Traditional IRAs During Retirement From A Retiree's Perspective

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Includes: AMT, BBL, BCE, CLX, DLR, GIS, HON, HTA, KMB, LMT, MSFT, NVS, QCOM, T, TRP, UPS, VZ, XOM
by: The Hedged Economist
Summary

Putting higher-yielding parts of the portfolio in traditional IRAs can delay any impact from the RMD.

A Roth IRA provides convenient safety valve for managing the RMD.

The approach of the RMD needed not necessitate a change in holdings.

Delaying the RMD will be temporary, 3 to 5 years, depending upon the yield of the holdings.

Introduction

One of the unfortunate aspects of the traditional IRA is that the government has taken it upon itself to help you manage it. Not surprisingly, their idea of helping you manage it is to ensure that sooner or later they will be able to tax it. Further, they decided that sooner or later begins at 70 1/2. They aren't even considerate enough to wait until you die. They insist that when you reach 70 1/2 they start getting a cut. That said, one doesn't want to be an ingrate. After all, the government has given the investor the opportunity for a long period of tax-free compounding of returns. (It is legitimate to wonder what approach would benefit society the most. Who would be the better custodians of the productive assets represented by the wealth in IRAs? Is it more likely to be the individual who accumulated the productive assets represented by the wealth or the government that has succeeded in accumulating trillions of dollars of debt? )

Anybody who has accumulated assets is used to the fact that many individuals and organizations would like to have a cut. Unlike many of the other individuals and organizations that would like a cut, it's impossible to just ignore the government. Consequently, one has to plan to manage the traditional IRA in a way that is consistent with the fact that the government will have its way, and that way includes getting a share of the income and, ultimately, the wealth represented by the traditional IRA assets. The subject of this posting is one approach to managing a traditional IRA in a way that's consistent with the government's requirements.

However, few people accumulate productive assets for the sole purpose of contributing to government. Generally, they have a notion that it might benefit them to have the income produced by those productive assets. With a traditional IRA, the role of that income is usually to support the individual during retirement. Granted, some people would prefer to leave their traditional IRA alone and let it compound tax-free while they live on other sources of income. However, as discussed in the previous posting in this series, "Portfolio Strategy From A Retiree's Perspective", one very convenient way to manage a traditional IRA is to focus on generating enough income from the traditional IRA to meet basic living requirements.

The balance of this posting describes a retiree's approach to navigating the two mandates created by government policies and a desire to have the traditional IRA generate enough income to meet basic living requirements. One should note that the traditional IRA is not the only source of income that can be used to meet basic living requirements. At some point during retirement, one receives Social Security and Medicare. Further, a fortunate minority of Americans have pensions, and some of those who knew they would never have a pension may have acquired annuities. So, a reasonable target for a traditional IRA is to fill in any shortfall from other income sources. As discussed in the first posting in this series, there are circumstances under which one would also want to use income from a Roth IRA to meet basic living expenses.

Background

Before embarking on a discussion of the actual management of the portfolios, it is probably appropriate to discuss some pre-retirement issues related to managing retirement accounts. Aside from the usual stress on starting early and paying yourself first, it's hard to know what more to say. Those basic fundamentals are really the essence of successful retirement planning. In addition, a previous article entitled "We All Like Toys And Retiring Rich," makes it quite clear that fully participating in the tax-advantaged savings programs available to most workers has a good chance of being a workable pre-retirement plan that results in a comfortable retirement. However, regardless of how one approaches it, the essence of the pre-retirement planning is to establish a level of comfort. The amount of wealth required to achieve that comfort isn't really a financial calculation; it's a very personal decision. Yet, more than likely, it will involve a significant amount of resources in tax-advantaged accounts.

Traditional IRA assets relevant to this posting are in two different traditional IRAs. They account for 36% of the retirement assets. Having 36% of retirement assets in traditional IRAs was not a target percentage. Rather, the target was to have the traditional IRAs generate an adequate dollar cash flow. A cash flow target withdrawal of about 3 to 3½% should be sustainable over a long retirement. However, since the assets are in traditional IRAs, the withdrawal rates will quickly rise above 3½% under the RMD. As the assets in the traditional IRA are liquidated to meet the RMD, cash flow from the Roth IRAs can be used to acquire substitute assets in order to sustain the cash flow target.

