Richard should start by trimming the collection of 31 different stocks in the taxable portfolio. This is way too many to keep track of, and with many congregated in the same sectors, there is notable overlap rather than diversification. And with so many low balance positions, this adds unnecessary clutter to his portfolio. Money could instead be reallocated to other asset classes. Richard was unaware that he could sell losing stocks to offset capital gains and even apply losses toward up to $3,000 annually in taxable income, carrying forward any losses into future years. This is one strategy he can employ when paring down the list. Fortunately, many of the smaller positions are held in dividend reinvestment plans that can typically be sold without commission.
The emphasis on dividend-paying stocks in the taxable side of the portfolio is fine, but the disparity in size between positions is not. A well-rounded portfolio of dividend-paying stocks will encompass a number of different industries with consistent amounts invested in each.
Address the risk: Looking at the overall portfolio, including taxable and retirement accounts, the current all-equity positioning is inappropriate for someone who will begin tapping his investments within 10 years. Dialing down the risk in the portfolio is a necessity. But before doing so, Richard must give some thought to this question: What assets will bridge the two-and-a-half-year gap between their intended retirement age of 64 and full retirement age?
Retirement income options: Here are a few retirement income options, some better than others: They could claim Social Security early, though that won't cover all their expenses, so they'd still need to tap their portfolio to fill the gap. Secondly, they could wait until their full retirement age to claim Social Security and use their taxable assets first, allowing the retirement assets to continue to grow. Or they could tap the retirement assets, such as Richard's 457 plan, to bridge the gap. This last option would also reduce the required minimums to be taken beginning at age 70½, giving more bang for buck as they'll likely be in a higher tax bracket at age 70 than at age 64, before the pensions and Social Security kick in. The Roth IRAs should be tapped last if needed, since they may come in handy as tax-free income at a later stage of their retirement.
As for which course they should take, the answer depends on their needs at the time. Over the next 10 years, while the couple is still in the workforce, there may be changes to the tax code or other life circumstances that may factor into their decision. For example, if dividend and capital gains rates go up, then maybe they would want to tap the taxable portfolio first.
In any event, a more conservative allocation is needed for whatever funds will be tapped at age 64. Richard has no exposure to bonds or commodities and the only real estate exposure is his home. But he has no real estate investment trusts, or REITs, in his retirement portfolio. On the bond front, foreign, inflation-protected, investment-grade and floating-rate bonds are all areas to consider for purposes of diversification.
Even though trimming stocks and adding bonds and cash in the taxable portfolio isn't a tax-efficient move, the reduction of risk is the greater need if Richard plans to tap those assets upon retirement. On the other hand, adding exposure to bonds, REITs, commodities and natural resources is best accomplished within a retirement account for tax efficiency purposes.
Look outside the U.S.: Even within equities, Richard could use some broader exposure. In the retirement portfolio, international equities -- both developed and emerging markets -- are under-represented. While the taxable side of the portfolio contains a more appropriate 19 percent allocation to international investments relative to domestic holdings, the majority is in small- and mid-caps. However, he does get additional international equity exposure via some of the multinational large caps he holds.
As long as they don't plan on tapping the Roth IRAs for early retirement or to bridge the gap until pensions and Social Security kick in, they can maintain a more aggressive stance with these funds since this is money they're unlikely to tap for decades, if ever.
Between pensions, Social Security and required withdrawals from retirement plans at age 70½, Richard and his wife will very likely have income well in excess of their monthly expenses -- a nice reward for decades of diligent savings. So they shouldn't be afraid to enjoy themselves in retirement. Although they plan on just one major trip per year, they have the resources to do more if they choose to do so. Their reserved lifestyle shows they're not about to go hog wild in retirement, but they have the comfort of being able to spend more freely in retirement than they've done in their working years.
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