No. of Recommendations: 3
I don't count on this in my planning for retirement but it is likely that an older relative (non-parent/sibling in his 80s) will leave us a decent sized tax deferred sum of money. If that happens while a very nice thing, it will certainly add to my tax issues. Anything that I can do to help minimize tax issues if this happens?
Do you know what form of tax deferment this takes? inherited IRA? If so, you have 10 years to draw down the total of the account, and you can break down the withdrawals to minimize tax drag. It's only taxed as it's removed from the IRA.
The big thing that changes in retirement is the lack of earned income, and with that the need to reconfigure your risk tolerances to compensate for no longer having a pay check provide extra dry powder to fuel new investments should you hit a pothole. When it comes to actual income, it really doesn't matter how you get it, as long as it is legal. I know that some people prefer dividends, but I like selling off shares of stock for capital gains as needed. The tax burden seems less onerous that way, but you have to keep an eye on making sure you have sufficient assets to go this way. So if you bought a share of something for $100 and when you sell it it's worth $150, you get the $150 to spend but are only taxed at the lower capital gains rate for one third of that spendable cash.
To simplify stuff I'm moving more to indexes and maybe a 50/50 split between stocks and fixed income. In my case the fixed income is mostly treasuries. I might move into bond funds down the road.
I use bond/cd ladders for cash I need to spend in the next 5 years, everything else being in equities or personal real estate. I do not like the lack of control with bond funds, and will only buy bonds I can keep to maturity as they will return their full value plus interest at that time. We have not yet taken pensions or Soc. Security. I have been amazed at how little we spend, frankly, though that may have been impacted by the lack of travel in Covid times and our general level of contentment wrt things. YMMV. I may be a bit crazy in that I am a fan of mortgage, considering them an inflation hedge. OBVIOUSLY, with more elevated mortgage rates this tidbit is dated, but it's very nice to have a 30 year fixed rate mortgage at 2%, cash in Vanguard making more than what we are paying on interest for the mortgage. Less nice is that we are not sure about living in that house any more, and with a pool and septic, renting would be complicated, not to mention a significant capital appreciation exemption we could realize by selling it instead.
Also I expect to draw down money most between 60 and 65 and least after 70. We get one COLA pension as soon as I retire but that will only cover about 1/3 of expenses. Initially the rest will be from my savings, then two smaller pensions at 65, my wife's social security at 67 and mine at 70. At that point our withdrawals from savings may be zero.
The money I'm moving to treasuries will cover us from at least retirement until 67 and might be about 30% of my savings.
I can't tell you what to do, since that is dependent on things we don't necessarily share, like risk tolerance. Dad was fully invested in stocks at 85, as is Sis at 70. My family example does not lean towards being heavily invested in bonds other than as a way to juice your returns of short term funds that should not experience a decline in principal. Anything we don't need in the next 5 years is (or will be as I am particularly cash heavy right now,)in stocks, either individual or ETF. Our assets are such that we can ride out down markets, however. The size of your oops cushion has an impact on the risks you can take. I personally have not liked bond funds, and find that they really are not reacting in opposition to the stock market these days, so what kind of hedge are they? Again, individual bonds held to maturity is different than bond funds. Yes, being fully invested in stocks can be risky, though that is mitigated by a 5 year cash cushion. Please just remember than bond funds have risk to capital as well, and there is risk inflation risk if you get stuck in investments that do not en masse at least keep up with inflation.
We had it relatively easy, as DH had a couple of lucrative years as a contractor for the company he retired from. That gave us time to figure out many of the relatively unknowns, while he still had money coming in, even though the money was not regular. It's a great way to go if you can do that.
Sorry, pretty rambling. Hope you get something useful out of it and feel free to ask questions. Just remember that what is working for us may not be for you, but it is always good to at least look outside the box.
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