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Brandon Renfro is a fee-only financial advisor and Assistant Professor of Finance at East Texas Baptist University in Marshall, TX. He teaches courses in investments, personal finance planning, money, banking, corporate finance, international finance, and economics.
Brandon has an undergraduate degree in finance is from Southern Arkansas University. He earned an MBA at Texas A&M University in Texarkana and a Master of Science in Finance at Texas A&M University in Commerce, TX. Brandon then went on to earn a Ph.D. in Finance from Hampton University.
He also holds the Retirement Income Certified Professional® designation from The American College of Financial Services, and is a Certified Financial Planner®.
In addition, since 2009 Brandon has been an Infantry Captain in the 39th Infantry Brigade in the Arkansas Army National Guard.
With regards to retirement planning for young people, what do you believe is the best retirement savings vehicle and why?
I’m a big fan of Roth accounts for younger investors. Preferably, young investors would have access to a Roth 401k or 403b but if they don’t, a Roth IRA is good too. The employer plans are preferred because of their higher savings limits. However, not all employers provide Roth options. The benefit of a Roth for a younger saver is the compounded tax advantage.
For middle-aged adults, what would be most effective for retirement planning?
The biggest thing for a middle-aged person to consider is their savings rate. At this point, they should be in their stride regarding their career. While it’s best to start saving early, that isn’t the reality a lot of people experience. Figuring out life, education, career, and family takes a lot of focus and retirement saving can end up as an afterthought. Because of that, most people will need to save a good amount in those peak earnings years of middle age. Middle-aged savers should be maxing out retirement accounts when possible, and possibly even saving additional money in a taxable account.
As a Certified Financial Planner® and Retirement Income Certified Professional®, are there any available retirement accounts that you would advise against, and why?
There aren’t any retirement accounts that I categorically dislike.
What are the three most important retirement withdrawal strategies that people should know, and can you elaborate on each of them?
The 4% rule is where most people will start. The application of the 4% rule is that you can withdraw 4% of your retirement account in the first year, adjust for inflation each year, and your money should last for at least 30 years. I like to focus people on the process of determining the 4% rule rather than just the conclusion. I think that’s an important consideration because the 4% rule isn’t a one-size-fits-all approach. You need to tailor the analysis to fit your condition. An example of what I mean by that is the 30-year period. Maybe that fits you and maybe it doesn’t. You might only plan for a 20-year retirement, or you may be young and planning for 40 years in retirement. You’ll need to adjust that withdrawal rate accordingly.
Another common withdrawal method is to take a variable withdrawal. This process provides for varying withdrawals with fluctuations in your account value by a predetermined formula. The benefits of a variable approach are both mathematical and behavioral. If you see that your account drops, reducing your withdrawal may help ease the stress and provide you with some peace of mind. On the other side, if your account value steadily climbs, it makes sense to withdraw more.
I also like the flooring approach. With a flooring approach, you use some type of fixed return investment to lock in a minimum level of income for a given period of time. You can use zero-coupon bonds, fixed annuities, and even fixed Social Security benefits to “lay the floor” so to speak. The benefit here is that you have a known amount of income that isn’t tied to investment performance.
Could you elaborate more on marginal versus effective tax rates, and how this is applicable to people reducing their taxes in retirement?
The key point here is to recognize that you don’t have just one tax rate to think about, especially in retirement. Your marginal tax rate is the rate that will be relevant to the next dollar of taxable income. The effective tax rate is your average tax rate. Those two measures differ because of our progressive tax structure.
Typical “tax-planning” involves just considering a single year’s tax bill and analyzing decisions in a single period. However, in retirement, we can most effectively reduce our overall tax burden if we think of the multi-year effects. For example, Roth conversions. We often purposefully drive up the current year tax bill by doing a Roth conversion, but are able to reduce the multi-year tax burden. If we only thought of taxes one year at a time we wouldn’t do Roth conversions.
What are the most important things that the average American may not know about their 401k?
1) You can avoid the early withdrawal penalty on a 401k if you are retired and at least 55 years old. If you retire at 55 you can save yourself a 10% penalty by withdrawing from the 401k rather than rolling it into an IRA and withdrawing from there.
2) Net unrealized appreciation on company stock can save you a lot in taxes. I wouldn’t encourage you to load up on company stock to take advantage of this, but if you are nearing retirement and have accumulated a decent amount of your employer’s stock it’s worth paying attention to. NUA rules allow you to roll employers stock out of your 401k into a taxable account and pay income tax only on the cost basis of that stock. Any unrealized appreciation is taxed as a capital gain only when you sell the stock. In contrast, if you withdrew the same value in cash you would owe income tax on the entire balance.
You’ve mentioned being a proponent of index investing. Could you elaborate more on the advantages and any limitations of this passive strategy?
Index funds allow you to easily and efficiently diversify across large segments of the market. You save a lot of time because you don’t have to go out and pick a bunch of individual securities. They are cost-effective because the internal expenses are very low, especially for ETFs. There are index funds for virtually any slice of the market you want to invest in, and any way you can think to construct an index.
What sort of insight would you provide to investors who want practical guidance on how to create a diversified portfolio for a comfortable retirement?
Start first with the broad asset allocation that fits your need for return and appetite for risk. You have to balance those two competing aims. However, keep in mind that you want this portfolio to provide you with income for your entire retirement. If you get too conservative, your money may not last as long as you need it to.
Next, break each component down into the market segments that you want in your portfolio. For example, maybe you want to hold bonds for 40% of your portfolio. You still need to decide which bonds that will be. You might decide to hold 20% in corporate bonds, 10% in Long-term treasuries, and 10% in TIPS.
Then, select index funds to fill the various market slices you want to include in your asset allocation. You can build a very diversified portfolio with just a few different funds. Again, there is an index fund to track pretty much any asset class you want. Be mindful of overlap in similar funds. There isn’t any reason to hold two different index funds that both track the S&P 500.
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