Bob’s Journal for 9/26/19

Some Questions From Our Latest Conference Call

Many Retirement Watch readers joined me to discuss retirement finance issues on a conference call that my publisher Roger Michalski hosted. If you missed the call or want to hear it again, a replay is available here.

I took questions from listeners during the call, but we weren’t able to get to all the questions people wanted to ask. In this week’s Bob’s Journal, I’m going to answer some of the questions we didn’t get to on the call.

What do you consider to be an optimal income-producing strategy that will minimize or eliminate taxation for a retired individual?

This is an issue I address regularly in Retirement Watch and that can’t be reviewed too often. Taxes are one of the largest expenses of most retirees. Contrary to popular belief, tax rates don’t decline for many people in retirement. You must do some work to minimize the bite taxes take out of your nest egg. Because your situation and the law change regularly, review the details of your strategy frequently.

For most people, the best strategy is tax diversification.

Different types of accounts and investments are taxed differently. Plus, the tax treatment can change over time.

Don’t try to guess which account and investment will receive the best tax treatment during your retirement. You won’t guess right, because the tax law and the markets will change.

Instead, own investments in each of the major types of accounts: taxable accounts, traditional 401(k)s or IRAs, and Roth 401(k)s or IRAs. You might also own annuities, tax-exempt bonds and other vehicles that receive special tax treatment.

Then, plan your distributions and cash flow from each of these sources to minimize taxes.

You’ll receive some income each year through Social Security, perhaps a pension, interest, dividends and mutual fund distributions in taxable accounts. Required minimum distributions from retirement accounts might be another income source you don’t control, and you might have other automatic income sources.

Determine where these income sources put you in the tax brackets. Then, plan how to take the cash you need to pay expenses from your accounts without pushing you into a higher tax bracket.

You could sell assets from taxable accounts that incur long-term capital gains instead of ordinary income. Or you might sell assets that have little or no taxable capital gains. Another option is to take tax-free distributions from a Roth IRA.

You might take additional distributions from a traditional IRA if you’re in a low tax bracket this year and want to minimize future required minimum distributions.

You have much flexibility and choice with this approach. It not only can keep you in a lower tax bracket but can help avoid higher taxes on Social Security benefits and the Medicare premium surtax.

Tax diversification works with almost any investment strategy. I discussed it in detail in the April 2018 issue of Retirement Watch.

In my estate plan, how should I leave nonliquid assets (such as a home and car) to multiple kids? Should I give each of them equal ownership?

This can be one of the most difficult estate planning issues. Too often, family conflicts erupt over such assets as well as less valuable personal items.

You should first determine if any of the kids has more of an interest than the others in a particular asset. The child might want to inherit that asset outright and have it reduce his or her share of the rest of the estate. Be sure that won’t upset any of the other kids.

Often the best solution is to direct the estate executor to sell the assets and distribute the sale proceeds equally to the heirs. This approach prevents disagreements among the heirs over how to handle the assets. I’ve seen homes sit idle for extended periods because each of the kids had a different idea of what should be done with a home. The same thing can happen with other assets.

Someone still could argue that the sale price was too low or have some other complaint. But the executor could reduce criticism by relying on real estate experts for advice. If there’s any doubt about the heirs being able to agree on what to do with shared assets, have the executor sell them and distribute the cash proceeds.

What does the future hold for retirees if the stock market tanks?

During the conference call, we asked a poll question about the listeners’ expectations for the stock market over the next 12 months. Most of the participants were neither extremely bullish nor extremely bearish. But we always must be prepared for a bear market.

The best approach is to be diversified, as we’ve been in our Retirement Watch portfolios. You don’t want to be too reliant on a strong stock market to support your retirement or concerned that a bad market will seriously hamper your retirement.

A good rule of thumb is that if you’re spending a lot of time worrying about the stock market, you probably have too much of your portfolio in stocks. I always recommend having a margin of safety in your portfolio. Our Retirement Watch portfolios have shown that over the long term that you can earn solid returns with less risk by diversifying and managing risk.

The Data

The economy didn’t change much in the last few weeks, but manufacturing improved a little, according to the PMI Composite Flash Index.

The services index remained steady at 50.9, while manufacturing increased to 51.0 from 49.9. The composite barely increased to 51.0 from 50.9. This is the weakest two-month period for this index in almost three years.

The Richmond Fed Manufacturing Index fell sharply in September. The index was reported as negative 9, compared to positive 1 in August. Most components of the report were negative, with employment being a significant exception. Even so, expectations for the next six months were moderately positive.

The prices of homes are flat lining.

The S&P Corelogic Case-Shiller Home Price Index was unchanged in July, following June’s 0.1% increase. For the 12 months, prices increased 2.0% through July, compared to 2.1% through June.

The FHFA House Price Index was a little better. It rose 0.4% in July, compared to 0.2% for June. For the last 12 months, prices jumped 5.0% through July, compared to 4.8% through June.

These reports lag most other housing reports, so they don’t reflect the sharp drop in mortgage rates in August.

The decline in mortgage rates definitely helped new home sales in August. New home sales leaped 7.1% from July’s levels, and that’s after July’s sales were revised sharply higher from the original report. June sales also were revised higher to a new high since the financial crisis.

New home sales in August were 18% higher than 12 months earlier. The three-month average of sales is the highest since October 2007. In addition, the median new home sales price in August increased 7.5% from a month earlier. For the past 12 months, the median price gained 2.2%.

Pending home sales also climbed in August, though not as much as new home sales. The pending sales increased 1.6%, following a 2.5% decline in July.

Consumer Confidence as measured by The Conference Board finally tumbled in September. The index plunged to 125.1 from 135.1 in August. For some time, this index has reported more optimism among consumers than the Consumer Sentiment Index from the University of Michigan.

The decline in Consumer Confidence was a result of fewer people saying jobs are plentiful and that there will be more jobs in the future. In addition, fewer people expected their income to improve in the coming months and more people were bearish on the stock market than were bullish.

New unemployment claims increased 3,000. Last week’s claims were revised upward by 4,000 from an initially reported 2,000 increase. The total for the latest week is 213,000, still near the historic lows.

The third estimate of second-quarter gross domestic product (GDP) was unchanged at 2.0% annualized growth. There were no significant changes in the components of GDP in this estimate.

The Markets

The S&P 500 fell 0.70% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 0.64%. The Russell 2000 dropped 1.19%, while the All-Country World Index (excluding U.S. stocks) lost 0.93%. Emerging market equities fell 1.34%.

Long-term treasuries rose 1.33% for the week. Investment-grade bonds increased 0.65%. Treasury Inflation-Protected Securities (TIPS) added 0.59%. High-yield bonds lost 0.27%.

On the currency front, the dollar increased 0.60%.

Energy-based commodities declined 1.10%. Broader-based commodities fell 0.72% but Gold gained 0.84%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

I’m a regular contributor to the Forbes.com blog. You can view my contributor page here.

Do your heirs know how to handle an inherited IRA? If not, they’ll join the long list of heirs who made simple mistakes that triggered additional taxes and penalties. To avoid this result, be sure your heirs have a copy of Bob Carlson’s Guide to Inheriting IRAs.