Savings – Brian Puckett's Blog

CASHING OUT IS NOT A CASH COW

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

We’ve recently been approached by a few nervous investors, who, thanks in part to Election Day jitters, are considering cashing out a sizable portion of their portfolio. While this may seem like a good idea at first, there are more downsides to cashing out than you might think. A sounder course of action is to stick to your long-term plan and not let Election Day distractions disrupt a sound investment strategy.

Certainly cash is becoming more popular these days. According to the most recent Wells Fargo/Gallup Investor and Retirement Optimism Index survey, 43 percent of investors reported having moved their money to cash or cash equivalent savings over the past year — far more than those moving money to stocks or bonds. Investors also revealed they have an average of 19 percent in cash savings and 11 percent in CDs or money market accounts.

But while some people view cash as king, there are several reasons why it may not be as desirable for long-term investors. For starters, unlike the 1980s when you could earn savings interest rates of 14 percent or more in CDs, today’s rates are only a small fraction of that. Stocks, on the other hand, have a well-documented history of outperforming the major investment choices, including gold and bonds. What’s more, when you factor inflation into the equation, you lose even bigger with cash because it erodes your purchasing power, meaning you can actually end up with negative growth. Some savvy investors call this “going broke safely”.

Here’s another problem with taking a cash-heavy position. Nobody can time the market effectively. Even professionals often fail miserably when trying their hand at market timing. So, by cashing out, you take on the new risk of earning a substantially lower return. The more often you switch in and out of cash, the more risk you pile on. It’s a loser’s game.

Remember, that, over time, the stock market has a strong history of rebounding, even after significant corrections. If you are investing for the long-term, you’ll most likely have time to ride out market fluctuations and still come out ahead. Jumping in and out of cash positions makes long-term growth even harder to achieve.

Certainly there are reasons an investor would want to keep a portion of his or her portfolio in cash—such as short-term needs and goals—and we even advise it in some instances. However, we don’t recommend most investors keep a high portion of their portfolio in cash for the reasons stated above.

While cash may seem to perform better in the short term, research supports the importance of sticking to your asset allocation, which is specifically tailored to your age, your risk tolerance and investment goals. We know staying the course may seem scary in light of Election uncertainty and other outside pressures, but we urge you not to let unfounded fears topple a sound investment strategy.

At Align, we help you craft a portfolio that’s best suited for your particular needs. Please don’t hesitate to reach out to us if you have any questions or concerns.

Brian Puckett | JD, CPA, PFS, CFP®
13921 Quail Pointe Drive | Oklahoma City, OK 73134
T: 405.607.4820 | F: 405.294.3340
125 5th St. S. Suite 201 | St. Petersburg, FL 33701
T: 727.455.0033
Toll Free: 800.401.6477

How Asset Location Can Help Fatten Your Nest Egg

The U.S. tax code is overly complex, not just for the income you earn working in your career, but also for the income you earn from your investments.

The good news is that by understanding the different tax treatment that applies to different investments—and account types—we can plan a tax-wise asset location strategy. And, successful asset location can significantly minimize the amount of taxes you pay on your investments as a whole. This can lead to a meaningful increase in your after-tax return—the money you get to keep, which is all that really matters.

How to Minimize Taxes in Retirement

If you’re an investor, you’ve surely heard the saying “It’s not what you earn, it’s what you keep.” Minimizing taxes is important when you’re growing your savings for retirement—but it’s at least as important after you’re retired.

That’s why retirees with different types of taxable and tax-deferred accounts should carefully plan the sequence in which they will withdraw money from those accounts. At stake is not just tax savings but also the potential for greater investment growth.

The various account types include traditional IRAs and workplace plans such as 401(k)’s, which are funded with pre-tax dollars. In these vehicles, taxes are deferred until withdrawal so that those assets can compound and grow faster. Roth 401(k)’s and Roth IRAs are funded with after-tax dollars, and their assets grow and are withdrawn tax-free. Finally, many investors have taxable brokerage accounts, which are funded with after-tax dollars and accrue taxes on gains, interest, and dividends.

Let’s look at some of the rules and guidelines when it comes to retirement-account withdrawals. One rock-solid rule is that retirees should prioritize taking their required minimum distributions (RMDs) from their traditional 401(k) or IRA. Failing to do so will trigger penalties—half of the withdrawal that was required—that outweigh any other advantage.

RMDs kick in at age 70 ½. They are calculated based on your life expectancy and the assets in your account. A simple example: A retiree with a 20-year life expectancy and $100,000 in a traditional IRA would be required to withdraw one-twentieth of his assets ($5,000) and pay tax on that amount.

Beyond that, the rules should be considered more flexible based on your individual circumstance and needs. Once RMDs are taken, the standard sequence is to withdraw from taxable accounts, then tax-deferred accounts, then Roths, in order to minimize the tax bite.

In general, taxes are highest on traditional 401(k)’s and IRAs. Withdrawals from these accounts are subject to ordinary income tax, with rates as high as 39.6%. By comparison, long-term gains and qualified dividends in your taxable account are taxed at a lower rate that tops out at 20%.

It’s often best to leave Roth accounts for last. Since they are not subject to RMDs and assets are withdrawn tax-free, it makes sense to let the account balances grow as large as possible.

Withdrawal planning should be flexible from year to year. One reason is that an individual’s tax picture can change based on their expenses, their available deductions and other factors. For instance, large deductions in a given year could drop you into a lower tax bracket. In such a case, it may make sense to withdraw more from a traditional 401(k) or IRA to take advantage of the temporary low tax rate.

On the other hand, retirees should take care to avoid having withdrawals kick them into a higher tax bracket. The bottom line: The taxman doesn’t retire when you do. To minimize taxes and to stretch your retirement income as far as possible, withdrawal planning is a must. Please contact us with any questions you may have.