You’ve Done Well Accumulating Wealth. Are You Prepared to Spend It Down?

You’ve Done Well Accumulating Wealth. Are You Prepared to Spend It Down?

By Joe Delaney

We’ve all heard the story of Icarus, who flew on wings of feathers and wax until he got too close to the sun. What happened next was something Sir Isaac Newton would codify into a natural law centuries after Diodorus wrote the iconic tale.

What goes up must come down.

Think of yourself as Icarus as you are now accumulating wealth. There will inevitably come a point when your wings will give out and you will begin a financial decent. The question is not whether it will happen, but rather, will you make a controlled descent, or fall flat?


When you retire, your accumulation period usually ends and your income will likely dip. We call this the “black out” period. At age 70 ½, your RMD (Required Minimum Distribution) period, or “spend-down period”, begins. This is the age at which the government mandates RMDs so it can finally tax those gains from tax-deferred accounts, such as your IRA, 401k, etc.

Will there be enough for you and your spouse? How much will be left for your children? How charitable do you intend to be in these final years?

The time to ask those questions is not in your 70s. It’s now. We have found that, while the individuals who come to us with retirement questions are often smart, forward-thinking people, they tend not to be aware of some of the strategies they could be putting in place that will make their spend-down period far more successful.

The key is understanding the tax nature of your investments and putting the assets in the right place as early as possible. An easy way to visualize this is with the concept of “buckets”.


We often have clients come to us with a variety of assets (cash, bonds, real estate, equities, etc.), and they are intermixed in a variety of accounts which are usually taxable, tax deferred (IRA, 401k) and tax free*.

Too often, investors lump all these assets together. By doing so, they are missing out on some great tax planning opportunities. That’s why you must organize your assets into two buckets: taxable accounts and tax-deferred.

*(While we are focusing on these two buckets in this discussion, a third would be tax free accounts, i.e. Roth IRA.)


Asset location is really important. Here a few ground rules to follow.

Ground Rule #1: If it makes sense to hold fixed income (e.g. bonds), hold that in your IRA/401k (tax-deferred).

In general, fixed income should go into tax-deferred accounts whenever possible. These accounts – the IRA, for example, if structured correctly – will likely grow slower than the taxable account, thus minimizing future RMDs.

With fixed assets, most of the growth comes from interest (rather than from appreciation, which is how equities grow). If you had these assets in a taxable account, the tax you pay on the interest every year would be an impediment to growth, as it cuts into compound interest potential over time. Even tax-free municipal bonds should go first into your tax-deferred accounts.

Bottom line, it makes more sense for these slow-growing assets (bonds) to be the ones taxed at regular income rates in your future RMD period, rather than the ones (equities) that will likely be worth far more at that point.

Ground Rule #2: If it makes sense for you to hold equities (e.g. stocks), hold them in your taxable account. Equities have historically grown faster than fixed income, so you want to take advantage of the preferred capital gains tax rate and step-up in cost basis.

Equities should go into taxable accounts so you can take advantage of the comparably lower capital gains rate now rather than pay the ordinary income rate on RMDs later. The more you have accumulated in tax-deferred accounts, the higher the RMD calculation will be, and the more you’ll pay in taxes in retirement.

In addition, the assets you expect to pass down to beneficiaries when you die should optimized. IRAs in general are not great as the RMDs continue after the Grantor’s death. They can be “stretched” if structured correctly, but the beneficiary is still required to continue the RMDs. On the other hand, taxable accounts get to have their cost basis stepped up. That means that the gains on these assets will not be (income) taxed.

Here’s how it works: A stock, for example, that began at value X and ended at value Y would normally be taxed on the gain, the difference between current value (Y) and the cost basis (X). Y-X = gain. But when the cost basis is stepped up, it becomes Y. No gain, no tax at the time of death of grantor.

