2. Tax-loss harvesting—This is a valuable tool in managing taxes, but the perception of its impact exceeds reality. The best way to improve after-tax returns is asset location. And asset location reduces how often tax-loss harvesting is necessary.
3. Tax-aware transitions—As investors consolidate accounts and align their portfolios with their target asset allocations, they must make trades. Decisions about what assets to sell and buy will tax consequences that they (and you) must consider in the context of the household portfolio to get the best results.
4. Optimizing Social Security benefits—The government provides an 8% bonus each year from a beneficiary’s full retirement age to age 70 for deferring Social Security benefits. It’s free money. And it’s critical to time Social Security benefits with the other moving parts I’m describing here. Here’s how to talk about this with clients.
5. Roth IRA conversions—Investors tend to benefit from lower tax brackets when they stop earning wages and begin to draw their income from other sources. Many can take advantage of Roth conversions to lower their tax liability if they choose the right time.
6. Required minimum distributions (RMDs)—The government says you must withdraw a portion of your tax-advantaged savings at a certain age. Investors need your help timing and coordinating RMDs within their households—and determining what to do with withdrawals, they don’t immediately need income.
7. Multi-account household rebalancing—Portfolios inevitably veer from their target asset allocations. The best way to right those ships is tax-smart, household-level, multi-account rebalancing.
8. Retirement income sourcing—Withdrawing or selling assets willy-nilly is a sure-fire way to spend more in taxes and have less income. Maximizing retirement income requires coordinating asset location, Roth conversions, tax-loss harvesting, tax-aware transitions, household rebalancing, and sequencing RMDs, Social Security filing, pension, and annuity income.
An independent analysis by EY confirmed the value of my tax-efficient methodology to investing and retirement income sourcing. Evaluating a hypothetical household of two 50-year-olds with $1 million in assets, EY found that applying practices to maximize tax efficiency produced a 40% decrease in taxes, 33% more retirement income and 45% increase in bequests.
When it’s time for decumulation, embrace technology. The financial plan is the road map when it comes to retirement income. Dynamic decumulation technology is Waze. We know that 10,000 to 12,000 people turn 65 every single day. Have you found the “Waze for retirement income” in your firm’s app store?
Paul R. Samuelson is the chief investment officer and co-founder of LifeYield.