(PUB) Morningstar FundInvestor

16

Avoid These 6 Portfolio Goofs Portfolio Matters | Christine Benz

But if you’re concerned about missing an RMD , especially if you’re an older retiree who’s looking to simplify and automate, you can also set up auto- matic RMD s with your brokerage firm or mutual fund company. You’ll typically have the opportunity to receive distributions on a monthly, quarterly, or annual basis. If you go this route, make sure to maintain a cushion of liquid investments (cash or a short-term bond fund) so that the provider doesn’t have to pull money from a long-term investment when it’s at a low ebb. Goof 2 | Not Signing Up for Medicare at Age 65 Many retirees have gotten religion about deferring Social Security past their full retirement ages; each year of delayed filing for benefits, up to age 70 , results in an 8% bump-up in benefits. But if that’s your strategy, it’s still important to sign up for Medi- care at age 65 . If you don’t, your Medicare Part B premiums will be permanently higher—and will increase for each year you delay—than would have been the case if you had signed up when you should have. Medicare Part B premiums will be 50% higher for the person who waits until age 70 to sign up for Medicare. The Avoidance Tactic: To avoid those higher premiums, plan to sign up for Medicare coverage three months prior to your 65 th birthday, regard- less of when you plan to begin claiming Social Security benefits. Goof 3 | Not Updating Beneficiary Designations Perhaps you made your brother the beneficiary of your 401 (k) and then got married two years later. Or maybe your husband was the beneficiary of your IRA , but now he’s your ex. In such instances, what’s on your beneficiary designation forms will stand regardless of whether it reflects your wishes, and the beneficiary designation will likely trump what’s laid out in other parts of your estate plan, such as your will. The Avoidance Tactic: It’s a good idea to revisit your estate plan from top to bottom every 10 years. But if you have a major life change in the intervening years, such as a marriage or divorce, that should be a catalyst for checking up on every aspect of your

I’ve always argued that creating a sound financial plan can be extraordinarily simple, even though some in the financial-services industry try to make it complicated. Yet even those determined to create a simple, streamlined plan run the risk of stubbing their toes, often by running afoul of the Internal Rev- enue Service’s often-byzantine rules governing tax-sheltered savings vehicles.

Here are six financial-planning “goofs” as well as the steps you can take to be sure you avoid them.

Goof 1 | Missing an RMD Individuals with assets in Traditional IRA s and 401 (k)s must begin taking required minimum distributions by April 1 of the year after the year they reached age 70 1 / 2 . The basic idea is that even as the government allows people to enjoy tax-free compounding on their money while they’re in the accumulation mode, at some point the IRS wants its cut. The penalty for not taking your RMD s on time—once you’ve started them, you need to take them by Dec. 31 of each year—is so steep it’s the stuff of legend: You’ll owe not just the ordinary income tax on the distribution, but a 50% penalty on the amount you should have taken but didn’t. The IRS allows you to appeal the penalty if the missed RMD was the result of an unforced error, such as if you were incapaci- tated or you simply forgot. But you probably still want to avoid that rigmarole if you can. The Avoidance Tactic: Savvy investors can be stra- tegic about which accounts they pull their RMD s from, to make sure they comply with the tax guidelines while also taking the distribution that makes the most sense from an investment standpoint. I like the idea of weaving RMD s into the rebalancing process, pulling the distribution from whichever funds or stocks you’d like to reduce anyway.