You may be fielding calls from clients rattled by prognosticators screaming (and tweeting), “Taxes are going up! Inflation is going to run away with your retirement nest egg!” 

It can be difficult to lower clients’ blood pressure. But you can, and you should. I don’t think there is cause for clients to worry or make moves today. But as debate rages in Congress and in the media, this is an opportunity to share some lessons I learned over four decades of studying the markets under the tutelage of my father, Paul A. Samuelson, a Nobel Laureate in economics.

He and I talked often, especially in challenging times, about taxes and inflation, the enemies of wealth accumulation and maximizing retirement income. I can share some of what I learned from him, so you can help educate your clients. In future columns, I’ll expand on how you can help clients maximize their income in retirement by coordinating multiple accounts and how to deal with inflation.

Four Tax Proposals And What They Mean To Your Clients
President Biden’s first proposal involves taxing dividends and capital gains at the same rates as ordinary income. This strategy would be unwise, as it would incent companies to retire equity and issue risky debt. High leverage almost invariably leads to poor operating performance.  

Your clients need to avoid risky, high-yield bonds. Period. They also need to avoid realizing capital gains now, because current tax rates may be lower than next year’s but still higher than their tax rates in retirement.

A second proposal is more likely to move ahead. It involves increasing tax rates on interest income and capital gains for very high-income households. The Medicare Investment Tax currently adds 3.8% in taxes to support Medicare, and a proposed Childcare Investment tax of 5% could support childcare programs. Increased tax rates should also encourage some investors to substitute municipal bonds for taxable bonds.

Of course, my father would have envied how low even proposed investment tax rates are compared to what he paid during most of his adult life.   

A third proposal would increase tax rates on ordinary income for high-income households. Again, should this be enacted, you can guide your clients toward options to decrease their tax liabilities. Those options include maximizing qualified contributions to 401(k) accounts and accelerating charitable donations of appreciated stock.

A fourth proposal involves a higher corporate tax rate and a minimum tax rate on earnings shifted to low-tax countries. This may increase taxes for some companies, but your clients have no obvious way to trade on it.

My Advice: Pivot Client Conversations To How To Reduce Their Taxes 
Clients should stay focused on ways to reduce their taxes while they are working. Wage earners in all federal tax brackets can maximize 401(k) contributions and gifting appreciated stock. Households in low (10% and 12%) and medium (22% and 24%) federal tax brackets use deductions to absorb some of their tax liability.

High-income clients may ask you about taking voluntary withdrawals from IRAs to fund Roth IRAs. This strategy is unwise and unnecessarily expensive because of the taxes they’ll pay. Roth conversions make sense as members of a household transition into retirement, their wages disappear, and they aren’t yet eligible for their full Social Security benefits.

You can help clients reduce their investment taxes in four ways, by:
1. Holding in their IRAs highly taxed assets, like high-yield bonds and high-turnover stocks that realize a lot of short- and long-term gains.
2. Substituting (especially in-state) municipal bonds for taxable bonds.
3. Delaying realization of gains on stocks for a long time.
4. Harvesting losses on stocks.

Many clients will be surprised they can reduce their investment taxes using their IRAs, even though investment income and gains are not taxed in them. While clients will have invested in municipal bonds, they are likely to underestimate their tax rates on interest income, especially if they have high earned income.

It takes discipline and understanding that retirement almost always means a drop in income for clients to accept they should delay realizing gains on stocks. Even when well-prepared for retirement, many clients find Social Security, pension, and annuity income only partially replace what they earned in wages. My father held onto Berkshire Hathaway stock for decades, and its cost basis stepped up at his death.

Harvesting tax losses are table stakes for investment advisors. However, many clients have few tax losses after years of a bull market. Advisors who delay gains for their clients build up an inventory of unrealized gains in portfolios, leaving almost no capacity for realizing losses.

Help Your Clients Who Lost Jobs Or Income Due To The Pandemic
The upheaval of the Covid-19 pandemic led to many early and unplanned retirements. If you have clients in this situation, they need your advice—urgently.

First, they need to responsibly withdraw from their retirement accounts. Premature retirement usually means a loss of 5% of spending from account withdrawals for each year of lost wages. And clients should not give in to temptation to file for Social Security early, before age 70, when they are eligible for the maximum payout. 

My father was always concerned about the effects of the economy on employment and retirement income. He served many years on the board of TIAA-CREF in consideration of his colleagues’ retirement security. He didn’t, though, walk in your shoes and need to advise individuals on how much they can afford to spend and withdraw from their retirement accounts.

Advisors who address their clients’ needs with empathy, knowledge and foresight, will win their clients’ trust. Incidentally, advisors who help clients understand the intricate levers of retirement saving and spending also stand a better chance of clients choosing them for management of all their households’ accounts.

Paul Samuelson is chief investment officer and co-founder of LifeYield.