Coordinating Bonds, Market Returns, and Taxes into a Personalized Retirement Strategy

One of the reasons my team at Keen Wealth puts so much care into personalizing our comprehensive planning process is that there's no one path to a successful retirement. Yes, we often incorporate some tried-and-true strategies and tools, like diversification, downside volatility protection, and Monte Carlo simulations. But as we discuss on today's show, even professional financial advisors have to sort through a wide array of options to help folks find their optimal plan. When you're managing your finances on your own, those options can be overwhelming and, in some cases, a little dangerous for your money.

After discussing four listener questions, I'd also like to share some exciting personal news and thank my alma mater, the University of Central Missouri.

1. "I just retired in April and have most of my money in bonds. Was this a bad strategy?"

This seems like a simple question, but when it comes to financial planning the specific details are so important.

Without knowing what kinds of bonds this listener owns, what her investment goals are, and what "most of her money" really means, it's hard to give her an answer. Maybe she has millions of dollars in bonds that she can cash in to fund a dream retirement. Or, maybe she had negative experiences with the markets and moved a much smaller asset base into bonds to "play it safe," which could have seriously hurt her wealth-building over the years.

Even folks in the middle of those extremes might be frowning at their bonds right now, because as interest rates go up, the value of bonds goes down. Just remember that at maturity, you get your principal back and all the interest you've accumulated over the years, which could offset the volatility you're seeing in bond markets. But this is also an example of how even "safe" investments still carry risks. In almost all cases, it's better to diversify your investments across many asset classes and cash reserves than to be too heavily invested in one bucket.

2. "I have been managing my retirement accounts by myself across several index funds. My overall return in 2023 has only been about 5%, even though the S&P 500 and the Dow Jones Industrial Average are both up. Why am I seeing such low single-digit returns in my portfolio when the major indexes have done better?

As I write this, the S&P 500 is up about 10%, and the Dow is up around 3%. I know some folks tend to think these numbers are the economy, and even conflate or confuse the two. But the S&P 500 measures only 500 companies, weighted by market capitalization; the Dow tracks only 30 price-weighted companies, meaning the highest-priced stock has the most influence.

Again, it’s hard to make any definitive statements about this listener’s portfolio without knowing more about which index funds he's invested in. But the economy is much bigger than just two numbers. And a portfolio that's invested in various index funds (and there are many to choose from) is going to be exposed to more securities than the S&P 500 and Dow measure, so it's going to perform differently as well.

3. "I am 62 years old and have multiple IRAs. Is there anything I can do that would help reduce the amount I'm required to withdraw and potentially lower my taxes?"

The simple answer is, "Yes!"

But what "Yes!" looks like will depend on this listener's other assets, her overall withdrawal strategy for retirement, her tax situation, and even personal matters like her health, where she wants to live, and if she plans to work part-time.

To sketch a broad picture, at age 73, folks have to start taking required minimum distributions (RMDs) from their retirement accounts. So, one option would be to wait to take withdrawals from her IRAs until age 73 and let those accounts continue to grow.

However, the longer you wait to take distributions from your retirement accounts, those amounts will likely be higher due to market growth, which could increase this listener's taxable income at that time. It's often better for folks who don't necessarily need to live off their retirement account balances to take some anyway, before RMD age, and convert them into tax-free Roth IRAs, especially if they're retired and in lower tax brackets.

Another option is to use your IRA dollars to make qualified charitable distributions (QCDs) starting at age 70 1/2. QCDs are tax-free withdrawals, which can, at age 73 and beyond, help folks hit their RMD requirements without increasing their taxable income, all while giving to causes that matter to them.

The SECURE Act 2.0 of 2022 also increased the amount of money folks can roll over from an IRA into a qualified longevity annuity contract (QLAC) to $200,000 until age 85. These annuities can defer some of your RMDs while earning a fixed interest rate, but folks should plan around their limits to determine if there are better uses for their retirement funds.

For this listener, "Yes" could be any of these options, a combination, or something completely different. I'd recommend she sit down with a financial advisor and start planning.

4. "I'm seeing lots of commercials for buying gold or investing in gold inside of an IRA. Costco is also selling gold bars online. Should I buy gold?"

Precious metals can have a place inside a portfolio. But physical gold has to be stored, insured, appraised, and physically moved when sold, which limits its practicality.

More importantly, most of these companies you're seeing on TV are selling gold at a markup. Costco is charging 6% or so above market value for its bars. Less scrupulous dealers could be devaluing your investment even more.

So why are you seeing these ads? Because folks are nervous about the world and the economy. Any time the markets are volatile, or inflation ticks up, “experts” who claim that buying gold is the solution to all your financial worries come out of the woodwork. But gold just isn't the rock-solid hedge against inflation that its fans -- and its sellers -- claim it is.

There are no shortcuts in life, or in financial planning. Let Costco handle your groceries. Let my team at Keen Wealth handle your retirement.

Thank you, UCM!

I'd like to close by thanking the University of Central Missouri for presenting me with their 2023 Distinguished Alumni Award for Service.

My wife Carissa and I were invited to UCM's homecoming weekend, where we attended dinner with other honorees, rode in the parade, and even were recognized on the football field at halftime. UCM also put together this beautiful video, highlighting some of the work that I have been doing in the Kansas City community and stories from my personal journey. It was especially moving for me to see my Great Aunt Nina up on the screen, who was also a UCM alum (from 1923!) and had such a huge impact on my life.

Thank you again, UCM, for hosting Carissa and me and for this very humbling honor.

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About Bill

Bill Keen is a financial advisor with nearly 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on 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 Forbes, 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.

KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.

The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.

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