Page 31 - Investment Advisor February/March 2023

early 2023, market experts say, this might include stocks in the year or two down the road, making the advisor’s job easier. On
banking and financial sectors, or select technology stocks with the other hand, it could be years or even the better part of a
good fundamentals but that have lost some public faith given decade away.
the broader technology selloff of 2022. This “early” payment of the taxes is a big pill to swallow
Clients often have a hard time wrapping their heads around for some people given the risk of early death, Piershale says.
the conversion math, they point out. This is simply due to the “Some people are just too afraid they’ll walk out of the conver-
fact that conducting a Roth conversion will generally require sion meeting and get hit by a bus on the way home.”
the payment of higher taxes in a given year than is necessary. Broadly speaking, converting a higher portion of a client’s
One main fear people have is that they will die before reach- traditional IRA could serve to reduce the level of future
ing what amounts to the conversion break-even point — the required minimum distributions. At the same time, for clients
point in time where they will indeed realize a lower lifetime who don’t need the money from their RMDs to support their
tax burden thanks to the conversion. Depending on the cli- retirement lifestyle, having more in their Roth IRA makes a lot
ent’s unique situation, the break-even point might be just a of sense.

Time for a Retirement Portfolio Reset?
There are still far too many investors approaching retirement Speaking directly to those who are approaching retirement
with an excess of equities in their portfolios, says Christine in 2023 and finding themselves with a lot of depressed bonds
Benz, Morningstar’s director of personal finance — despite and equities in the portfolio, Benz says the key thing to keep
the fact that U.S. and global markets have witnessed one of in mind is that this difficult moment is coming on the heels of
the most challenging years on record in 2022 from both a a prolonged and very powerful bull market that has delivered
performance and a volume-of-volatility perspective. significant wealth to investors.
It’s a difficult but urgent issue she urges financial advi- “Even though you didn’t catch the absolute top in terms
sors to tackle head-on in 2023, arguing that the effort to of de-risking your equity portfolio, you’ve nonetheless
de-risk portfolios in the pre-retirement years should actu- had a really good run in your equity portfolio, most likely,”
ally be based on “everything going on financially outside she explains.
the portfolio.” Still, one can imagine that an investor set to retire in
“Start by thinking about income that your client will get 2023 will be seeking the best place to turn for cash after
from Social Security or from a pension and use that to deter- a tough year for both stocks and bonds. Sadly, there is
mine how much they’ll need to withdraw from your portfolio,” not really a great answer for those who have already been
Benz suggests. “Start by maximizing those non-portfolio burned while sitting in what Benz and others call the retire-
income sources. That in turn can help lessen your portfolio ment red zone — that five- or 10-year window around
withdrawal needs. It’s also important to mind the tax conse- the retirement date when an investor is most exposed to
quences of any repositioning, especially if you are lightening sequence of returns risk.
up on equity holdings.” Very likely, many investors in this position have had to sell
As Benz notes, 2022 proved to be a unique year in that stocks or bonds at significantly depressed prices merely to
equities and bonds simultaneously performed poorly. This is meet their non-discretionary income needs.
something that has happened only a handful of times in the “So, this is just another illustration of why it is important to
market’s sizable history, and that fact has left a lot of inves- make sure that your portfolio has adequate liquidity and has
tors who are approaching retirement scratching their heads adequate allocations to very safe assets that you could draw
about what to do now. upon in this type of scenario,” Benz says.
“Historically, when we saw stocks fall in periods of bear For those investors who are really in a pinch and looking to
markets, we often saw bonds at least hold value or maybe minimize the pain, Benz posits that bonds should theoreti-
even gain a little bit of value,” she explains. “We didn’t see cally be next in the queue for sale to fund current income
that this time around, in part because interest rates are bug- needs, because they’ve performed the least poorly relative to
ging both stock investors and bond investors. Rapidly rising the other asset classes.
interest rates depress the value of already existing bonds.” And one final tip: “If you need to make changes to get your
This happens because investors who hold such bonds asset allocation more in line with where you want it to be,
see how newer bonds are coming online with higher yields concentrate the selling in your tax-sheltered accounts where
attached to them, and they move toward the new bonds you won’t owe taxes to do that repositioning,” she adds.
instead. That pushes down existing bond prices, in turn. —John Manganaro

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