Is it Time to Clean up Your Portfolio for The New Year?

For many of us, a portfolio of investments is like a junk closet: It starts out organized, but gradually collects random stuff until it needs some serious cleaning.

But unlike cleaning a closet, cleaning your portfolio can save (or even earn) you money.

The first step is to look at the number of accounts you have. Over our lives, we tend to accumulate accounts as we move and change jobs, leaving us with many we don’t need. So, go through your accounts, and consolidate.

First, close down all but one brokerage account for taxable assets. Putting investments in one account makes it easier to monitor your asset allocation, which is your mix of stocks, bonds, and cash.

Additionally, doing so could lower fees. Ensure you are dealing with a stable brokerage that is or will quickly become familiar with your financial situation.

Then, roll all of your tax-deferred retirement assets into one plan. In addition to allowing you (or your advisor) to better monitor your asset allocation, consolidating 401(k) and Individual Retirement Accounts (IRAs) will make it easier to calculate the required minimum distributions you must take from those accounts once you pass age 70 1/2.

Once your accounts are consolidated, you’ll want to look at your investments, asking if they align with your long-term goals. At this point, it’s important to discuss your objectives with your advisor, particularly when you’re thinking about selling, as doing so can result in capital gains and losses, and a potential tax impact.

Cashing Out Your Retirement Plan Can Cost You

If you’re retiring, taking a position with a new employer, or have decided to leave your job for a wide variety of other reasons, you’re faced with a major financial decision: What should you do with the money in your retirement plan?

One option is taking your savings as a lump-sum distribution, and not investing them in another tax-deferred plan. If you need cash immediately, this will certainly work. Some investors’ do just this, reasoning that it’s better to pay taxes now rather than later.

Major tax ramifications

But if you take your savings as a lump-sum distribution and don’t invest them in another tax-deferred plan, you’ll pay the price: Uncle Sam is waiting to take your money. Twenty percent of your savings will be withheld immediately to pay federal income tax, and you’ll have to pay any remaining federal tax, as well as state and local taxes, when you file your annual income tax return.

Additionally, if you’re under age 59½, you may be subject to a 10 percent early-withdrawal penalty. Then, whatever is left won’t continue to grow tax-deferred.

Hypothetical example: $112,803 versus $181,940

For example: Let’s say you decide to take $100,000 as a lump-sum distribution and invest it in a non-tax-deferred investment. You pay a $10,000 early-withdrawal penalty and (if you’re in the 28 percent tax bracket) another $28,000 in federal taxes. That leaves you with just $62,000 to invest. Assuming an investment return of 6 percent compounded monthly, you would have $112,803 in 10 years.

But, if you keep the $100,000 in a tax-deferred plan, and the money grows at the same 6 percent compounded monthly, you’d have $181,940 in 10 years, significantly more than if you had taken a lump-sum distribution and paid taxes.

Of course, these examples are hypothetical; please consult your advisor for help in determining the course of action that’s best for you.

Understanding Adjusted vs. Unadjusted Returns

You’ve probably noticed that your mutual fund account statement shows two sets of figures for average annual total returns: one is adjusted and the other, unadjusted. What does this mean?

Unadjusted performance figures: Unadjusted performance figures show the performance of a fund during the time periods indicated, taking into account changes in share value, and assuming reinvestment of all income and capital gain distributions. They do not adjust for sales charges.

Adjusted performance figures: Adjusted performance figures use the same calculation as for unadjusted figures, but also factor in the effects of the maximum sales charge that can be applied to a certain share class. This might include the front-end sales charge, or a contingent deferred sales charge that applies when shares are redeemed within the first year of investment.

Which figure should you use? The Securities and Exchange Commission (SEC) mandates that mutual funds show both figures to allow investors a fair and accurate comparison between funds, or between a fund and a market index. But many shareholders wonder which number they should use to assess the performance of their individual investment.

The truth is that because both unadjusted and adjusted performance figures are standardized, you may find that neither precisely reflects your own investment experience. For example, front-end sales charges are sometimes reduced, so a figure adjusted for the maximum sales charge wouldn’t apply to you, nor would a figure that was totally unadjusted for sales charges.

Other relevant factors: Additionally, a number of other factors, not just performance, are relevant when you’re deciding whether to hold or sell a mutual fund. A fund that doesn’t have a high current return, for example, may still play an important role in your portfolio as a diversifier. If you are trying to decide, your best option is to seek advice from your advisor, who understands your individual financial circumstances and goals.

When Should You Take Your Social Security Benefits?

Most Americans are eligible to receive Social Security benefits as early as age 62, and many assume they must automatically begin receiving benefits as soon as they are eligible. But taking Social Security benefits is never mandatory, and you have some flexibility as to when you begin taking them.

Most people believe they should start taking benefits when they reach their retirement age. What that age is depends on when you were born. For many years, everyone’s “full retirement age” (also called “normal retirement age”) was 65. But beginning with people born in 1938, it started increasing. For people born after 1959, full retirement age is 67. (Find your full retirement age using Social Security’s calculator at )

However, you don’t have to wait until your full retirement age to start taking benefits. You can begin receiving them as early as age 62. But, in this case, the benefits will be reduced.

Alternatively, you could defer receiving Social Security benefits until after your full retirement age. In this case, your benefits will go up; the increase is a certain percentage for each month past your full retirement age.

So, should you start collecting benefits as early as age 62, wait until your full retirement age, or delay? The answer depends on several factors, but generally speaking, your best option is to seek advice from a professional. Discuss your choices with your advisor or contact your local Social Security office. (Call Social Security Administration at (800) 772-1213 to find an office near you.)