Cooking Up an Order of Liquidation
About the author: Curtis has earned the Life and Health Insurance licensure, has passed the Series 66 examination, and has earned a degree from the University of Nevada, Reno. He has over 16 years of experience in the financial industry, helping others protect, grow and manage their wealth. Curtis helps clients create customized strategies for their portfolio based on their unique financial goals.
Cooking up an order of liquidation
When we approach retirement, we look back and realize we have spent decades accumulating assets, from 401k’s, IRA’s, Roth IRA’s to Non-Qualified accounts. It is essentially like going to the store and grabbing a cart full of different ingredients for a recipe; the problem is while gathering these ingredients it seems we don’t necessarily know what the recipe is. Once you get to retirement, how you choose to liquidate assets to fund your retirement becomes that recipe. If done right it can create a harmonious meal, if done wrong it may be something we choose to give to the dog or throw in the trash.
The order of liquidation is important on multiple fronts, the first being what assets do you liquidate to fund said retirement or what accounts do you use? In what order do you liquidate those accounts? What stocks, bonds, funds, ETF’s do you sell first? Do you take from an IRA first or from savings? What about Social Security? There are many questions and many possible answers, but they will be unique to each individual situation.
One of the most important things to consider is the tax aspect of your order of liquidation and how that will coincide with Social Security, pension, or maybe both. It is important to have a plan on when best to take Social Security, pension etc. in conjunction with liquidating assets, especially tax deferred assets such as an IRA. Remember, Required Minimum Distributions start at age 70 ½, so it is possible that there is a window there to be as tax efficient as possible.
The other important thing to consider is what to liquidate. Should you sell your Amazon stock or that mutual fund sitting in your Non-Qualified account for the last 20 years? Remember, each position not only may have a taxable effect, but what you liquidate could throw your risk exposure off from your risk comfort level. A simpler portfolio can make this easier; by holding fewer positions it can create a clearer picture in regards to order of liquidation. Trying to navigate a sea of 200 positions and wondering when to sell what portfolio item can create a headache in retirement.
Plans are important and having a plan for the order of liquidation of your assets in retirement is no different. In fact, it may become a fundamental part of your plan on how you create income in retirement. We all want to do what we consider is best and smart not only from a tax efficiency standpoint but from a risk standpoint as well. Make sure you know your recipe before starting to cook, because you don’t want to throw away that food or feed it to the dog unless they have been a good dog and deserve a treat.