After you retire, you may need to tap your portfolio for income. Here’s a suggested strategy:
1. Start with the taxable investment income (interest, dividends) in your taxable accounts. As long as you are paying tax on that money, keep it for spending cash. However, your interest and dividend income may not provide enough money in today’s low-yield environment.
2. To raise more money, rebalance your portfolio by selling some of the assets that have performed well.
Suppose Jim Jackson retires at age 62 with $300,000 in a traditional IRA and $300,000 in taxable accounts. In addition to his pension and Social Security, Jim wants to take $20,000 from his portfolio for spending money this year. Further suppose that Jim will receive $6,000 in taxable interest and dividends this year.
Thus, Jim will need to tap his portfolio for another $14,000. Suppose his basic allocation calls for Jim to hold 25% of his portfolio in bond funds. That would be $150,000: 25% of the $600,000 total.
Say that Jim now has $180,000 in bond funds, $30,000 over his desired amount. If Jim sells $30,000 worth of bond funds held in his taxable account, he will be back to his target allocation. Jim can use $14,000 of the sales proceeds for the spending money he wants and reinvest the other $16,000, perhaps in asset classes that are below his ideal asset allocation.
