The concept of Diversified Retirement Income Sources (DRIS) highlights two important strategies to consider when investing for retirement. Most people are familiar with the first principle, diversifying assets to protect against down markets, but very few have heard of the second, diversifying the taxation of retirement assets. We'll provide a quick overview of these principles here, but we encourage you to discuss your specific situation with a Cambridge Financial Group Financial Professional because these strategies need to be tailored to your tax and risk needs.
While many people understand how important it is to diversify their retirement assets, very few realize how significant the benefits of asset diversification can be while taking income in their retirement years. When someone takes withdrawals from equity-based retirement accounts during a down market, they are essentially "locking in" losses and significantly impacting their long-term retirement outlook.
The benefits of DRIS are the result of creating access to funds in retirement that are not directly impacted by market fluctuations. These assets are also known as "non-correlated" assets because they tend to move independently from the stock market. Owning non-correlated assets provides the flexibility to take retirement income from another source during a down market, allowing time for the market-based investments to recover.
Take a look at the serious, long-term impact created by taking retirement income by selling assets at a loss. You may be surprised at how significant that difference is, but you'll likely be even more surprised at how easy it is to protect against it. So, make sure that your long-term retirement strategy includes solutions designed to help protect you from the impact of negative returns when you start taking income.
The second principle of DRIS, diversifying the taxation of retirement assets, is rarely mentioned by the "online gurus of finance", but its long-term impact can be just as powerful as basic asset-class diversification. From an income tax perspective, the assets in your portfolio can be categorized into three buckets—taxable, tax-deferred and tax-free. Diversifying across these buckets can help you structure your retirement income withdrawals with your tax bracket in mind, minimizing the impact of taxes on your portfolio and helping to maximize your portfolio’s long-term growth.
You can clearly see in this example how simple it is to control your tax bracket from year to year when you have funds invested in each of these three tax buckets. Fortunately, many of the non-correlated assets used to protect against down markets also provide some of the best tax-planning options, so you can very effectively accomplish both strategies with the same assets. However, just like the power of compound interest, to get the most impact from retirement income tax diversification, you need to start planning for it many years before retirement.
The key is creating a great overall strategy in which your financial accounts work together and benefit from the synergy of an overall plan. Please let me know if you have questions or would like to see how our planning process can strengthen your retirement income strategy.
Investing involves risk, including loss of value. No investing strategy can assure a profit or protect against loss in a down market.
Registered Representative of, and Securities and Investment Advisory services are offered through Hornor, Townsend & Kent, LLC, (HTK), Registered Investment Advisor, Member FINRA/SIPC, 600 Dresher Rd., Horsham, PA 19044, USA. 800-873-7637, www.htk.com. Cambridge Financial Group and other listed entities are unaffiliated with HTK. HTK does not provide legal and tax advice. Always consult a qualified tax advisor regarding your personal tax situation and a qualified legal professional for your personal estate planning situation.