So, if a stock was worth $100 and grew to $1,000, it would normally be taxed on the gain – current value of $1,000 – cost basis of $100 = $900 if you sold it. But after you die, the cost basis for your beneficiary becomes $1,000. Current value is $1,000. So, the gain = $0.

Remember tax deferred accounts are just that. At some point the government wants their money. Imagine losing huge swaths your hard-earned income every year to taxes on high income RMDs when you’re years past working age.

Roth IRAs are really great because they grow tax free so you want to always put your growth orientated assets (stocks) in your Roth IRA first, if you have one. There are also planning opportunities to convert some of your IRA into a Roth IRA in low income years, which happens during the black-out period.

Ground Rule #3: If it makes sense to hold international equities (e.g. international stocks), hold those in your taxable account to be able to deduct any foreign tax credits.

This is fairly self-explanatory. If you want to take advantage of tax credits on assets, they need to be in taxable accounts. Those credits can make a meaningful difference over time. This is just another example of why understanding the tax implications of your buckets is so vital.


This is just a brief overview of strategies to plan for a successful spend-down period. There are many strategies we recommend to clients depending on their specific situation, needs and goals.

The most important takeaway for clients from these discussions is the concept of tax mitigation as a lifelong strategy, not primarily an annual one. It’s not about how much you pay in taxes in any one year, but how much tax you pay over your lifetime. Every strategy we discuss is built on that principle.

Don’t hesitate to reach out to us with your spend-down questions. Lifeguard Wealth is here to help you pass through those final years confident your goals are more realistic, and more within reach, than the sun above Icarus’ waxen wings.

By clicking on any of the links mentioned above, you acknowledge that they are solely for your convenience, not required to click. They do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2018, Lifeguard Wealth
Are You a Complainer, Consumer or Contributor?

Are You a Complainer, Consumer or Contributor?

By Tim Maurer

Are you a Complainer, Consumer or Contributor in the workplace? In Adam Grant’s book, Give and Take, he differentiates between three types of people–Givers, Matchers and Takers–categorizations that have implications in both our personal and professional lives.

But as an educator–and student–in the realm of financial advisory development, it struck me that Grant’s triumvirate may have an analogous trio of traits that accurately describes our posture toward learning how to be better professionals. (And people.)


I’m sure you’re not a Complainer, but I’ll bet you know how to spot one, whether that person is a friend, colleague or client. Complainers tend to have an eye for the imperfection in everything, and they almost seem to enjoy pointing it out. They seek to disagree and magnify their discontent. They capitalize on opportunities to provide criticism, but it’s rarely constructive. And they also tend to be vocal about it, creating dissatisfaction for others where it may not have previously existed.


Consumers aren’t a perfect parallel for Grant’s reciprocity-seeking Matchers, as they likely have more taking than giving tendencies. But like Matchers, who represent 56% of the population in Grant’s studies, I wouldn’t be surprised if a majority of those pursuing continuing education opportunities are Consumers.

You might be a Consumer if you don’t complete evaluations at the end of conference sessions (or you just put a three-out-of-five for every category with no comments). You’re not as likely as a Complainer would be to speak up about your points of disagreement, but you’re also unlikely to offer positive feedback, perhaps carrying yourself with an air of apathy or even entitlement. Of course, you don’t take notes. You take what you need and get out, but your lack of engagement also means that you’re less likely to apply whatever you’ve learned.


This isn’t a problem for Contributors, a rarer but welcome presence for educators and managers, who need not rely solely on their own energy to breathe life into the classroom or meeting. Contributors are actively engaged and offer the teacher, colleague or expert the benefit of the doubt in making their case. They do offer critical feedback, but in a way that is genuinely constructive and typically accompanied by affirmation and thanks. The Socratic partnership Contributors display hastens their learning and stimulates that of others, often enticing Consumers in the crowd to contribute themselves.