The split between the two traditional IRA accounts is such that about 26% of the retirement assets are in one account, and 10% of the retirement assets are in the second. The two accounts are for two individuals who differ slightly in age. They also reflect marked differences in labor market experience. Given that the majority of Americans do not have pensions, the resulting portfolio management issues are probably similar to those faced by a large number of retirees.

That distribution was quite different at the time of retirement. In preparation for retirement and in early retirement, the spousal IRA was allowed to compound and grow. Dividends were reinvested. It was fully invested until the year before the beginning of the RMD. By contrast, the primary IRA was the sole source of funds for basic living requirements, and it was the source of funds converted into Roth IRAs. Further, cash was maintained in the account to cover basic living expenses for a year, and then it was built up to multiple years as the RMD was approaching. However, the buildup did not have to be done abruptly since the dividends from the Roth were an alternative way to cover basic living expenses if the market crashed. In absence of the crash, the dividends in the Roth could be compounded or used to add new positions.

It's worth noting that if one starts retirement with assets in both traditional IRAs and Roth IRAs, there is an interesting potential guideline to use in managing the traditional/ Roth balance. Depending upon the tax implications, one has the potential to target 3 to 3 ½% of the total portfolio as potential withdrawals and take the entire withdrawal from the traditional IRA. Since only the 3 to 3½% from the traditional IRA is required for living expenses, the balance of the withdrawal after taxes can potentially be re-characterized into Roth IRAs.

It seems convenient to draw down funds from the larger traditional IRA, especially when it is the one that will experience the RMD first. The benefit of that approach is that it retains more tax management flexibility as one ages. Further, in some instances, the smaller traditional IRA belongs to a female which would imply a longer life expectancy. In the actual situation being discussed, that female is from a family with longevity characteristic of the females. Thus, converting the assets from the larger traditional IRA to a Roth is a convenient way to allow those assets to compound until later in her life. Since eventually the RMD will click in on the traditional IRAs, and the portion of the assets that will have to be withdrawn and taxed would increase continually as the investors age, the conversions to Roth reduce the risk that one of the spouses could be left with a decreasing level of funds available from withdrawals from the shrinking traditional IRAs.

Much of the discussion that follows addresses changes that become more urgent as one approaches the RMD. Keep in mind that each traditional IRA has a separately-calculated RMD. That, by itself, justifies some adjustments that will ensure that when the RMD is reached neither traditional IRA would be drained too quickly. However, given the strategy of using the funds from the traditional IRA to fund basic living expenses, the steps being discussed are appropriate earlier in retirement.

The Spousal IRA

It may seem curious to begin with the smaller traditional IRA, but there are very good reasons to use it as an illustration of how one can plan for a traditional IRA to meet basic income requirements while recognizing the constraints imposed by the RMD. Further, in many respects, since it was not used to meet living requirements early in retirement, it was possible to make many adjustments that have resulted in it already being well positioned. Thus, it may provide a better illustration with fewer references to what has to be done to position it.

Although this traditional IRA accounts for less than 10% (9.9%) of the total assets available for retirement, it accounts for 11% of the dividend flow from individual stocks held in retirement accounts. That tilt reflecting a higher average yield was felt to be appropriate for the traditional IRA. On average, the stocks in the portfolio in this IRA yield an average of 3.94%. Thus, dividends from stocks could be used to build the cash position that is desirable when this IRA begins being used is a source of cash to meet basic income requirements. It also could be used to build a cash position in anticipation of the beginning of the RMD.

Further, the yield of 3.94% compares favorably with the initial RMD. The first few years of RMD currently require withdrawals of percentages shown in the table below.

