5 Strategies for Portfolio Withdrawals in 2022

Key Takeaways

• It's been a depressing year for all investors, but perhaps most of all, for retirees who are actively spending from their portfolios in retirement.
• For retirees who are not sure where to start on withdrawals, they can use the bucket strategy, look at their income distributions, look for tax-loss sales candidates, look for their portfolio "problem child," and lastly look at rebalancing their portfolio.

Susan Dziubinski: Hi, I'm Susan Dziubinski from Morningstar. Well, stocks and bonds are struggling in 2022, leaving many retirees wondering where they should go for their portfolio withdrawals this year. Joining me to discuss the topic is Christine Benz. Christine is Morningstar's director of personal finance and retirement planning.

Hi, Christine. Nice to see you.

Christine Benz: Hi, Susan. Great to see you.

The Bucket Strategy

Dziubinski: It's been kind of a depressing year for all investors, but perhaps most of all, for retirees who are actively spending from their portfolios in retirement. So, what would you say to a retiree who is trying to figure out what my first choice should be this year for my in-retirement withdrawal?

Benz: Right. It's been a depressing and a stressful year, I think, for retirees. So, the gold standard to my mind for people who need their retirement portfolios would be to have some sort of an ongoing allocation to cash. As you know, I often talk about this bucket strategy, where you're setting aside a couple of years' worth of portfolio withdrawals on an ongoing basis. The very idea of the bucket strategy is for a year like 2022, where you can leave your bonds, you can leave your stocks and just pull from those liquid reserves. That's one reason why I like the idea of people keeping that ongoing allocation to cash even though it is a long-term drag on the portfolio.

Income Distributions

Dziubinski: Let's say, a retiree doesn't necessarily have sufficient cash on hand to cover living expenses, and they don't want to completely clean out all of their liquid reserves, what sort of the next best place to go for these withdrawals?

Benz: Sure. I think a great strategy would be to look to any income distributions that your holdings have produced so far this year. And the good news, the silver lining in this very difficult market environment is yields have been going up. That's what's been pushing down stock and bond prices in the short term, but yields have been going up on savings instruments, on bonds as well. And so, if you can, pull some of those income distributions versus reinvesting them. I would say that's kind of your next line of defense if you don't have liquid reserves, yet you don't want to touch those depreciated equity and fixed-income assets.

Look for Tax-Loss Sale Candidates

Dziubinski: Well, let's go to that third line of defense, Christine. Let's say the retiree doesn't have enough cash on hand or income distributions to meet those expenses. What's next in line?

Benz: Next in line--and I would say this is not a bad idea at all for not just retirees but anyone managing a portfolio--look around for tax-loss sale candidates. We have had broad losses across all different market segments. Chances are you've got some positions in your account that are trading below the price that you paid for them. So, you can sell them and use the proceeds to provide your living expenses and potentially use the losses to offset capital gains elsewhere in your portfolio. If the losses exceed your gains, you can use the loss to offset up to $3,000 in ordinary income. So, it's a strategy from a portfolio cleanup standpoint and also a way to help lower your 2022 tax bill.

Look for the Portfolio "Problem Child'

Dziubinski: But if you're a long-term investor, you might not necessarily have those. You might have largely long-term capital gains, not losses. So, again, what about somebody who might be in that position?

Benz: That's a very good point, Susan. For retirees, they may have just been adding to their positions over many years. They may not have many new positions that are in losing territory. In that case, I think it's wise, if you need funds from your portfolio, scout around for what I call problem children in the portfolio. Look for funds with manager changes where you're not sure about the new person running the fund, or maybe our analysts have given the fund a downgrade because of a switcheroo like that. Or maybe you've got some holding that persistently underperforms its market benchmark. Look for problem spots. Look for problems of concentration where maybe you just have simply too much in a given sector relative to where you want to be. Do some portfolio cleanup and potentially meet your distribution needs at the same time.

Rebalancing and Withdrawals

Dziubinski: And related to that idea about of cleanup, finally, you think that retirees can look to rebalancing to play a role here and how to perhaps tap in and get some withdrawals?

Benz: Absolutely. It had been really easy to be hands off with our portfolios as we saw our stock positions march up and up and up through 2021. The weird thing is, even though stocks have had such a big selloff so far this year, many investors are apt to find that their equity allocation is still higher than perhaps they want it to be if they hadn't been actively pruning during those very good years. In fact, I recently looked, Susan, and even factoring in the losses so far in 2022, stocks are up 8% on an annualized basis over the past three years; bonds are up just 4%. So, if you haven't done any rebalancing, you may want to consider stripping back equity exposure. I would focus the stripping back in the large-growth space which still looks better than value over long time horizons. But think about doing some rebalancing and potentially you can shake some cash out of your portfolio that way.

Dziubinski: Well, Christine, thank you so much for these strategies. It's been a tough year for investors, but it's good to know there are a couple of places they could look to to get that cash that they need. We appreciate your time.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch "3 Ways to Manage Capital Gains Distributions in 2022" for more from Christine Benz.