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WEALTHTRACK
Tax-Efficient Investing: Optimizing Asset Location with Higher-Yielding Assets
Feb 3, 2024
Christine Benz, Morningstar's personal finance guru, discusses the impact of higher yields on retirement planning. Topics include adding a fixed immediate annuity to retirement plans, the importance of asset location, investing in defined maturity bond funds, iShares I bond Term TIPS ETFs, and implications of higher interest rates on portfolio returns.
25:48
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Quick takeaways
- Higher yields benefit bond investors in retirement planning, increasing estimated retirement returns and influencing safe withdrawal rates.
- Investors should prioritize tax-sheltered accounts for higher-yielding assets and consider municipal bonds to take advantage of higher tax-free yields.
Deep dives
Higher Yields and Retirement Planning
The rise in yields has significant ramifications for retirement planning. Higher yields benefit bond investors, as the income stream from bonds becomes a more significant portion of returns. While bond prices may experience short-term dislocation, higher yields should translate into higher total returns in the long run. Morningstar's research indicates that higher yields have led to an increase in estimated retirement returns, influencing safe withdrawal rates. Additionally, the recommended equity allocation for retirees has decreased, with an optimal portfolio ranging between 20% and 40% in stocks. Customizing asset allocation based on expected spending and considering annuities as a source of fixed income can provide added stability in retirement portfolios.
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