Contributors are pure gold for those leading an educational session or meeting, but such leaders too often miss out on these benefits due to the lackluster design of the experience they create. If you don’t provide opportunities for engagement early and often, even those inclined to contribute won’t have a chance. The conventional, standard monologue followed by Q&A doesn’t allow for sufficient exchange and has a tendency to inspire impatient Complainers more than affable Contributors.

High Stakes

Whether managing your employees, clients or students, the stakes here are high because the damage done by Complainers is powerfully negative. Grant finds that the negative impact of a Taker can be two to three times greater than the positive impact of a Giver.

Therefore, weeding out, or retraining, the Complainers in your midst is likely to have an even more positive effect than adding Contributors. But why not do both?

As a leader, how can you suppress or eliminate the drain of Complainers and better inspire the influence of Contributors?

And as a learner, how can you give and get more out of opportunities by exhibiting the traits of a Contributor?

This commentary originally appeared March 3 on

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

To read the original article, click here.

The Four Horsemen of Your Portfolio

The Four Horsemen of Your Portfolio

By Larry Swedroe

A common axiom is that those who fail to plan, plan to fail. And while most people would never start a business without a business plan, many investors manage their money without an investment plan that identifies their ability, willingness and need to take risk, sets goals (such as the rate of return they require their portfolio to generate), and includes an asset allocation and rebalancing table to provide discipline.

Compounding the problem of a failure to plan is that even a well-thought-out investment plan is only a necessary condition for success, not a sufficient one. Even the “perfect” investment plan can fail for reasons that have nothing to do with its investment results.

Examples of how plans can fail for noninvestment reasons include the premature death of a family’s main income earner combined with insufficient life insurance, forced early retirement, the lack of sufficient personal liability insurance (such as an umbrella policy), poor estate planning (such as neglecting to keep beneficiary designations updated), the lack of appropriate medical insurance (such as long-term care coverage) and even living longer than expected.

This is why the right approach is to create a fully integrated estate, tax and risk management plan.

These issues have always existed. However, today’s investors, whether they’re planning for retirement or already in the withdrawal phase, face four hurdles that their predecessors didn’t. If these hurdles aren’t planned for, the odds of ending up without sufficient assets to maintain a desired—let alone a minimally acceptable—standard of living can greatly increase.

In Biblical tradition, the Four Horsemen of the Apocalypse are a quartet of immensely powerful entities personifying the four prime concepts—war, famine, pestilence and death—that drive the Apocalypse.

For today’s investors, the equivalent of those four horsemen are historically high equity valuations, historically low bond yields, increasing longevity and, as a result, the increasing need for what can be very expensive long-term care.

1. Historically High Equity Valuations

From 1926 through 2017, the S&P 500 returned about 10.2%. Unfortunately, many investors naively extrapolate historical returns when estimating future returns. In this case, that’s a bad mistake, because some of the return to stocks was a result of a declining equity risk premium, resulting in higher valuations. Those higher valuations now forecast lower future returns.

The best metric we have for estimating future returns is the Shiller cyclically adjusted price-to-earnings (CAPE) 10 ratio. The inverse of that metric is an earnings yield (E/P). It is used to forecast real returns. As I write this, the Shiller CAPE 10 is at 34.3, producing a forecasted real return of just 2.9%. To get an estimate of nominal returns, we add the difference between the yield on the 10-year nominal Treasury bond (2.63%) and 10-year TIPS (0.57%), which is about 2%. That gives us an expected, forward-looking nominal return to stocks of roughly just 5%, or about half the historical level.

Before moving on to look at bonds, I will note that forward-looking return expectations for international stocks are better, though, again, well below historical returns. The Shiller CAPE 10 earnings yield for non-U.S. developed markets and emerging markets at year-end 2017 were 5.1% and 6.3%, respectively.

Again, if forecasting nominal returns, you should add about 2% for expected inflation. Thus, if you have an allocation to international markets, your forecast for returns should be somewhat higher than for a U.S.-only portfolio.

Unfortunately, the story on the bond side is not any better.

