4 Proven Ways to Protect Your Nest Egg

One afternoon, during my early days as a newspaper reporter, my managing editor wandered over to my desk and glanced at the story that I was banging out. He could see that my prose was starting to meander.

He impatiently asked me: “What are the three rules to writing?” Before I could stammer out an answer, he yelled: “Focus, focus and focus!”

I never forgot those words of advice. They also apply to investing.

Just reading the headlines is enough to make you gnash your teeth. The escalating U.S.-China trade war, growing calls to impeach the president of the United States, rising geopolitical threats, slowing global growth … the list of dangers is long.

I like to periodically take a “time out” from covering the daily gyrations of the stock market to focus on fundamental issues of importance to all investors. It behooves you to sometimes take a step back from the headlines, so you can make clearer and more objective decisions.

You must adopt common-sense methods today, to ensure your family’s safety and financial security. Below are four simple and easy measures that will protect your portfolio, net worth and kids’ future.

1) Set a Retirement Date

It’s important to have a specific date in mind for when you plan to retire. This should be based on multiple factors.

If you enjoy your job, would you prefer to keep working (and saving) a little longer? It’s tough to get back into the working world once you’ve left it behind.

Are you slated to get a defined-benefit pension from your job? Are you fully vested? If so, you may not need to make significant changes in your investments.

When are you eligible for full Social Security benefits? This varies depending on when you were born. If it was in 1960 or later, you will have to wait until age 67. If you start to collect your benefits earlier, your monthly payments will always be lower than if you had waited.

Make an assessment of your future spending needs. Will you sell your home and move to a lower-cost area? What are the tax consequences of this? After you set a specific target, you can start formulating your strategy for getting there.

2) Create a Withdrawal Plan

It’s usually best to let your wealth compound tax-free for as long as possible. The greater variety of accounts you have, the more opportunities to diversify your tax savings.

As a general rule, you should withdraw cash from taxable accounts first. Later on, focus on tax-deferred accounts such as traditional Individual Retirement Accounts (IRAs) and annuities.

Leave accounts with tax-free withdrawals for last. An example of such an account is the Roth IRA, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free.

Taxes are paid on contributions, but withdrawals, subject to certain rules, are not taxed at all.

Early in your retirement, converting currently taxable assets to spending money makes sense because little or no additional tax likely will be due.

First, take dividend income and any mutual-fund distributions in cash instead of reinvesting them. You pay tax on these payouts even if you reinvest them, so this step won’t cost you anything.

Next, sell investments with no cost basis or the highest basis and therefore no or low taxable gain.

Assets with no cost basis include money funds and bank CDs as well as Treasury bills and various types of bonds held to maturity. Bond funds likely carry a high basis compared with your sale price, and therefore low tax liability.

Ideally, you’ll be more passive in taking long-term gains and more active in “harvesting” your tax losses.

Continuing to hold profitable, long-term investments in a regular account is a form of tax deferral. If you sell losing investments, you offset your tax liability on any gains you’ve taken with other investments.

3) Diversify Among Stocks and Sectors

Don’t put all of your eggs in one basket. Also be sure to diversify across sectors.

Investors often punish themselves as much as the market does. Despite the compelling case to diversify, many investors hold portfolios with assets concentrated in relatively few holdings. This common failure has its roots in lack of knowledge and just plain laziness.

Also, don’t just stick to components of the S&P 500 or the Dow Jones Industrial Average. Spread your portfolio among value, small-cap, large-cap, growth and dividend stocks.

The following chart demonstrates the importance of diversification:

4) Shield Inheritance

If you don’t initiate measures ahead of time, Uncle Sam will take a huge bite out of your inheritance via the capital gains tax.

One of the few ways to sidestep the substantial capital gains tax is to make a gift of property to a charitable organization. When you do so, you may take a deduction based on the full fair market value of the property, rather than just its cost.

The tax savings will largely depend on the amount of appreciation. In turn, you can reap greater income by investing these tax savings.

The most popular types of charitable giving plans are the annuity trust, revocable trust, pooled income fund, gift annuity, and life estate agreement. Consult your tax accountant for details, to find the plan that’s precisely right for you. But do it now.

Questions or comments? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.