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.