RMD as a %

of portfolio

Age

value

70

3.649635%

71

3.773585%

72

3.906250%

73

4.048583%

Keep in mind the percentages change each year as the life expectancies used to calculate them are adjusted. Nevertheless, the current dividend yield on the stocks is higher than the likely percentage withdrawal requirements for the first few years of RMD. Thus, the stocks in the portfolio are appropriate for accomplishing the objective of generating enough cash to meet the RMD.

The portfolio holdings and contribution to dividend flow are shown in table below. The final column shows an approximate forward yield on each stock.

Spousal Traditional IRA

Account/

Percent

Percent

Forward

Holding

of the

of the

Yield

Account's

Account

Dividends

Value

GIS

23.6%

16.4%

4.4%

TRP

25.2%

14.7%

5.0%

KMB

21.4%

17.8%

3.8%

CLX

9.9%

10.3%

3.3%

UPS

7.9%

6.9%

3.3%

T

4.3%

2.3%

6.0%

AMT

3.3%

4.7%

2.2%

DLR

4.4%

3.4%

4.0%

Subtotal

100.0%

76.6%

Mut.Fund

16.9%

Cash

6.5%

Acc.Total

100.0%

The average portfolio yield reflects adjustments that have been going on during early retirement when the account was not being used to draw cash. As the consumer staples companies' stock prices fell, additional shares were acquired to a point where General Mills (NYSE:GIS) and Kimberly-Clark (NYSE:KMB) are now considered full positions. (As a risk management practice, an effort is made to keep the dollar value of the dividend flow from any individual stock below a certain level). Clorox (NYSE:CLX) is close to being a full position and probably will be allowed to grow to that level. The position in UPS (NYSE:UPS) will probably not be expanded, at least not in the short run. That should not be taken as a vote of no-confidence in UPS. Rather, it's a product of the focus on other higher-yielding alternatives. All of those stocks have been in the portfolio for a long time previous to retirement. The positions have been expanded as price fluctuations have made the stocks attractive.

TransCanada Corporation (NYSE:TRP) is a more recent addition. The position was started with a much larger initial purchase than is typical of portfolio adjustments in these accounts. The objective was to establish a higher average dividend yield by acquiring a higher-yielding pipeline company. It was brought up to a full position as the price of the stocks of pipeline companies have underperformed. It now constitutes a full position. AT&T (NYSE:T) is a very recent addition. However, the initial position is far from the ultimate objective for this higher-yielding dividend aristocrat. Additional shares will be added opportunistically. For discussion of approach to AT&T that is very similar to the strategy being deployed, I would refer anyone interested in that specific stock to a Seeking Alpha article entitled "Retirement Strategy: Is It Chasing Yield To Buy AT&T Now?" The approach taken is very similar to that summarized in the article in the quote below:

"I believe that T could drop further, perhaps until the court case is settled, but I also think that a dividend growth investor seeking a higher income stream for retirement, would not be chasing yield by buying shares of T at the current share price, and easing into the stock by taking small bites on pullbacks. Especially for those of you who have 10+ years to go before you need to use the income."

The principal difference being taken in terms of managing this account versus that conclusion is that the steps are being taken in order to achieve portfolio objectives. Consequently, the last sentence in the quotation is irrelevant from the perspective of managing this portfolio. AT&T will probably be acquired not for the benefits 10 years from now; it will be acquired for its immediate impact on the yield from the portfolio. Further, for those with 10 years to go before they need to use the income, I would suggest also looking into BCE (NYSE:BCE) although it's hard to argue that AT&T is not a buy at its current PE.

The other two positions, American Tower (NYSE:AMT) and Digital Realty (NYSE:DLR), are also recent additions to the positions in this portfolio. Both represent initial acquisitions that are based on enough due diligence to feel comfortable with the initial positions. Both will be researched further, and positions may be expanded or abandoned. Both were acquired with an eye toward not just yield, but also growth in dividends.

The stocks' percentage yield may be appropriate, but the overall portfolio requires adjustment. Keep in mind that this account also contains cash holdings and a mutual fund not considered when calculating the percentage yield. As a result, the average yield on the stocks in the portfolio may exceed the RMD, but the dollar value of that dividend flow is only about three quarters of the cash needed for the RMD. When the dividends on the stocks are compared to just the value of the stocks the yield looks close to the 4%, but when the dividends are compared to the total of all assets in the account, it's closer to only 3%.