2. Historically Low Bond Yields

From 1926 through 2017, the five-year Treasury bond returned 5.1%, and the long-term (20-year) Treasury bond returned about 5.5%. The current yields on those two Treasury securities are just 2.5% and 2.8%, respectively. Clearly, those investors relying on historical returns are likely to be disappointed, as the best estimate we have of future returns comes from the current yield curve.

Now, let’s combine stocks and bonds in a traditional 60/40 portfolio.

Traditional 60/40 Portfolio

Over the last 36 years, from 1982 through 2017, a 60% S&P 500 Index/40% five-year Treasury portfolio returned 10.4% with volatility of 10.2%. Note that the 10.4% return was almost 2 percentage points a year higher than the portfolio’s return over the full 90-year period from 1928 through 2017, which was 8.5%, with a volatility of 12%.

Investors building plans based on that 10.2% return over the last 36 years, or even the lower 8.5% return figure covering the last 90 years, are running a great risk, as forward-looking return expectations are right now much lower. Even if we were to use a more aggressive 6% expected return to stocks, given the low yield on safe bonds, a 60/40 allocation would only provide an expected return of 4.6%.

The lesson here is that, when designing a financial plan, investors should be sure to use current estimates of returns.

3. Increasing Longevity

When I was growing up (I’m 66), there were very few people who lived to collect Social Security for more than a few years. Today it’s a very different story. Consider the following: The average remaining life expectancy for those surviving to age 65 is now about 13/15 years for the male/female 1940 cohort, and about 15/20 years for the male/female 1990 cohort. However, these are just averages.

When thinking about longevity risk, you should also consider that, today, a healthy male/female at age 65 has a 50% change of living beyond 85/88, and a 25% chance of living beyond 92/94. For a healthy couple, both 65, there is a 50% chance one spouse will live beyond 92 and a 25% chance one spouse will live beyond 97.

This means that an investment portfolio should have a planning horizon greater than 30 years, assuming an investor in his or her mid-60s. And that is what we know today. It seems likely that medical science will continue to advance and extend life expectancy even further. Does your plan account for this type of longevity risk?

The good news in this arena is that we have a good solution for addressing longevity risk—deferred payout annuities. Longevity annuities are like traditional forms of insurance in which individuals purchase the contracts for protection and may never need them. Unfortunately, because longevity annuities can greatly reduce the remaining pool of assets that must be spent to generate a specified amount of cash flow, they are an underutilized product—individuals are reluctant to lose a large part of their estate.

Another problem is that the payout from annuities is not only based on longevity, but also on interest rates. Buying an annuity today effectively locks in today’s historically low interest rates. That, too, could be contributing to the lack of use of this valuable tool.

We now turn to the fourth “horseman” facing retirees: The longer we live, the greater the risk that we will need expensive medical care.

4. Risks Of Long-Term Care

By 2020, nearly one of six Americans will be 65 or older. And the scary truth is that the likelihood of developing Alzheimer’s doubles about every five years after 65. After 85, it increases even faster, with one in three people that age and older being diagnosed with the disease—with some estimates as high as 50%.

Unfortunately, the all-too-common unwillingness of the elderly to even discuss the possibility of losing their independence, and the awkwardness of the subject for other family members, leads to a lack of planning for the financial burdens that long-term care can impose.

That, again, brings to mind the adage that the failure to plan is to plan to fail. This failure ignores the hard reality that, according to the National Family Caregiver Alliance, the probability of an individual over 65 (there are 35 million Americans in this category, and the figure will double over the next 25 years) becoming cognitively impaired or unable to complete at least two “activities of daily living” (such as dressing, bathing and eating) is almost 70%.

Raising the importance of the issue is that, today, one in nine people 65 or older has Alzheimer’s. And as previously mentioned, nearly one in three of those 85 or older (the fastest-growing part of the U.S. population, with 4 million currently in that group; almost 20 million are expected to be there by 2050) will develop the disease (women have twice the risk).

