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Investing Specialists

A Conservative Tax-Efficient Portfolio for Retirees

This investment mix is designed to limit risk and keep the tax collector at bay.

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Investors don't get a lot of gimmes, namely simple, low-risk, or no-risk ways to boost our take-home returns. But one of the key ones is managing your portfolio for optimal tax efficiency, thereby (legally) reducing Uncle Sam's cut of your return during the life of your portfolio. Banks and brokerage firms hire armies of lawyers to help wealthy individuals and families limit the taxes they pay on their investments, but they often charge a steep fee for their services. Basic tax-management techniques are a cinch to practice on your own.

Staying attuned to tax efficiency is particularly crucial for those nearing or in retirement. For one thing, most retirees are in drawdown mode, and some strategies for tapping your accounts for income incur fewer tax-related costs than others. Moreover, there's only so much money you can shelter in tax-protected vehicles, so many people come into retirement with substantial shares of their portfolios in taxable accounts. (The higher the level of wealth, the more this is the case.) Finally, retirees and pre-retirees are generally steering ever-larger shares of their portfolios into bonds and cash investments, and income from these asset classes is taxed at a higher rate than is the case for withdrawals from equity accounts.

Christine Benz has a position in the following securities mentioned above: VTMGX. Find out about Morningstar’s editorial policies.