As a wealth management firm, we have many clients who have reached the distribution phase of their financial lives and are withdrawing funds from their investment account. Many of these withdrawals are from taxable accounts and others are required minimum distributions (RMDs) from traditional IRAs or employer sponsored retirement plans. Our March 2021 Client Question of the Month will address the optimal way to withdraw funds from an investment portfolio.

At Winthrop Wealth, we apply a total net worth approach to wealth management that combines both comprehensive financial planning and investment management. While financial planning and investment management can function successfully on their own, the combination produces a whole greater than the sum of its parts. Optimal portfolio withdrawals offer a clear example of the power of having a comprehensive financial plan working in concert with investment management.

Financial Planning
One of the most common and costly mistakes an investor can make is to not plan for a scheduled cash flow need in advance, and then fund it by selling equities AFTER a significant market decline. Selling equities after a market decline effectively locks in losses and makes it more difficult for the portfolio to recover once the market rebounds. Without a financial plan, an investor faces serious risk of having an improper asset allocation at an unfortunate time.

Our comprehensive financial planning process defines cash flow needs, optimizes account structures, considers tax minimization strategies, and determines the appropriate asset allocation based on the clients’ willingness and ability to take risk. Once the plan is complete, we will generally invest at least two years’ worth of estimated cash flows in short duration, high quality, liquid, fixed income securities. These holdings are designed to provide stability and some income to the overall portfolio. No matter what occurs in the markets, these holdings are readily available to fund cash flows as needed.

Investment Management
We like to say that the financial plan drives the investment strategy. Based on the output of the financial plan, we will invest the clients’ assets in a well-diversified portfolio constructed with a methodology based on prudent risk management, asset allocation, and security selection. We continue to believe this is the best approach for helping our clients pursue their unique goals and objectives.

By actively managing the portfolio, we can let the market dictate whether we fund cash flows from the stable fixed income holdings or from the equity side of the portfolio.

When equity markets are strong: we will fund distributions from the equity side of the portfolio. This allows us to trim stock holdings into strength and provides an opportunity to rebalance the portfolio closer to our target asset allocation levels if there was any drift. For taxable accounts, we will sell specific tax lots and monitor realized gains closely.

When equity markets are weak: we will fund distributions from the stable fixed income holdings. Ideally, these fixed income holdings will have kept their value despite any market turmoil. This further provides an opportunity to move the equity allocation higher toward target levels in a period of market weakness. During these times, we remind our clients about the power of a long time horizon and we avoid the need to sell equities after a market decline.

60/40 Portfolio Return
The following graphic is helpful to understand our approach to funding distributions. The chart displays both the Rolling 12-Month Percentage Return and Total Return of a hypothetical 60/40 investment portfolio from 1976 through 2020. A 60/40 allocation would generally be appropriate for an individual taking moderate distributions from their investment portfolio (reminder: the financial plan will determine the optimal asset allocation based on the clients’ unique circumstances and willingness and ability to take risk).

The Rolling 12-Month Percentage Return portion shows that returns can vary significantly. Over the timeframe, annual returns ranged from -25.2% to +48.8% with an average of about +10.5%. When returns are strong, we will generally trim from the equity side and when returns are weak, we will fund distributions from the stable fixed income. Each time we fund a distribution it gives us another opportunity to rebalance the account back toward the target asset allocation.

The Total Return section demonstrates the value of a long time horizon, which is important to remember during periods of volatility. A $10,000 investment into the hypothetical 60/40 portfolio in 1976 would have increased to over $800,000 at the end of 2020.

Planning for and funding distributions from the correct asset class can make-or-break a financial plan and investment portfolio. Nearly everyone will need to withdraw funds from their portfolio eventually, so having a strategy and defined process is critical.

For many of our clients, we manage close to one hundred percent of their investable assets. Of course, investments held outside of our direct control and/or other assets, including, real estate, business ownership interests, restricted stock, insurance policies, and annuities are always taken into consideration. We proactively manage wealth by identifying opportunities and implementing a risk-based financial planning and investment management process. Our talented and experienced team provides solutions for every aspect of our clients’ financial lifecycle.

Please see our December 2020 Client Question of the Month for several charts that support our investment philosophy by demonstrating that: the stock market goes up over time, market declines are common, the value of time, and the benefit of portfolio diversification.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All indexes mentioned are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Financial planning is a tool intended to review your current financial situation, investment objectives and goals, and suggest potential planning ideas and concepts that may be of benefit. There is no guarantee that financial planning will help you reach your goals.

Likewise, it is important to remember that no investment strategy assures success or protects against loss. Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk which you should be prepared to bear.

Rebalancing a portfolio may cause you to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.