6 Portfolio To-Do's for Retirees at Midyear

Managing a portfolio in the years leading up to retirement doesn't require a lot of magic. If you save enough of your salary and invest those savings in even a semi-sane investment mix, you'll have a good shot at amassing enough for a comfortable retirement.

Shepherding a portfolio through retirement, by contrast, is inherently more complicated. You have to make sure that you're not spending more than is prudent and that your investment portfolio appropriately balances safety and growth potential. Ideally, you'd also stay attuned to pulling your withdrawals from the right account types to help keep your taxes down. And those are just the headline jobs: You also have to think about required minimum distributions, estate planning, your Social Security strategy, and how you'll shoulder long-term care costs if they arise. That's a lot.

For those reasons, portfolio checkups for retirees necessarily should be a little different--and more in-depth--than a portfolio review that an accumulator might undertake. If you're a retiree checking up on your portfolio after 2018's volatile first six months, here are the key items to have on your dashboard.

1. Check your year-to-date spending rate. If you're looking for a single number to help you gauge whether your retirement plan is on track and sustainable, your withdrawal rate is a good place to start. Calculate your withdrawal rate by dividing the total amount you expect to spend this year by your portfolio's balance. Be sure to take tax effects into account; for example, if you're spending $70,000 each year and need to pull $85,000 from your IRA each year to arrive at your target amount after taxes, your withdrawal rate should obviously be based on the higher number.

The 4% guideline is a reasonable starting point for withdrawal sustainability, but be sure to take your own situation into account before taking 4% and running with it. Your anticipated drawdown time horizon is a crucial input. The original 4% research was based on a 30-year time horizon, but if your time horizon is shorter (you're an older retiree) or longer (you're young), you'll want to adjust accordingly. This Michael Kitces post delves into the interplay between time horizon and withdrawal rates. The required minimum distribution tables published by the IRS provide a quickie shortcut for older retirees attempting to gauge whether their withdrawal rates are sustainable, but they're based on average life expectancies at various ages. If you have longevity on your side, be more conservative.

Asset allocation is also key: Over time, portfolios with higher equity weightings have tended to support higher withdrawal rates than portfolios positioned more conservatively. Of course, past may not be predictive. And in any case, much of the recent research related to withdrawal rates points toward connecting your withdrawals to market action. Even if you don't want to employ a fixed annual withdrawal rate (versus a 4% initial withdrawal, adjusted upward for inflation), which can result in radical swings in spending, being willing to spend less in down markets will improve the sustainability of your plan.

2. Check the asset allocation of your long-term portfolio. Your withdrawal rate is the key gauge of the viability of your plan, but your portfolio's asset allocation is a close second. Bonds have been no great shakes lately, but not having enough safe securities could force you to withdraw from stocks when they're down, which could impede your portfolio's long-run sustainability. If you err on the side of holding too much in safe securities, you run the risk of inflation gobbling up your meager returns and then some.

As regular readers know, I like the idea of using your own anticipated portfolio withdrawals to determine how much to allocate to the ultrasafe (cash), reasonably safe (high-quality bond), and aggressive (equity) portions of your portfolio. This article delves into customizing your allocation to each of these three main buckets based on your portfolio withdrawals and the probability of each asset type having a positive return over your holding period.

Bonds have been flat to down this year, so it's not hard to see why many investors would be feeling iffy about them. But it's also useful to remember that starting bond yields are predictive of what to expect from the asset class. Even though rising yields cause bond prices to decline in the short term, investors will benefit from those higher yields over time. (The yield on the 10-year Treasury is nearly a full percentage point higher today than it was a year ago.) If you own a significant allocation to bonds in your retirement portfolio, just make sure your portfolio includes ample inflation protection, too, via inflation-protected bonds and equities, especially.

3. Take a closer look at your cash. In addition to checking up on your long-term portfolio, also take a closer look at liquid reserves. I've often written that six months' to two years' worth of portfolio withdrawals is a reasonable allocation to cash for retirees. But with higher cash yields coming online, I can't quibble with the idea of retirees pushing their cash holdings up a bit, perhaps closer to three years' worth of portfolio withdrawals. The yield differential between FDIC-insured cash instruments and high-quality bonds is still pretty low. Moreover, interest-rate increases are a net positive to cash investors, but they can hurt bond investors, as discussed above.

