There are many different ways of thinking when it comes to investing for the future. Some investors choose to act alone. Some people have a “set it and forget it” attitude, while others prefer to leave investment decisions to experts.
All of these strategies have merit. Which one is right for you depends on your interests and time. Some investors look at the performance of the U.S. stock market over the past 15 years and say, “Just buy a low-cost index fund and that's it.''
This seems logical in this market. This is especially true if you are working under his 50s. Once you're over 50 and start envisioning your life after work, the flaws in that strategy may become apparent.
The need to turn assets into income requires a change in investment philosophy. When creating your income plan, consider the time period over which your investments will be used.
The reality is that once you reach the age of 50, that window of time shortens and usually involves a change in your investment philosophy. What you need at this stage in your life is an investment plan that can generate tax-efficient income with little loss of liquidity.
For example, a couple's standard of living is $120,000 a year after taxes. They say she is over 65, receives Social Security, and has a net income of $40,000. This means that her investable assets combined will require her $80,000 of net income.
This family's income plan will likely include distributions from a pre-tax IRA up to the 12% limit for married filing jointly (currently $94,300). An oversimplified solution is to distribute a total of $54,300 from your IRA.
After taxes are deducted from the $54,300, the couple is left with a net balance of approximately $45,000. This will further improve their standard of living, but there will still be more work to do. Her additional $35,000 must be distributed from separate assets. It may come from a taxable brokerage account or a Roth IRA. This plan is very tax efficient.
The next question is, what is the best way to generate $54,300 from an IRA and $35,000 from a tax brokerage account?
Active management by a team of portfolio managers is one answer. This allows you to adjust nimbly if different sectors of the market become favorable or unfavorable. Additionally, active management gives you the opportunity to invest in a variety of income-generating solutions. The main goal is diversification from a broader market and consistent returns.
A “set it and forget it” investing attitude in retirement not only exposes you to risks, but can also lead to you missing out on opportunities that could help you achieve your post-work life goals. If you feel like a “set it and forget it” strategy isn't right for you, consider consulting with a financial professional to discuss a tax-efficient income plan that will work for you. please.
