7 Investing To-Dos for Retirees This Fall

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. As much as we might not want to admit it, summer is almost over. I'm here with Christine Benz, she is our director of personal finance, for seven things retirees should have on their radar as we enter fall.

Christine, thanks for joining me.

Christine Benz: Jeremy, it's great to be here.

Glaser: So, let's start with the first, about looking at your withdrawal rate. It's obviously important for retirees. Why is this a good time to check up on that?

Benz: Well, because you still have time to course-correct between now and year-end, there are four months left in the year. So, if as you look on the amount that you've spent so far in 2016 and you're a little ahead of where you might hope to be, you still have time to pull in your belt and try to reduce your spending so that you're staying within whatever limit you've set out for yourself. It's also valuable to revisit your withdrawal rate each year because retirees really should be able to take a greater share of their portfolios as they get older.

Our colleague, David Blanchet, who heads up retirement research for Morningstar Investment Management, has said that those RMD tables, the required minimum distribution tables, can serve as good benchmarks for retirees who are trying to figure out how their withdrawals might step up as the years go by. So, as your life expectancy declines, you should be able to take a larger share of your portfolio. That won't be appropriate in every situation, and the RMD tables are based on average life expectancies. So if you have a reason to believe that you have a much longer than average life expectancy, you'd want to be more conservative in terms of your withdrawal rate. But I think they do nicely demonstrate how a withdrawal rate might reasonably change and in fact grow a little larger over time.

Glaser: Speaking of RMDs, this might be a good time if you are 70 1/2 to start getting ready to take that.

Benz: That's right. Look at where your RMDs might come from. The thing I always advocate is tying the RMD season in with your overall portfolio review. So, it's important to bear in mind that it's not like you have to give all of the holdings in your IRA a haircut to accommodate RMDs. As long as you're taking the right amount out of the accounts of a certain type, it doesn't matter which holding you tap for your RMD. So, maybe you have a holding that you view as especially overvalued right now, or maybe it's simply too large a share of your portfolio, or maybe it's just fundamentally unattractive. Those are all great candidates for trimming to help meet your RMDs.

Glaser: And do you think this is a good time to think about rebalancing.

Benz: I do. This is a great time because we've had, in my mind, a surprisingly good equity market so far in 2016, and it's easy to grow complacent in these very strong equity markets. As we've seen our balances go up, up, and up, chances are for most of us, and retirees in particular, our equity weightings may be higher than our targets, and that's been a good decision so far, but there is extra risk embedded in the equity position in your portfolio especially as the market has crept higher.

Glaser: Another portfolio maintenance item you think should be on retirees' radar is refilling the cash bucket if they're using your bucketing approach to build in retirement portfolio.

Benz: Right. If you're using the bucket strategy, the name of the game is that you're setting aside money for living expenses that you will spend throughout the following year. So, ideally, you'd be refilling your 2017 cash bucket throughout 2016. And for a lot of retirees this can be easily accomplished by having any dividend and income distributions that are naturally getting kicked off of your portfolio, just send them right over into the cash bucket for 2017. But unfortunately, we've seen yields go down, down, down. Many retirees' yields alone will not refill that cash bucket. So here's a good place to also think about tying in rebalancing. If you're trimming appreciated winners perhaps to meet RMDs, you can send that money into your cash bucket that's going to supply your living expenses for next year. So, it's good to stay a year ahead of this refilling your highly liquid bucket.

Glaser: With the strong market that you referenced earlier you might not have a lot of candidates for tax-loss selling. But if you do have something, you think this is the time to really take a closer look at those positions?

Benz: I would because you do need to realize those losses before year-end to have them count on your 2016 tax returns. So take a look around. It's a good situation for most investors as you say, so they may not have candidates for tax loss selling. Certainly, if you're a fund investor, you'd be hard-pressed to find many core type positions that are apt to be trading below the price that you purchased them at. But if you're an individual stock investor, it's certainly well worth scouting around whether you have individual holdings where you could take that tax loss, use that money to offset any capital gains in your taxable portfolio, or if those losses exceed your capital gains, you can use them to offset up to $3,000 of ordinary income.

People who have sector funds or ETFs in their portfolio may also be able to find holdings that are currently selling below their purchase price, so in the energy sector, financials sector, recently healthcare stocks have been under a bit of a cloud, those might be areas where if you've got those sector-specific holdings, you may be able to find positions where you can do some tax-loss selling. It's important to keep in mind the wash sale rule, so you can't unfortunately sell the security, book the tax loss and then go rebuy the same security, but you can rebuy something similar. So, for example, if you sell that sector-specific ETF, you could buy a sector-focused actively managed mutual fund. So you can make some swaps like that to maintain like-minded exposure if you think that sector is attractive or undervalued.

Glaser: For charitable-minded investors you think this is a good time to really get their giving plans set for the year.

Benz: Right. Here again, the clock is ticking on the 2016 tax year. So, if you did have additional charitable contributions that you hope to make between now and year-end, it's a good time to think about what they will be, what charities you will contribute to. It's also a time if you are someone who is required to take minimum distributions from your IRA because you're post age 70 1/2, you might consider what's called the qualified charitable distribution. And this simply means that you take money from your account and send it directly to a charity, so you never touch the funds. The virtue of that strategy is that it does reduce your adjusted gross income. It will tend to be better from a tax perspective than taking the money out of your IRA, sending it to the charity and then deducting it on your tax return. That will tend to be a better tax strategy, the QCD, versus doing the deduction.

Glaser: Finally, you think this is a great time to update your master directory of what you hold and where it is. Why does it make sense to do it now versus another time of the year?

Benz: It doesn't really. I just like to lobby for investors, especially older investors having such a directory, but it's really a valuable thing for investors at all life stages. The basic idea is that you've got this document. It has your major holdings. It has account numbers. It has the crucial information about your investment accounts, and this is a document that you're keeping updated on an ongoing basis so that it conveys your current information. It's obviously a highly sensitive document. Anytime you've got account numbers on a file, you want to make sure that you are password-protecting it. Or if you're printing out some sort of a physical document that you are keeping it under lock and key. But it is a really valuable document for people at all life stages to keep up-to-date, but especially seniors just so that their loved ones, if for whatever reason they were unable to manage their accounts on their own, that their loved ones would be able to pick it up and figure out what was going on there with the portfolio plan.

Glaser: Christine, thanks for sharing these tips with us today.

Benz: Thank you, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.