The need for an increase in the cash flow will be financed by liquidating the position in the mutual fund and managing the cash balance. The cash balance currently represents about 20 months of the RMD as it's currently constituted. If the dividend flow can be brought up to a point where it more than replenishes the entire cash withdrawals to meet the RMD, the cash balance can be adjusted to reflect that phenomena. However, the dividend yield will have to be significantly above the percentage of the portfolio that is required to meet the RMD in order to accommodate holding low yield cash. Thus, the focus will be on adding the higher-yielding stocks. It may become necessary to sell some lower yielding stocks in the portfolio. That will probably be done by selling the stock in the traditional IRA and acquiring it in one of the Roth IRAs. Similar adjustments have been made in the total portfolio in the past. They can generally be done at no cost by timing the sales and purchases, and, in some cases, by using options. In any case, the transaction costs are only relevant from the perspective of the time required to accomplish them.

The target portfolio will be heavily weighted toward consumer staples. Five stocks will each result in almost 20% of the desired cash flow. Three of them will be consumer staples: CLX, KBM, and GIS. In order to achieve the required cash flow with the amount of funds available the remaining two stocks are a higher-yielding pipeline, TRP, and a telecommunication company, T.

The three smaller holdings provide some diversification, but as a portfolio, the absence of any significant industrial, healthcare or technology exposure would be a major deficiency absent the ability to supplement the portfolio through holdings in Roth IRAs. The relevant Roth IRA currently holds Lockheed Martin (NYSE:LMT), Qualcomm (NASDAQ:QCOM), and Novartis (NYSE:NVS). The positions in the Roth tend to be slightly smaller than those in the traditional IRA. However, dividends are reinvested in the Roth; so those positions will grow over time.

Considering both the traditional and the Roth IRA, with eight major holdings and three minor holdings, the portfolio has industry diversification. It can comfortably meet the overall portfolio objectives. However, as discussed above, in order to meet the dual mandate of the RMD and the desire for the traditional IRA to generate enough income to meet basic requirements, the portfolio has been organized, and will continue to be sorted, so that the higher-yielding and, hopefully, more defensive stocks are in the traditional IRA. As the RMD rises as a portion of the portfolio, the dividend flow will cease to be adequate to replenish the cash reserve. However, a reasonable objective is to establish a portfolio that doesn't require the sale of the assets for at least the next three or four years. Between the cash reserves and the anticipated dividend flow, the traditional IRA should be able to endure a multiyear market decline without having the RMD necessitate the sale of assets during a market downturn.

The Primary Traditional IRA

In many respects, the primary traditional IRA represents the opposite situation from the spousal IRA. The account includes 26% of the retirement assets, but it generates only about 20% of the dividends generated by the total portfolio of Roth and traditional IRAs. To some degree, that's a result of it holding cash and a mutual fund, but that's only part of the explanation. The average yield on the stocks in the portfolio is only 2.85%. It's not only well below what's required for the RMD in the first few years of RMD, it's below the targeted overall yield for dividends across the entire portfolio. In short, unlike the spousal IRA, the primary IRA does not hold the correct stocks. The stocks it holds are fine; they are just in the wrong part of the portfolio. Thus, it may provide a good illustration of the types of adjustments that have to be made as one approaches retirement, and especially as one approaches the RMD.

The holdings in the portfolio are shown below. The table follows the same format used in the previous discussion of the spousal IRA.

