Lawmakers are debating the nature and scope of tax increases to fund President Biden’s “Build Back Better” plan. If they can agree on a plan, it could mean higher marginal tax rates for earned income and capital gains.
The expression goes, “You can’t worry about what you can’t change.” But as a financial advisor, you can sharpen your approach to help your clients worry less and have more money.
My colleague Paul Samuelson, chief investment officer at LifeYield, wrote recently that overwhelmingly, taxes are the biggest threat to maximizing retirement income. In that case, focus on what you can do to help clients manage the levers of cost, risk and taxes—especially taxes—as they worry about, prepare for and enter retirement.
Here are three simple but essential steps to help maximize your clients’ retirement income, reduce the taxes they pay so they have more money. The reason I say they are “simple” is because technology is here to help you.
Step 1: Free Money From The Government
The first question investors ask when thinking about retirement is: “When should I file for Social Security and how?" Be ready to answer.
The government rewards workers with an 8% annual "bonus" in benefits between ages 66 and 70—it's a slightly smaller annual percentage increase before 66. Still, it adds up. Today, the average increase in benefits from waiting to age 70 to file for Social Security is more than $140,000 over a 10-year projection. Those who wait to file will benefit from the cost-of-living adjustment of 5.9% for 2022. Waiting equals “free money.”
Of course, deferring may not be best for every client, and individual cases will vary. That explains why using software is critical: To model scenarios for filing for Social Security and for filling gaps between income their assets can supply and what they may need to do, such as consider annuities, investment income strategies or life insurance.
Step 2: Use Tax-Smart Asset Location
Once advisors calculate potential Social Security benefits, clients ask, “What should I do now?” And their next question is, “What should I do with my 401(k) and IRA rollover(s)?”
Investors nearing retirement consolidate assets. And it’s no wonder: the portfolios of clients nearing retirement are mind-boggling. Their portfolios are the result of 40 years of evolving policy and regulations for employee benefits, investment management and taxation.
Software can help you advise clients on how to locate assets in accounts that will the greatest tax efficiency. Advisors using asset location software can help clients realize an average benefit of another $150,000 in income over 10 years.