Picking the right asset allocation was relatively easy for investors over most of the last 14 years. Since the end of the Great Financial Crisis in 2009, and with the fed funds rate sitting between zero and 2.5 percent, it’s been stocks, stocks, and more stocks. But as singer-songwriter Bob Dylan once famously told us, “The Times They Are a Changin’.”

You see, in 2023, because of higher interest rates, we are all faced with a new investment landscape. No longer shackled by the paradigm of perpetual 0% interest rates, we now have an opportunity that hasn’t been seen in decades. Most of us can spend less time focused on stocks and stock funds and shift, at least partially, into less bumpy, less stressful income products and securities that let us focus on the things we really care about. This is true for retirees, but also for accumulation-phase investors who, almost always, have big expenses on the short- to medium-term horizon.

Points of emphasis:

Now, what are some of the tools you can use for this rebalance? Will any old bond fund do? Do you just shift to money market funds and CDs? I’d say no. While these can be part of your new strategy, you have to consider diversification, long-term yield, and tax impacts both during your rebalance and afterwards when you are generating income from your new portfolio. This is why asset location will be just as important, if not more important, than asset allocation.

Let’s start by saying anything that helps you draw income tax-free when you are living off your nest egg is top of the class: for example, Roth 401ks, Roth IRAs, and some permanent life insurance products. The government limits how much you can put into these vehicles for a reason. As MoneyLetter pointed out in the January 2023 issue, now is a great time to consider Roth conversions. If your money is already in Roth accounts, you can shift your portfolio without the hassle of tax considerations.

As part of your portfolio shift, you may also want to consider using permanent life insurance to de-risk your portfolio and manage your taxes in life and estate. When structured correctly, permanent policies can provide a reliable internal buildup of cash value and tax-free access to funds for liquidity needs. In the ultra-high-net-worth space, we will even use private placement life insurance as a pure alpha play. For retirees and soon-to-be retirees at all levels of wealth, you may want to consider putting a long-term care rider on your permanent policy. This allows you to have tax-free access to the death benefit if you have a long-term care event. Long-term care can cost upwards of $20K per month and if you need to spend $200K a year while taking taxable distributions, you will need to pull out significantly more, likely at a higher tax bracket than you intended.

Taxable events:

If your stock positions are held in a regular brokerage account, we can still take measures to limit the tax impact during your repositioning. For many of our clients, a portfolio of stocks could be held in a Direct Index Portfolio that automatically tax-loss harvests. This allows us to liquidate gains with less friction when rebalancing because of losses carried forward from previous years. If you do not have any losses carried forward from previous years, you can still choose to sell individual positions that have losses to offset the gains you are selling. A third option, if you are an “Accredited Investor,” is to sell your equity positions and roll them forward into an Opportunity Zone Real Estate Fund. Opportunity Zones were created in the 2017 Tax Cuts and Jobs Act and allow investors to defer their original capital gain for up to five years while receiving income from cash-flowing real estate projects and prosper from the potential long-term growth of real estate. If the position is held for 10 years, investors can actually reap the new gains totally tax free. This has been a valuable strategy for clients shifting to income-producing products if they have large capital gains to mitigate.

Yields are more appealing now:

So, what else is attractive in the fixed income space? We always help clients build a robust foundational bond portfolio allocated to various sectors: treasuries, corporate bonds, interest and inflation-protected bonds, money markets, municipal bonds, and total return funds. Once we establish this core position, we will then look to more exotic solutions. For example, private credit is having an important moment right now. With depleted reserves in the banking sector, big businesses, real estate developers, and private equity firms are increasingly turning to private credit to provide debt capital for their ventures. The yields on the notes have been in the range of 8–10% for first-position collateralized loans with strong covenants.

Fixed-income seekers also shouldn’t overlook annuities. While the industry has a reputation for being old and expensive, there has been quite a bit of innovation in the sector, and today’s annuities are a far cry from the annuities of your father’s generation. For accredited investors, you can incorporate private real estate (real estate returns without the land lording), energy projects in both renewables and oil, private placement variable annuities, and many other unique solutions.

Armed with all the above, you’ll be better positioned for today’s markets and your retirement years.


By Peter Doherty

Peter is a Financial Consultant for Asset Strategy, MoneyLetter’s sister company.



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