Many investors choose to sell shares of stocks in their portfolios every month, or perhaps every quarter, to raise the cash they need for retirement income. This isn’t necessarily a good or a bad method for generating retirement income, but there are three things investors should consider when taking this approach.
1) Tax Implications of Selling Stocks
Investors should be mindful of realizing capital gains in their portfolios due to selling stocks. If the shares are being sold at a gain, it could mean having to foot a sizable tax bill the following year.
These gains might be offset by selling stocks at a loss in the same year, but some investors may not have a lot of positions that carry a big loss—meaning you’ll be stuck with the tax bill. The current capital gains rate for investors filing jointly and making less than $457,600 is 15%, while anything above that threshold is taxed at 20%.1
2) Selling Shares of Stock May Incur Transaction Costs
Investors may be charged a commission every time they sell shares of stock. There isn’t a universal system regarding trading commissions charged by brokerage firms - some charge rather steep fees for each trade, while others charge very little.
A discount brokerage firm might charge as little as $10 for a common stock trade or even less, while a full-service might easily charge $100 or more per trade. In some cases, commissions are waived as part of the management fee you pay,2 so you can make unlimited trades.
3) The Importance of Asset Allocation
One of the more important decisions you and your financial advisor will make is how to allocate your portfolio. This decision should take into account your long-term goals, retirement income needs, and your comfort with risk.
As you sell shares of stock to raise cash in your portfolio, there is a risk that your portfolio will become misaligned from your original asset allocation. This could affect your portfolio’s ability to weather volatility in the market as well as affect your ability to reach your long-term goals.
Investors Should Explore Different Retirement Income Options
Selling stocks to generate retirement income is just one way to do it. There are other ways investors can generate income in their portfolios, such as through holding different types of bonds or even exploring how dividend paying stocks can provide extra cash needed for retirement.
WrapManager can help you explore these options while also building you an investment plan to help you navigate your way through retirement. Call one of our Wealth Managers today at 1-800-541-7774 to learn how. Or you can get started now by answering a few questions here.
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