It’s never too early to begin thinking about your IRA nest egg, even if you are a young couple many years away from retirement. Traditional individual retirement arrangements require you to begin taking minimum distributions shortly after you reach age 70 1/2. You have many factors to consider as you decide what to liquidate first. General guidelines might help, but each individual must consider his own situation.
Minimum Required Distributions
The Internal Revenue Service gives you a tax deferment on the money you deposit and earn in your traditional IRA. By the time you reach 70 1/2, the IRS wants to start collecting some of those taxes. If you don’t take out at least the minimum amount that the IRS dictates, it will hit you with a 50 percent excise tax on the shortfall. You calculate the minimum figure based on your age and the life expectancy tables in Appendix C of IRS Publication 590. You must begin taking distributions by April 1 after you reach 70 1/2. You must then keep withdrawing minimum amounts each year.
You will have a lot to think about as the deadline approaches. Given the possibility that you will live for another 10, 20 or more years, you might be concerned about outliving your savings. In 2012, the IRS expected 71-year-olds to live another 16.3 years. You’ll have to mull over your health, wealth and living expenses, your bucket list, your estate, and perhaps the wishes of a spouse who might be older or younger than you. Since the IRS is whipping you into taking the minimum distributions, you might as well grab the opportunity to analyze your investments and get rid of the least useful ones. You might be figuring this out for a parent or grandparent who is not capable of doing so alone. A good way to begin is to budget expenses and income requirements for the next 20 years, perhaps with the help of a trusted financial adviser.
Fabled Vanguard founder John C. Bogle opines: “Your bond position should equal your age.” Bonds give you current interest income that is the backbone of your retirement plan. As you age, you might be more interested in the safety of the bonds you hold rather than their interest rates. You might therefore lighten up on junk bonds and favor a mix heavier in Treasury bonds and high-quality corporate bonds. You might also want to lower your bonds’ sensitivity to interest rates by pruning away the longest maturities.
Preferred stocks produce high dividends that offer you another source of current income. Preferred stocks are usually less volatile than common stocks and pay higher dividends. Owners of preferred shares are paid off ahead of owners of common stock if the company goes bankrupt. Common stock has a greater potential for capital gains. If you plan to hang around for another few decades, you will need capital gains to offset the effects of inflation. Regarding investments for the elderly, a 2008 article in Bloomberg Businessweek states: "Believe it or not, the safest mix of investments historically is not a 100% bond portfolio, but a 20% equity and 80% bond portfolio." You might want to lower your stock-to-bond ratio as you age, but always keep a portion of your portfolio in stocks for the long haul. The best stocks or mutual funds to sell might be ones that pay little or no dividends and don’t have a good growth record.
If you think you might need cash on short notice, you can keep some in a money market or certificates of deposit. Assets like precious metals pay no income, so unless you fear that economic chaos is around the corner, cutting back on metals might be a good idea. Collectibles in your IRA may be hard to liquidate on short notice, so you might want to sell these off first in an orderly fashion as you approach age 70 1/2.
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