Johnston: How will you deal with retirement blind spots?
Eric W. Johnston is a certified financial planner and the president of InFocus Financial Advisors, whose firm focuses on the needs of people in retirement.
Often, when driving, you might give a little glance over your shoulder and start to switch lanes, only to hear a horn and find someone driving in your blind spot. You move back over and keep heading in your lane. The question might be, “Were you able to get back over, get off on the exit you needed and get to where you are going?” In investing and managing your retirement, there are times when you “can’t get over” and opportunities when you can. However, there are no horns to alert you. What might be something on the road in your retirement that you can do but you’re not seeing it when it happens? There might be some blind spots. Here are a few and what you can do:
- Taking profits — When stocks return more than 20% in a year (in 2023, for instance), this is an opportunity to take some profits and reduce your risk and downside potential, while locking in some handsome gains. The timing of this matters. It is likely that you don’t want to rebalance every time you have a gain. However, there is great research that supports this timely profit taking. Take profits. Reduce risk. Lock in gains. All nice moves in one fell swoop.
- Roth conversions — I’ve written and spoken about this on our podcast, but I’ve often found that people early in their retirement years — 62 or 65 or so — aren’t even remotely paying attention to what their required minimum distributions are going to be when they turn 73. Roth conversions can help permanently reduce what these required distributions might be. This gives you far more control of your tax situation once you turn 73 and on — before even considering the powerful tax-free growth in the Roth individual retirement account. Once your required distributions start, you effectively lose control of your taxable income, and there is no exit ramp to avoid this if you don’t make some changes sooner.
- Distribution order — Distribution order is the order from which you might take distributions from your accounts to supplement or pay for your lifestyle in retirement. Taxwise, you might be tempted to take from your Roth IRA or taxable accounts first and only pay tax on your capital gains. This will allow your traditional IRAs and 401(k)s to potentially grow without withdrawal. This effectively increases your required distribution from your IRAs once you reach 73, proportional to the growth of the account. It also doubles your required distribution from your IRAs once you reach 73. This is not a great tax position or plan. Take a look at this earlier than you think. Roth IRAs might be the last place from which you take distribution, instead of the first. Taking some of the growth from your traditional IRAs might benefit you later. You can end up at a better destination with some planning on distribution order.
These are what come to mind and some easy steps you can work on with your adviser. Drive safe, folks. Watch your blind spots. Get safely to where you want to go. Some financial destinations are prettier than others.
Reader reactions, pro or con, are welcomed at civiltalk@iniusa.org.