Alzheimer’s is a progressive, deteriorating disease for which currently there is no known cure. What we do know with certainty is that anyone with dementia will require some form of long-term care unless they succumb to something else before dementia reaches an advanced state.

Failure to address issues such as the cost to take care of aging loved ones, the possibility elder care is needed and not covered by insurance, and whether there are sufficient assets to pay for the care required can result in a shock when long-term care becomes a reality, and it may lead to a diminished quality of life.

The burden can then fall to other family members, often with dramatic financial consequences because the cost of long-term care is frightening. The average out-of-pocket medical expenses a 65-year-old couple can expect to incur during retirement is estimated to be in the mid-$200,000 range to somewhere in the mid-$400,000 range. And that’s the average. Obviously, some will incur far greater expenses.

Elder care attorney Carolyn Rosenblatt, R.N., and her co-author, geriatric psychologist Dr. Mikol Davis, are thought leaders on how aging affects all areas of personal finance. In their book “Hidden Truths About Retirement & Long Term Care,” which I highly recommend, they provide the following estimates of the costs of care today.

The monthly median cost of a homemaker (someone who helps with shopping, cooking, cleaning and other household chores) is about $3,200. A worker with some training would be a personal care attendant or home health aide—costing roughly $20 an hour. The cost of assisted living, while varying widely across the country, is now close to $4,000 a month. Even adult day health care costs about $1,500 a month.

For some residents in California, assisted living facilities with daily help cost up to $12,000 a month, and that is without any skilled nursing whatsoever. It’s just for maintaining someone who needs help with most daily living activities. If nursing home care is needed, the cost rises to about $7,000 a month for a semi-private room and about $8,000 a month for a private one. Does your retirement plan contemplate such costs?

A Fifth Horseman?

There’s another threat lurking in the failure of government to fully fund the Social Security and Medicare programs. Because of declining birth rates (from three to two children per woman), the Social Security Board of Trustees projects the cost of providing Social Security benefits will rise by 2035 so that taxes will be enough to pay for only 75% of scheduled benefits. Thus, there is at least the risk that benefits will be cut. And for those remaining in the workforce, this deficit could lead to greater taxes on earned income.

The situation is similar regarding Medicare. According to the nonpartisan Center on Budget and Policy Priorities, “the 2017 report of Medicare’s trustees finds that Medicare’s Hospital Insurance (HI) trust fund will remain solvent—that is, able to pay 100% of the costs of the hospital insurance coverage that Medicare provides—through 2029.” When the trust fund reaches its projected depletion in 2029, it’s estimated that incoming payroll taxes and other revenue will be sufficient to cover only 88% of Medicare’s hospital insurance costs.

The organization continues: “The share of costs covered by dedicated revenues will decline slowly to 81% in 2041 and then rise gradually to 88% in 2091. This shortfall will need to be closed through raising revenues, slowing the growth in costs, or most likely both.”


The combined challenges I’ve presented have important implications for investors. First, forward-looking return expectations from stocks and bonds are now lower than historical levels. Make sure your plan is based on current valuations, not historical returns. To address the issue of lower forward-looking return expectations, it’s likely many will have to increase savings, plan on working longer and perhaps adjust their goals as well.

It’s equally important to understand what you should not do. Do not use lower expected returns to stocks as a reason to take on more equity risk than you have the ability, willingness or need to assume.

Similarly, lower bond yields should not serve as a reason to take on more credit risk (which historically has been poorly rewarded, and also does not mix well with equity risks, as the correlations tend to rise at the wrong time, when stocks are suffering) or term (inflation) risk than appropriate.

Instead, to improve outcomes, investors, especially those exhibiting a home-country bias (if you have less than 40% of your stock allocation in international equities, you are in that category), can consider increasing their exposure to international stocks, as they now have higher expected returns. The global market cap is a good starting point for thinking about allocations, and today U.S. equities make up about 50% of total world capitalization.