Traditional IRA

Account/

Percent

Percent

Forward

Holding

of the

of the

Yield

Account's

Account

Dividends

Value

MSFT

20.0%

22.8%

1.8%

UL

21.2%

13.9%

3.4%

NNN

12.4%

5.4%

4.9%

HTA

10.9%

5.0%

5.0%

HON

10.6%

10.8%

2.0%

CVX

13.3%

7.1%

3.6%

EMR

11.5%

8.5%

2.8%

Subtotal

100%

73.5%

ASIX

0.1%

ExMktFund

9.2%

Cash

11.0%

CD 2/19

3.1%

CD 2/20

3.1%

Acc. Total

100.0%

The first characteristic of the portfolio to notice is that it is holding cash and CDs to cover multiple years of the RMD. That was partially a risk management approach and partially a response to the fact that the dividend flow was inadequate to replenish the cash that would have to be withdrawn in order to meet the RMD and basic living expenses. So, there is a limited opportunity to more finely tune (reduce) the cash holdings because the dividend flow can be increased to replenish more of future cash requirements. However, it would be an error in risk management to overestimate the potential for reducing cash holdings.

The second characteristic to note is that the portfolio has just over 9% of its assets in a mutual fund that yields very little in dividends and has been treated as irrelevant to the cash generation requirement. The growth mutual fund in the spousal traditional IRA can easily be replaced by investments in a taxable account and is less appropriate when focusing on cash flow. By contrast, the extended market fund in the primary traditional IRA provides valuable diversification since all of the individual stock holdings tend to be in large-cap companies. Thus, a reasonable approach is to sell the mutual fund out of the primary traditional IRA. It would be replaced with dividend-paying stocks. One option is to then purchase it in one of the Roth IRAs, perhaps moving some dividend-paying stocks from the Roth into the traditional IRA. For example, one of the Roths holds BCE (BCE) and BHP Billiton (NYSE:BBL) both of which currently pay reasonable dividends.

In my opinion, the individual companies in the traditional IRA portfolio represent very desirable holdings. In many instances, when they were acquired their yields were much higher. However, as their growth potential and desirability as holdings became more widely recognized, their P/E ratios were bid up, and their yields declined. Higher growth companies tend to command higher P/E ratios. If the market decides that a company one acquired based upon its yield has a higher growth potential, the P/E will expand and the yield will fall. If, however, one purchased it understanding its growth potential, the expanded P/E is not a reason to sell. Absent the cash flow requirements created by retirement, the simple solution would be to simply hold the stock. In retirement, an alternate solution is to place them in a portfolio where the cash flow is not an immediate need. (That process of adjustment of the P/E can overshoot in both directions).

Microsoft (NASDAQ:MSFT) and Honeywell (NYSE:HON) are prime examples of long-run holdings that are currently highly valued in terms of price earnings ratio resulting in lower yields. Both, however, have demonstrated an ability to grow their dividends. Consequently, they are reasonable holdings in a dividend-growth portfolio, but they are better suited to a Roth IRA than a traditional IRA where the dividend yield has to meet the RMD. The next posting that will address the Roth IRAs will show that both stocks are already included in the Roth. Those holdings in the Roth represent the beginning of the process of shifting these two stocks to a Roth. That process will continue, and it would be very advantageous for it to accelerate. In the Roth, there are stocks that could potentially be moved to the traditional IRA.

Fortunately, there are stocks in the Roth IRAs that have higher yields. The issue in planning the adjustments is to avoid overly concentrating the traditional IRA in industries characterized by high dividends. For example, if the BCE is moved into the traditional IRA, it would be inappropriate to also have a full position in Verizon (NYSE:VZ). Similarly, since the portfolio already includes one oil company, moving Exxon (NYSE:XOM) would produce an overweight position in oil. The portfolio already includes two REITs so an additional REIT seems inappropriate. A pipeline company or a utility is an option. Despite a position in Healthcare Trust Of America (NYSE:HTA), a pharmaceutical or health care company is a possibility. Further, despite the cyclicality, and consequent risk to the dividend cut when investing in cyclical industries like metals (think BBL), another highly cyclical, high dividend stocks might be an option.

Ongoing Management Issues and Risks

The RMD is calculated as an ever-increasing percentage of the portfolio based upon life expectancy, but the objective for the portfolio is a dollar cash flow. There is an inherent contradiction there. It's a phenomena experienced by many retirees. It can create two management problems.

