“Retirement readiness” is non-existent in most 401k programs
by Steve SelengutMr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]
All of us are approaching retirement, many of us are already there, and some of us (myself included) are thinking about the ultimate IRS slap-in-the-face… The Required Minimum Distribution from our 401k and IRA investment programs.
It’s never too soon to make sure that you have prepared your portfolios for their income production responsibilities. “Retirement readiness” is non-existent in most 401k programs and something rarely considered by IRA investment managers… most of whom are us.
Retirement readiness requires:
1) at least a 60% income purpose asset allocation within 7 to 5 years of retirement;
2) some income generation from every security within the portfolio;
3) cost based asset allocation using The Working Capital Model;
4) disciplined, pre-targeted profit taking, and
5) compounding of all realized earnings until distributions begin..
Risk minimization is accomplished through a quality based selection process, and cost based diversification below the 5% per security level. Income growth is made possible by the discipline to: 1) remove less than 70% of the income produced pre- RMD, and 2) to reinvest (tax exempt if beneficial) at least 30% of the withdrawal post-RMD .
Every investment program becomes a retirement income program eventually, and the sooner you start this disciplined approach, the sooner you will be able to say: “a stock market downturn will have no significant impact on my retirement income.” This epitomizes “Retirement Readiness” and it applies to everyone.
Income development is always important, and a Tax Free Income portfolio, separate and apart from your tax deferred programs will serve you well as you prepare for retirement… particularly the spending that we all seem to have in mind “while we’re still young” and healthy.
It is no less than mind boggling to realize that, in spite of its zeal to regulate 401k investment plans as though they were pension plans, the DOL focuses on plan and product expenses instead of net income production, and on market value performance instead of risk minimization….
Killing the goose?
Meanwhile, and equally as curious (I’m being nice here), the expense and market value benchmarks are creating an environment where neither employers nor plan advisors are safe from fines… there was once a story about killing the goose that laid the golden egg.
Only private “safe haven” 401k plans and individual IRA programs are geared up and capable of focusing on income development, classic diversification, and risk minimization.
Retirement readiness, in the early years, requires active consideration of your asset allocation, your overall diversification, and most importantly, the quality of your holdings. Those of you who are relying on 401k market value to fund your retirement income requirements need to look inside. I’d be surprised if your program generates as much as 2.5% in spending money.
If you are within five years of retirement right now, at the top of a stock market cycle, what are you waiting for! Sell the Funds, sell the ETFs, and move into safer positions… if you can find them within the plan’s product menu.
If you are in retirement, get your portfolio out of any employer plans and into your IRA…you just can’t protect yourself (and especially, your income) in Mutual Funds or ETFs.
And, If you are approaching 70, the RMD is “in your face”. Here’s how to deal with it:
- Position the portfolio to produce slightly more income than you must take from the program.
- Take the income monthly; lump sum withdrawals require pre-funding and uninvested cash reserves… or untimely sell transactions.
- Move the RMD disbursements into an individual or joint account and reinvest at least 30% in Tax Free Income CEFs.
- If you hold equities (in addition to the RMD income producers you need), set your profit taking targets lower than usual; and maintain the Cost Based Asset Allocation.
I’m relatively sure that some of you are currently dealing with the RMD incorrectly… with “lump sum + the taxes” distributions. You should always avoid tax prepayment if you can.