Second, make sure your plan incorporates the proper life expectancy, and considers that half the population lives longer than expected. Consider annuitizing some portion of your assets with a deferred payout policy (you should only buy insurance for the period you need it, and you should not need it unless you live longer than expected). Buying an appropriate deferred payout policy greatly reduces the amount of premium you would pay relative to purchasing an immediate payout policy.

Third, ensure your plan takes into account the likelihood of the need for long-term care, and build contingency plans for addressing that need should it arise. Consider the purchase of a long-term care policy.

Finally, it’s important to integrate tax management strategies into your overall plan. For example, during your retirement years, your plan should include a goal to lose as little wealth as possible to income taxes over your remaining lifetime. One tactic is to take full advantage of the current income tax laws, which permit long-term care expenses to qualify as deductible medical expenses.

Assuming a cost of $8,000 per month, the medical deduction could be approximately $100,000 per year. This compares to the new standard deduction of $24,000 per year under the recent Tax Cuts and Jobs Act.

The tactic is to offset these deductions against ordinary income produced from the realization of taxable income from tax-deferred assets, such as withdrawals from tax-deferred traditional IRAs, annuities and U.S. savings bonds. Planning would consist of calculating the dollar amount required for long-term care and trying to avoid paying income taxes on these tax-deferred assets until the medical expenses are incurred.

Post Script

For investors who need more return than safe bonds can provide, there are safer alternatives than either junk bonds or additional equity investment. We recommend allocations to four alternatives, each of which we believe has equitylike returns with much lower volatility.

The four alternatives we use are the AQR Style Premia Alternative Fund (QSPRX) and three funds from Stone Ridge: LENDX, an alternative lending (small business, consumer and student loans) fund; SRRIX, a reinsurance fund; and AVRPX, a fund that sells volatility insurance across stocks, bonds, currencies and commodities.

We believe an equal-weighted portfolio of these four funds has forward-looking return expectations similar to those of a global equity portfolio, but with only about one-quarter of the volatility of equities (5% versus 20%). (In the interest of full disclosure, as noted, my firm, Buckingham Strategic Wealth, recommends AQR and Stone Ridge funds in constructing client portfolios.)

One reason the volatility of this four-alternative portfolio is low is because of the low correlation of the funds’ returns. A second benefit of such a portfolio is that it virtually eliminates term and inflation risk.

The trade-off is in two forms: The Stone Ridge funds are interval funds (thus, you don’t have daily liquidity), and you give up the flight-to-safety benefits that a portfolio of safe bonds can provide in severe equity bear markets. On the other hand, you do have higher forward-looking return expectations and you minimize term and inflation risk. For many, that’s a good trade-off.

The alternative portfolio can also be used as a substitute for stocks. In that case, forward-looking return expectations should be similar but with much lower volatility, again only about one-quarter of that of a global equity portfolio.

I’d note that none of these four strategies is new. They have been available to institutional investors for, in some cases, decades. It’s just that they have only recently become available to retail investors (and without the typical 2/20 hedge fund fees), thanks to the SEC’s approval of the interval fund structure.

Finally, investors can also increase the expected return of equities by having more than the market’s exposure to small and value stocks (market portfolios have no net exposure to these factors). Investors can further increase the expected return of equities by adding exposure to the momentum and quality/profitability factors. Because of their diversification benefits (each of these factors has low to negative correlation to market beta risk), expected returns increase by more than risk. The result is a more efficient portfolio.

This commentary originally appeared February 7 on

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

Read the article from BAM Alliance here.

Fixed Income Quick Take: In-State vs. Out-of-State Bonds

Fixed Income Quick Take: In-State vs. Out-of-State Bonds

By Steve Wiechel

In-state or out-of-state municipal bonds? Fixed Income Advisor Steve Wiechel explains how the fixed income desk determines which is best for each individual client.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

View the original here.

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