The first issue is unavoidable. As the percentage increases with the age of the retiree, it begins to require withdrawals that are sufficiently large that the remaining assets in a traditional IRA will no longer generate the desired income. To illustrate, if one had a portfolio of $500,000 and it generated income that was adequate for living expenses, at some point the withdrawal of the RMD will begin to reduce the $500,000. Consequently, the assets in the traditional IRA will no longer generate the income required. A common response is to move those assets to a taxable account, but that has an implication that is often overlooked. Because the assets are coming out of a traditional IRA in order to be placed in a taxable account, they will be reduced by the amount of taxes the individual has to pay on the assets. Continuing the illustration, if the RMD required a withdrawal that was $50,000 more than what was required, and eventually it could because it continually rises as a percent of the portfolio, that $50,000 will not all be available for reinvestment in a taxable account.

Keep in mind that the RMD is designed to drain the traditional IRA over the retiree's life. Thus, the retiree will eventually become dependent upon a very small portfolio. Continuing the illustration, if the income needed was $17,500, there is no guarantee that the RMD will generate that figure in combined earnings and sale of assets. It is taking an ever-increasing percentage of a portfolio that is fluctuating in value. The RMD is designed to provide income over a life expectancy, but it is not designed to provide any specific dollar value in income over any period of time, and certainly not over a lifetime. There is clearly an end-of-life or old age planning issue it doesn't help address. One is still responsible for taking steps to ensure adequate income even until death. Further, if one is providing for a spouse, one has to provide an income even after death.

The second issue that the RMD creates is less morbid; it doesn't involve death. As mentioned, the RMD requires taking a percentage of the fluctuating portfolio value. In some years, the RMD may be less than what is required for living expenses if the portfolio value has dropped. In other years, if the fortunate investor's portfolio has taken off, it may require withdrawing more than the income needed. The Roth IRAs provide the safety valve that can make managing either situation easier. If the RMD is too little, dividends from the Roth IRAs can be used to meet the income requirements. If the RMD requires more than is needed, the investor has to figure out what to do with that "excess money." Transferring it to a taxable account is an option discussed above. Another option, which I prefer, is to use some of it to pay taxes to re-characterize assets as a Roth IRA assets. In either case, the total value of the assets in the new location will be less due to taxes, but if more assets are in the Roth, any dividends or capital gains are tax-free, which partially compensates for the taxes paid when they were withdrawn from the traditional IRA.

An effort has been made to discuss the entire portfolio management issue without implying any major change in the mix of companies represented in the portfolio. Some mutual funds will be liquidated in order to acquire individual stocks as discussed above. Further, since some positions are being shifted between Roth IRAs and traditional IRAs, the positions may be expanded faster than would be implied by dividend reinvestment. As mentioned above, dividends are being reinvested in the Roth IRAs in order to eventually accumulate full positions in the stocks. If those holdings are moved to a traditional IRA, it may be appropriate to bring them up to the desired holding level at the time of the transition.

The risk is that the retiree will allow concern about meeting the RMD to cause the overall portfolio mix to change. It would be an error to restructure the portfolio to chase yield simply to avoid having to sell stocks to meet the RMD. Eventually, the need to sell assets in a traditional IRA will come no matter what.

Even if one avoids yield chasing, the investor should recognize that by restructuring the portfolio to place the higher-yielding stocks in the traditional IRA, there is a high potential that the volatility of each individual account will increase. There will be a tendency for the higher-growth stocks that are often more volatile, and in some cases more cyclical, to be in the Roth while the more defensive stocks will end up in the traditional IRA. Further, as discussed above, there is a risk that the traditional IRAs will become concentrated in industries characterized by higher yields. The industry concentration can create a risk and the higher-yielding stocks may also be more sensitive to interest rate risk.

Allowing the individual accounts to become concentrated in a single industry or in stocks with a single characteristic is manageable. However, it can introduce a higher probability of an unanticipated and detrimental development in one of the accounts. As should be clear from previous postings on the subject of buying stocks for a retirement portfolio, in my opinion, there is a higher probability of success if the investor can construct a balanced portfolio that includes stocks that respond differently to economic and market conditions. I think that applies to both the overall portfolio, and, also, it probably applies to any subset of the portfolio that is viewed and managed as if it were a portfolio.

