Answering Listener Questions During a Volatile Summer

"It depends!"

You'll hear us say that a lot on today's episode, in which we answer some very thoughtful and wide-ranging retirement questions from our listeners.

I hope our longer answers on these important topics are a reminder that while there are some universal principles upon which you can build a financial plan, the long-term success of that plan will depend on how you and your advisor work together to find the best solutions for your specific needs and goals.

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1. "With the stock market down right now, are there any tax advantages that we can benefit from?"

Here are three proactive moves worth discussing with your advisor as the market continues to correct:

• Tax-loss harvesting. Sell investments that are down in your brokerage account, lock in a capital loss on your taxes, and then reinvest the proceeds in a similar security. To benefit from this, government rules require that you do not reinvest in the same security for 30 days before or after the sell.
• Roth IRA conversion. If you're thinking about your long-term tax picture, now could be a good time to shift a portion of your net worth into a Roth IRA, pay taxes now on the conversion, and enjoy tax-free growth as the market eventually rebounds. And it has rebounded from past declines.
• Increase your contributions. This probably won't save you any money on taxes, but I have to mention that if you're not struggling to pay your monthly bills right now, consider "buying low" on investments that have declined in value by contributing more to your brokerage and retirement accounts.

Now remember, I'm not recommending that everyone run out and execute these transactions right now. While there are potential opportunities during market corrections, taking advantage of them has to be considered within the context of your comprehensive plan. Talk to your advisor before you make any knee-jerk or emotional moves that could throw off your long-term growth trajectory.

2. "What is the best withdrawal sequence in retirement?"

Everyone is going to have a different group of assets of varying value, so there's no one-size-fits-all answer here. But generally, it's a good strategy for retirees to live on after-tax money for as long as they can, such as earnings in your brokerage account or a cash bucket you've designated for retirement expenses. Meanwhile, you can convert money from IRA accounts into a Roth IRA, where funds for later in retirement will grow tax free. This generates some taxable income up front although good planning can keep you in a lower tax bracket. This also may lower future required minimum distributions from traditional IRAs and 401(k)s.

Generally, it's also a good idea to delay taking Social Security for as long as possible to maximize your benefit. But unlike these rules of thumb, your retirement doesn't happen in a vacuum. If you or your spouse has a sudden health emergency that triggers an early retirement, or if you need extra funds to facilitate a relocation, it might be necessary to adjust your withdrawal strategy.

So ... it depends!

3. "Will my husband's current Social Security benefit affect the amount of my spousal benefit when I start collecting?"

Non-working spouses qualify for 50% of the working spouse's benefit amount when you reach full retirement age. In this case, it's the husband's lifetime earnings and not when he decided to take Social Security that determines the size of the spouse's Social Security benefit. But be aware that if the non-working spouse wants the full 50%, he or she has to wait until they reach full retirement age to claim their spousal benefit.

4. "Are taxes on mutual funds different than taxes on exchange-traded funds?"

First some definitions.   

Most mutual funds are actively managed funds in which participants pool their money together and a manager buys and sells securities in line with the objectives of the prospectus. Investments and redemptions in mutual funds occur at the end of the day each day the market is open.

An exchange traded fund trades like a stock does, throughout the day while the markets are open, and you buy at whatever the price is at the time the trade was made.

Both funds will tax you on your capital gains. But the differences in how those gains are accounted for can be dramatic.

In an exchange traded fund, you're generally only taxed when you sell for a profit. In a mutual fund, all participants are taxed for capital gains inside the fund each year even if you didn't sell or take any money out. Some of these mutual funds are holding hundreds and even thousands of different positions, dating back years and even decades. So there are instances where the mutual fund could be down for the year, but participants still receive a tax bill.  This can be very surprising. For this reason, it is important to be aware of any embedded tax liabilities of any mutual fund you may consider investing in.

These swings and inefficiencies are why, generally, we avoid mutual funds at Keen Wealth. We believe a globally diversified portfolio of securities -- tailored to suit each person's goals -- is the best way to build wealth over time while also maintaining strategic flexibility and controlling long-term tax ramifications.

I hope you'll take some time to listen to this episode in its entirety, as we also discuss selling your home, more benefits of Roth conversions in retirement, Medicare premiums, and how various income streams can affect your Social Security benefits.

Do you have a question you'd like us to tackle in a future podcast or blog post? Or a specific retirement issue that you need some help with? Reach out and my team at Keen Wealth will be in touch.

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

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