Investor Toolkit

How advisors prepare client portfolios for retirement

Preparing client portfolios for retirement is a time for optimizing and coordinating all the moving parts of the portfolio, built over the decades.

The first step, said Dana Anspach, certified financial planner and CEO of Sensible Money, is to stress-test preretirees' portfolios to see how well their plans would hold up under a severe market decline or a time of prolonged below-average returns. This is followed by a projection of how much would need to come out of each type of account and when.

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"Once we have a withdrawal schedule, we rearrange the portfolio so that a series of bonds mature in amounts that are matched up to the withdrawals they will need," she said.

The first several years of withdrawals are to be covered by safe investments, Anspach said, with the remainder of the portfolio invested for growth.

"Retirees find a great deal of comfort in knowing they are not subject to market risk on the amounts they need to withdraw for their first five years of retirement," she said. "It really helps reduce stress during this transitional time."

Tax treatment

Just as there are benefits to investment diversification, there are benefits to having tax diversification, said Chad S. Hamilton, CFP and vice president of practice management with Mariner Wealth Advisors.

He listed several broad categories of income in terms of tax treatment:

  • Tax-free: Roth individual retirement accounts, municipal bonds, or return of basis.
  • Fully taxable: Withdrawals from traditional IRAs, 401(k) and 403(b) accounts.
  • Partially taxable: Social Security.
  • Tax-favored: Long-term capital gains, qualified dividends.
  • Other Income: Earned income, rental income, monthly pension.

"You can think of these as different 'buckets' of money, and the idea is that prior to starting to draw down from your assets, you spread money across a variety of investment vehicles," said Hamilton. "By doing so, you will provide a hedge against the inevitable future changes to the tax laws.

"The objective is to monitor the source of your withdrawals each year so that you can max out lower marginal tax brackets but avoid creeping into a higher tax bracket."

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According to Douglas Kobak, CFP, principal of Main Line Group Wealth Management, employees of public companies who overlook the Net Unrealized Appreciation could pay "tens of thousands of dollars in additional taxes." To explain, he used the example of an employee with a 401(k) plan with $1,000,000 of company stock with a cost basis of $100,000.

If the employee were to withdraw directly from it, or roll over the entire amount into an IRA, the withdrawals would be taxed as ordinary income, as high as 39.6 percent federally.

Checklist for preparing client portfolios for retirement

● Define their retirement lifestyle.
● Determine how much income they need annually.
● Review their current investment allocation to prevent against a market downturn.
● Take money out of the market and put it in a safe place.
● Set money aside for any beneficiaries.
● Ensure their investments keep up with inflation.
● Reduce their tax liability.
● Set up an estate plan.
● Put a long-term care plan in place.

Source: Alexander G. Koury, CFP and investment manager at Householder Group Estate & Retirement Specialists

Employing the NUA strategy, the employee does a qualified lump-sum distribution, transferring all shares of company stock from the 401(k) into a taxable account and rolling over all remaining assets to an IRA account.

"As a result, tax owed at transfer is only on the cost basis ($100,000) and taxed as ordinary income," Kobak said. "When shares are sold, long-term capital gains (currently a maximum of 20 percent) are paid on the difference between the cost basis ($100,000) and the sale proceeds.

"This could save the employee as much as 20 percent on taxes," he added.


"If your clients have been divorced, you may need to approach retirement planning differently," said Avani Ramnani, CFP and director of financial planning and wealth management with Francis Financial.

Determine if your client and his or her ex-spouse's retirement plans are in one large account or multiple accounts, she said, and then ensure the accounts are divided correctly with a qualified domestic relations order (QDRO), a court judgment for a retirement plan.

Divorced clients need to pay special attention to their survivor benefits.

"If your ex-spouse dies, you are not guaranteed to keep receiving their benefits," said Ramnani, who advises clients to update the beneficiaries on wills and all retirement plans.

Clients should be aware of how their divorces can affect their plans for Social Security, she added. A client can receive benefits on the client's ex-spouse's record if the marriage lasted at least 10 years, he or she is single and hasn't remarried, and is age 62 or older. If clients earn Social Security benefits of their own, they can claim the greater of their personal Social Security benefits or their ex-spouse's, but not both.

— By Deborah Nason, special to