Dear Liz: My wife and I have been blessed with a very large income from real estate that will provide us with enough money to live comfortably for the rest of our lives. That leaves retirement accounts and Social Security as a lot of discretionary or extra money.
Right now, we have 90% of our retirement accounts and Roth accounts available. I thought that, given our circumstances, we could afford to take risks. We have another 10% per year. I’m curious to know what you think of our aggressive situation. Is it stupid, and should we be more careful, like having a role in detention?
Answer: Another question to ask is, “If I don’t need to take this risk, why should I?”
Many people need the growth that stocks provide to achieve their long-term goals, such as a healthy retirement. Even in retirement, people often need at least some exposure to stocks to reduce inflation. To get that growth, investors must endure the inevitable downturns when the markets slide. But why risk more than you need to?
Also remember that real estate income is not guaranteed. Although real estate and stocks are not closely related over time, both can be affected by economic problems. It can be painful to see your income stream go down along with your stock portfolio.
A balanced portfolio can provide modest returns but a good night’s sleep in the future when the stock market crashes. This would be a good thing to discuss with a trusted financial planner.
Dear Liz: This is about a couple in their 70s who were persuaded to transfer their approximately $2-million retirement account to a third party, resulting in a capital gain of $184,000 and a tax bill of approximately $50,000.
The question I’m wondering is whether the $184,000 income also kicked them into the high Medicare bracket (which you often warn your readers about) or whether they were already in the high bracket for other reasons (ie, the minimum amount required each year, plus the size of Social Security or pension benefits).
The problem with their new broker is that the couple seems surprised to learn that they will get more money and more income tax by transferring their portfolio from their broker to the new broker. Shouldn’t the new broker, in his “fiduciary” role, have warned them that they would receive a large capital gain and a large tax bill and checked to see what impact the capital gain would have on the couple’s Medicare payment (if any)?
Answer: The couple did not say they were surprised by the tax bill. They said that their respondent was not happy, which seems to have made them question their decision.
Let’s define some words. The word “broker” in this context usually means a stock dealer. Stockbrokers are usually not brokers, which means they don’t have to put their clients’ interests first. Instead, stockbrokers are often held to a low level of “privilege”, which means that they can recommend investments that are not a good choice for their clients as long as those investments are not really worth it.
Registered financial advisors, on the other hand, are fiduciaries. The couple’s new RIA should have explained why the investment sale was necessary and detailed the costs, including the tax bill and those affecting Medicare payments. The RIA should have explored other options as well, such as leaving the portfolio alone or extending the investment portfolio over several years. RIA would have recommended the move, but would carry out whatever project the couple ultimately chose.
Liz Weston, Certified Financial Planner, is a financial columnist. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact Us” form at askliweston.com.
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