Raleigh Financial Advisor Mike Palmer in Kiplinger: Should Your Asset Allocation Change in Retirement?

The transition from living on a paycheck to living off your portfolio can be a challenging one. Saving for retirement can largely be automated - but automating the decisions you face in spending your retirement savings can lead to mistakes - sometimes big ones.

In his recent Kiplinger column (Should Your Asset Allocation Change When You Retire?), Raleigh financial advisor Mike Palmer, CFP® addresses the critical factors retirees and those approaching retirement should consider in managing their portfolio during the distribution phase.

What Changes and What Stays the Same?

Any sound investment evaluation starts with a simple question: What should this money do?

For most retirees, the answer shifts from wealth accumulation toward generating income. Finding your new "sleep-at-night factor" requires looking beyond basic spreadsheets and deeply analyzing three critical components:

• Net Income Needs: Exactly how much annual income, after taxes, do you require to maintain your desired lifestyle?

• Fixed Income Sources: What is your guaranteed baseline provided by Social Security, pensions, or annuities?

• Account Diversity: What is the exact breakdown between your taxable, tax-deferred, and tax-free accounts, and how much do you have in each?

Defeating the Real Enemy: Sequence of Returns Risk

During your accumulation phase, your average annual return was king. In retirement, however, average returns take a backseat to the timing of returns.

A major market dip in the first few years of your retirement—known as sequence of returns risk—can be devastating if you are forced to sell equities to fund your daily living expenses.

The Solution: To mitigate this risk, we recommend establishing a liquidity buffer of 18 to 24 months of anticipated distributions.

By carving out two years of planned expenses into high-quality, liquid assets—such as CDs or money market funds—you ensure that stock market volatility does not dictate your monthly "paycheck". This buffer acts as a vital shield, giving your growth-oriented investments the time they need to recover from a market downturn without being liquidated at a loss.

The Withdrawal Roadmap: It’s Not What You Make, It’s What You Keep

Distributions from retirement accounts are frequently a retiree's largest annual tax event. Properly managing the "tax bite" requires strategic sequencing across your three distinct financial "buckets":

1. Taxable (e.g., standard brokerage accounts)

2. Tax-deferred (e.g., Traditional IRAs and 401ks)

3. Tax-free (e.g., Roth IRAs)

Effective tax bracket management allows you to deliberately fill lower brackets while avoiding sudden "tax spikes". Left unmanaged, these spikes can trigger higher Medicare premiums (IRMAA) or unnecessary capital gains taxes.

True tax planning must be a multiyear exercise. A common mistake investors make is drawing exclusively from taxable accounts first, believing it is always better to let tax-deferred accounts grow untouched. This rigid approach often results in two significant missteps:

• Failing to fully utilize lower tax brackets with tactical taxable distributions.

• Creating massive, unexpected IRA Required Minimum Distributions (RMDs) later in life. When combined with delayed Social Security, this can create a severe "tax torpedo" in your 70s.

Asset Location: Why All Accounts are Not Created Equal

One of the most common misconceptions we see is applying a uniform asset allocation identically across every account. For a truly optimized plan, you must look at asset location alongside tax treatment:

• Roth Accounts: Provide tax-free growth. Hold your most aggressive, high-growth assets to maximize long-term tax-free growth.

• Traditional IRAs: Offer tax-deferral. The are best suited for income-producing assets like bonds or Real Estate Investment Trusts (REITs), since distributions are taxed as ordinary income anyway.

• Taxable Accounts: Subject to annual tax drag. Prioritize tax-efficient ETFs, or municipal bonds to minimize the annual tax drag on your portfolio. And keep an eye on dividend structure to make sure your dividends qualify for preferred tax treatment.

While managing to a comprehensive asset allocation across your entire wealth footprint is sound, each type of account should feature its own customized allocation tailored to the larger, tax-optimized picture.

Moving Beyond the Spreadsheet

Retirement is not a signal to completely abandon equities; rather, it is a time to be far more strategic. Your portfolio allocation shouldn't rely on an arbitrary rule of thumb. Instead, it should be a customized allocation built entirely around your specific goals, cash flow needs, and personal tax situation.

As you near this milestone, reviewing and refining your investment strategy is essential. For some, the transition from the "years to retirement" to the "years of retirement" might require a complete portfolio overhaul, while for others, it may just require a subtle tune-up.