There is considerable behavioral economic research that documents that investors' perceptions of risk are influenced by recent experience. In fact, there is considerable evidence that risk tolerance changes based upon recent experience. Consequently, viewing a portfolio that is performing poorly creates heightened risk of excessive trading in order to avoid the pain of loss. The conclusions of that behavioral economic research are totally consistent with the findings of research that tracks individuals' investment accounts. Thus, structuring the accounts to avoid concentration and the resulting volatility can be viewed as a risk-reduction strategy. The risk it is reducing is the risk of an investment mistake or, put differently, it's a way to avoid doing stupid.

Summary

Quite a few individual investments have been mentioned in this posting, but, hopefully, it's clear that the focus is not on the individual investments. Rather, the purpose of this posting is to illustrate some of the issues and responses appropriate to portfolio management if one has the objective of postponing the need to sell assets in a traditional IRA in order to meet the RMD. An alternative strategy that many advocate is to just focus on total return and sell down the assets as required. Eventually, the RMD will require the sale of assets or transfers in kind to a taxable account as the percentage of the portfolio required to meet the RMD increases. However, if one is satisfied with the holdings in the total portfolio, it seems reasonable to structure where they're held so that the RMD does not require a change in the portfolio mix.

This posting presents the problems in terms of the context of the total portfolio. Some of the options, like moving assets to the Roth IRA, are feasible because of steps taken to size the Roth and traditional IRA in preparation for retirement. However, most importantly, the whole issue is dependent upon having adequate retirement funds to structure the traditional IRAs so that they can cover all the basic living expenses. Thus, although the issue only arises in retirement, it is a product of retirement planning that has to be begun long before one reaches retirement. Hopefully, the discussion is couched in terms that are relevant to those in or soon approaching retirement. It is also relevant for those accumulating assets in both Roth accounts and traditional accounts.

Individuals with a long retirement planning horizon will eventually face the issues unless the regulations related to retirement accounts are changed. Further, as tax-advantaged retirement accounts have become less miserly in terms of the savings they allow, it becomes increasingly likely that future retirees who are still young can achieve retirement savings that give rise to the issues discussed. It's quite likely that all one has to do is take tax-advantaged retirement programs seriously, then eventually one will face the portfolio management issues discussed in this posting.

Your feedback is welcome

This entire posting and the subsequent one on Roth IRAs is totally couched in terms of portfolio structure. There are references to individual stock holdings. It should be understood that the references are not recommendations. In fact, readers should feel free to comment on any holding. I also invite authors to add references to any articles they've written on the individual holdings.

The focus of the posting is portfolio structure. In anticipation of those who would immediately point out that the portfolio is very light on bonds, your criticism is welcome. However, part of the explanation is that by using tax-advantaged savings programs, the portfolio has achieved the size that allows for severe market corrections to be manageable. To some degree, it's possible just to wait until the correction is over rather than to try to time rebalancing between bonds and stocks. Further, as I've discussed in other postings, dividend flows tend to be less volatile than prices. Thus, by focusing on achieving a dividend flow that exceeds cash requirements, the need to time rebalancing is less urgent. Part of the dividend flow can be used to acquire stocks during the correction.

Disclosure: I am/we are long GIS, TRP, KMB, CLX, UPS, DLR, T, AMT, LMT, QCOM, NVS, MSFT, UL, NNN, HTA, HON, CVX, EMR, BCE, BBL, VZ, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: While quite a few stocks are mentioned, they can be viewed as examples relevant to the portfolio management issue being addressed. The references should not be taken as recommendations. However, I am long positions in all of the stocks.
Hopefully, my discussion of how I'm addressing the RMD will be useful to others planning for retirement. Unfortunately, funding the Roth IRAs was a primary focus for too long. As I was doing it, and as with others who choose the approach of creating a significant Roth portfolio, there is benefit to considering the issues raised by this article as early as possible. In hindsight, the issue of getting assets into the proper portfolio would have been much simpler to address during the process of creating the Roth IRAs. My bad.