6 Top Tips for Selling Taxable Assets: Christine Benz

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Investors who are freshly retired are facing a “triple-whammy” of lower stock prices, lower bond prices and higher inflation, says Christine Benz, Morningstar’s director of personal finance.

The current market environment is demonstrating in no uncertain terms the paramount importance of addressing sequence of returns risk, she said Tuesday in a phone interview.

Benz spoke with ThinkAdvisor about the ongoing impacts of market volatility on retirement investors and the significant opportunities afforded by tax-efficient spending strategies.

“If you are a retiree or near-retiree right now and you haven’t prepared your portfolio to weather this moment, you are in a difficult position,” Benz says. “Ideally, you would have already set up a portfolio strategy such that you can draw on a bucket of liquid assets today without having to sell securities at this point in the market.”

For those clients who find themselves fully exposed to sequence of returns risk, Benz says, one thing they can do is try to reduce expenses and withdrawals as a temporary solution, in the hope that markets will bounce back relatively quickly. This is obviously not an ideal solution, and for many clients it will in fact not be viable.

“Unfortunately, the impacts of inflation make cutting back all that much harder,” Benz says, noting that this is a teachable moment for advisors with younger and middle-age clients. “There are different approaches out there for helping younger clients prepare for moments like this in the future, and it is important to talk about them early on. I am an enthusiast of the bucket approach, for example.”

Benz says investors tend to respond favorably to the bucket strategy, because it helps them keep losses in the growth side of the portfolio in context.

“If people have their short-term cash flow needs taken care of, then they tend to have that important peace of mind about market volatility,” Benz says.

Benz has also found that a bucketing approach — in which investors hold perhaps one or two years in liquid, safe assets, complemented by two other buckets dedicated to middle-term and longer-term wealth accumulation — helps people feel confident to spend more than they otherwise might.

“A bucketed strategy gets them off of this mindset where they are just obsessed with subsisting on current dividends and income,” she notes. “Especially when rates were so low, people would construct odder and odder portfolios in the pursuit of yield, simply because they didn’t want to spend principal.”

Benz says one silver lining of the higher inflation environment is that the growth of interest rates, while damaging to bond prices in the short term, presents a good opportunity to lock in higher yields. She says the current environment puts a further spotlight on the need to make tax-efficient decisions when selling assets to fund spending.

In that vein, Benz shared her top tips for selling taxable assets in an efficient manner. See the slideshow to read her key insights.