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I start with the tax deferred stuff sooner... RMD's get really high later and spreading it out even if you are doing Roth conversions or reinvesting in taxable accounts makes sense given the jumps btwn tax brackets... 12%, 22%, 24% then all the way to 32%
Such a sudden shift on day one seems..... Silly.
But if you're gonna do it why not do half in 2018 and half in 2019 to split the bill.
However I want to go back to the planning and rationale that got you to the point where the whole plan was "day one of retirement.... Massive portfolio shift with huge tax implications."
Seriously dude/dudette.... You're giving us all heartburn.
Going from 75% equities to 30% is one sure way to lose a client. As soon as they will see how poor their accounts perform, they will be open for any other advisor to pick them up and promise them better returns.
Why don't you gradually decrease it? Just because the client is retiring today doesn't mean they need to take out their money today... Remember, you are trying to have the money last through retirement AND grow
Asset location principals would suggest keeping more of the risk assets in the taxable accounts and more of the assets taxed at ordinary income in the retirement account. Putting more of the Ira in safe assets makes sense to me based on tax situation, asset location and current allocations.
Also the tax hit from selling 40% of the portfolio to make that switch could be quite unfortunate. And good suggestion president 1. Work with their tax guy and see where there brackets are and where best to maximize his taxable income. Taxes will probably never be lower...
Not enough info here. If $1.3M is taxable and you go 70% in income, that’s over $900k. What is his annual need? Say it’s $100k per year.
That’s a 2% w/d rate.
If you keep $50k in money market, $50k in 6 mo CD, $50k in 12 mo CD, $50k in 18 mo CD....then average yield is over 2.5% and that guarantees his income for first two years. Total amount allocated is just $200k.
I think that’s smart so pressure is taken off of the rest of his assets and accounts while allowing them to grow. Tax planning is key so I agree with a lot of what has been said (wise advice). Draw a little (or Roth covert) some from the IRA the next few years (starting in 2019). Nothing wrong with that at all. Good luck
I appreciate the candid responses.
A little more context, please let me know you still think it is a bad strategy. They are a new client that was unhappy with the fluctuations in his portfolio. His risk tolerance came back at a 45/55. There will still be $3.7M in qualified accounts growing at 75/25, that was the argument for going below the 45/55, we’d still have a bucket for growth. The taxable money is for wealth preservation, living expenses, and to reduce volatility.
I agree and plan on working with the accountant to ensure we do not push him into a higher tax bracket, and if so, doing part of the sale in 2018 and part in 2019. Also, the move from a Traditional to a Roth, in increments, in the out-years. Thanks for the recommendations.
Bonds are death. What about structured notes with some principal protection?
Let the tax deferred stuff grow. The rebalancing to 30/70 comes with a $35k tax bill. I am telling him tax the win, reduce risk, and move on.
Anyone have another strategy? Thanks fish
Agree with most of the above... why on earth would you switch a taxable account (especially at a $35k cost) to 30/70. 70% fixed income...now...seriously? With market cycles now pushing out the likelihood of a recession to 2019/2020, you have no need to be that drastic. You’re dropping equity markets exposure risks lower by adding in fixed income/interest rate risk? Not a good idea, in my opinion. I sat with a panel of Fixed Income managers today and they weren’t too optimistic about bond funds, where an SMA manage has the ability to be more tactical in a tough bond environment. How old is the client? Let the brokerage rise and take from the qualified assets (assuming he/she is not below the age of 59.5.)
No, no, no. Run a cash flow analysis. See what he/she needs. Depending on the amount needed, convert some assets into an income annuity if your client is really concerned with risk. Manage the rest of the portfolio with a set of risk parameters.