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How to Use RMDs to a Client’s Advantage: Morningstar’s Benz

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Fill two needs with one deed by applying some art to taking required minimum distributions from retirement accounts. Indeed, these annual withdrawals can be great opportunities to invigorate retirees’ portfolios, as Christine Benz, Morningstar’s director of personal finance, describes in an interview with ThinkAdvisor.

The senior columnist, formerly director of mutual fund analysis for the research and investment management firm, recently outlined this smart RMD strategy and several others to help clients achieve a comfortable retirement — financially and psychologically.

(Related: Working Past 70½? Skip the 401(k) RMD Without Penalty)

THINKADVISOR: What’s some creative thinking when it comes to taking annual required minimum distributions from retirement accounts?

CHRISTINE BENZ: It’s a missed opportunity not to use them to improve your portfolio. Many retirees can add a little art to required minimum distribution-taking. For example, at year’s end, look at the problem spots in your portfolio and see if you can trim those holdings to help meet your RMDs. Look at the parts that you’ve wanted to cut: Maybe the positions have grown too large, or you no longer like them. Maybe the fund had a manager change.

What are the most costly mistakes investors make concerning RMDs?

One of the biggies is not taking them! You’ll pay a big penalty of 50% for missing one. A lot of firms have auto-RMD services, which is a kind of failsafe. If you forget to take your RMD proactively, they’ll cut the check for you.

What’s another good strategy related to RMDs?

If you’re older than 70-1/2 and have a tax-deferred account subject to RMDs, you can take a portion of it, up to $100,000, and steer it to a charity with a qualified charitable distribution. The virtue of that is it doesn’t affect your adjusted gross income. You never get your hands on it because the money goes straight to charity.

What should a pre-retiree essentially keep in mind when building their retirement portfolio?

I believe that investors should broadly diversify and, especially in retirement, not try to get too fancy with tactical allocations. I’m a believer in a really well-diversified portfolio that matches your anticipated cash-flow needs and not trying to focus too much on what might perform well or not so well.

What do you consider a dependable investment?

There’s a very strong case to be made for holding index funds in retirement. They’re not necessarily less risky than active funds, but they give you a lot of diversification at very low cost. Also, they require less oversight than active funds because you don’t have to worry about manager changes or the manager taking big bets on individual stocks or sectors. With the right asset allocation of index products, you can pretty much set it and forget it.

Many clients think that all mutual funds have active managers — so they invest in passive ETFs instead.

Certainly we’ve seen a strong appetite for passive products, whether ETFs or index mutual funds, which fall under the mutual fund umbrella, too. Not every mutual fund has an active stock or bond manager.

Any other areas of investor confusion that you can clarify?

The expectation that index funds are somehow lower risk than active funds or that active funds are lower risk than index funds. It’s not the case that one type is more risky or less risky. You can find a very aggressive passive fund, and also very aggressive active funds.

Some pundits have been forecasting a big correction, mainly because of the extended bull market. What should worried retirees think about concerning their portfolios?

Risk tolerance is an important issue in retirement. If you know that you’re a retiree who freaked out in 2008 when your stock portfolio went down, you probably want to have a more conservative asset allocation. So, if you know you’re the type of person who gets deeply uncomfortable in response to volatility in your equity portfolio — maybe you sold equites at the bottom — you probably want to tilt toward a more conservative position. This is another dimension of: Do you expect to need the money anytime soon?

What if you do need it soon?

If you’re an older retiree who’s relying heavily on your portfolio plus Social Security to supply living expenses, you’d probably want to have a more conservative portfolio because your cash-flow needs from the portfolio are heavier.

What sort of asset allocation is appropriate, then?

If someone is actively tapping their portfolio for cash flow, that would argue for having a higher weighting in cash as well as in bonds, whereas someone taking very modest amounts from the portfolio annually would be able to support a higher stock weighting.

What’s an example of the latter?

A retired teacher, say, where their pension supplies a big share of their cash-flow needs and they’re not drawing heavily from the portfolio on a year-to-year basis. Arguably, they should have a more aggressively situated portfolio.

What about those who continue to work in “retirement”?

The interrelationship between Social Security and taxes is something to keep an eye on. If you’re working later in life, you can still stash money in a tax-deferred fashion in a retirement plan, if your employer has one. That’s something to take advantage of.

Health care costs are rising faster than most other major expenses. So what should investors bear in mind when preparing for retirement?

Insuring against those costs and making sure you’re getting good advice on purchasing a supplemental policy — and to remember to re-shop Medicare Part D [prescription drug] coverage every year.

Who should buy long-term care insurance?

The long-term care question is the big risk factor in many retirees’ plans. People who don’t have long-term care insurance are courting a risk that they may incur big costs that could gobble up their portfolios.

But those policies are very expensive.

Yes, and premiums have been rising. So even people who thought they were doing the right thing in buying a policy have, in some cases, been socked with really large premium increases.

What’s the risk if people wait till they’re older to apply for that insurance?

They may not even qualify because the policies can be quite stringent about a pre-existing condition.

What general guidance can you offer about customizing a retirement portfolio?

I always advise retirees to think about being flexible about where they go for cash-flow needs and not get hung up on what their portfolio yields. I use the term cash flow as opposed to income because these days, income is so scant that it’s really difficult for anyone to earn yield they can live on.


The asset allocation that someone arrives at depends heavily on other, non-portfolio, sources of income in retirement. It’s important that each retiree customizes his or her portfolio based on anticipated cash-flow needs.

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