Opportunistic retirees might also consider maintaining additional liquid reserves to facilitate bargain-hunting if equities or bonds fall. Just be choosy on the cash front: Brokerage sweep accounts often offer incredibly paltry yields, whereas online savings accounts, CDs, and T-bills look a lot more compelling. In other words, you're often sacrificing a lot for the convenience of having your cash live side by side with your investment portfolio, as is the case with the sweep accounts.

4. Take a fresh look at IRA conversions. Under the new tax regime, converting some of your traditional IRA balance to Roth is apt to cost less than would have been the case just last year. Although you'll pay ordinary income tax on any converted amounts (unless you have aftertax dollars in your account), you'll avoid taxes on withdrawals after you've converted (assuming you meet the five-year rule), and you'll also skirt required minimum distributions. The post-retirement, pre-RMD years are a particularly good time for retirees to take a look at IRA conversions, in that they have more control over their incomes--and in turn their tax bills-n those years. A tax advisor or tax-savvy financial advisor can help you determine how much to convert without pushing yourself into a higher tax bracket.

Of course, a countervailing force is that IRA balances have gained ground, which means that any taxes due upon conversion will be based on those plumped-up balances. One of the key retirement-related changes in the new tax laws is that recharacterizations of IRA conversions made after year-end 2017 are no longer allowed. Thus, there's no do-over if you convert an IRA at what turns out to be a poor time. One way to hedge is by conducting a series of partial conversions over several years.

5. Develop an action plan for required minimum distributions. If you're post-age 70 1/2 and have accounts that are subject to RMDs, start thinking about where you'll source them. You have until year end to take them, and you may even derive a bit of a tax benefit from doing so, but don't wait until the very last minute. Many retirees snip their RMDs from the income their securities kick off, which creates ready-made RMDs. Other retirees might employ rebalancing to generate distributions; that has the salutary benefit of reducing risk in their portfolio at the same time. Retirees taking the latter route today might consider trimming their equity exposure, especially the growth equities that have performed best, to help source their RMDs.

It's also worth thinking through the interplay between RMDs and your withdrawal rate. If your RMDs are more than you need for spending or are going to take your withdrawal rate above your comfort level, you can reinvest them in a taxable account. Alternatively, if you or your spouse has enough earned income to cover the contribution, you can invest unneeded RMDs in a Roth IRA, up to the annual contribution limit of $6,500.

6. Revisit your charitable giving strategy. The new tax regime has implications for charitable giving, too. Thanks to higher standard deduction amounts, the percentage of taxpayers who will benefit from itemizing their deductions (because they're higher than the standard deduction) is expected to drop by two thirds in 2018--from 30% of taxpayers in 2017 to just 10% in 2018.

That has implications for many aspects of tax planning, including charitable giving. If taxpayers aren't itemizing, they won't benefit on their federal tax returns from charitable contributions unless they take extra measures. One idea worth considering for retirees who are subject to RMDs is the qualified charitable distribution, the benefits of which are unchanged by the new tax laws. Clustering deductible expenses, including charitable and discretionary medical outlays, into a single year is another strategy to consider, as discussed here. Donor-advised funds can be particularly useful for taxpayers using this strategy, enabling them to take a charitable deduction in the year they make the contribution to the fund while also taking their time in getting the money sent to charity.

Of course, you're giving to charity to help, but as with RMDs, it's worthwhile to use charitable donations to help improve your portfolio. If you're availing yourself of a QCD, for example, why not raise the money for your QCD by selling a chunk of the most appreciated (and arguably the riskiest) securities in your portfolio? In a similar vein, if you're planning to make a charitable contribution from your taxable account, you can donate highly appreciated assets, thereby circumventing the taxes on that appreciation. (The charity will, too.) You can also donate highly appreciated assets to a donor-advised fund, which similarly removes the tax obligation from you.