Savers and investors are generally in a “buy” mindset—saving as much as they can and purchasing investments to help fund their future financial goals. However, there comes a time when they reach their financial goal, and the focus shifts from accumulation to spending. How do you know what to sell?
Our Ten Year Rule philosophy states that any money needed from your portfolio within the next 10 years should be allocated to high-quality, fixed-income investments like U.S. Treasury bonds, FDIC-insured CDs, or municipal bonds—investments generally regarded as “safe” to protect the money for when it’s needed. However, this doesn’t fully answer “what to sell, when to sell, and how much to sell.”
From a financial planning perspective, an investor first must understand their estimated retirement spending and how much will need to come from their portfolio—thus calculating how much to sell. The investor’s financial plan and cash flow projection dictate the allocation of assets required to meet their goals. As retirement approaches—typically 10 years away—an investor’s financial situation changes, necessitating a shift in asset allocation to align with their future needs rather than past strategies.
Deciding “what” and “when” to sell is usually assessed on a case-by-case basis, taking into account investments in both taxable and tax-deferred accounts, potential capital gains taxes, how market performance has impacted the target allocation, historical performance of investments, and the investor’s capacity, need, and willingness to take on risk.
Creative selling strategies can help avoid immediate tax liabilities by evaluating gains in taxable accounts and determining if it’s better to defer those sales. Capital gains in taxable accounts are typically taxed at a 15% rate, which is likely more favorable than ordinary income tax rates. However, there may be opportunities to delay this taxation by optimizing the sequence of withdrawals, which plays a key role in tax efficiency. In some cases, reallocating to dividend-paying stocks may allow an investor to generate income without selling equities.
Selling should not be done arbitrarily or across the board. Many investors are tempted to sell if they believe the market has peaked or will continue to rise. Managing a portfolio based on market timing is incredibly difficult, if not impossible—even for professionals. For example, selling all technology holdings after a strong performance could leave the portfolio underexposed to a crucial sector.
When developing a sell strategy, it’s important to consider the investor’s capacity and willingness to take on risk, which is directly tied to asset allocation. A cash flow projection might reveal that an investor only needs a 6% return to meet their retirement goals, but their asset allocation is designed to achieve a 10% return. While higher returns are enticing, it’s worth asking, “Why take on extra risk if it isn’t necessary?”
Ultimately, many individual factors influence sell decisions, emphasizing the importance of working with a financial adviser, asset manager, and tax consultant when nearing retirement.
If you have questions on how to begin shifting your asset allocation for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the September 7, 2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
