Retirement income planning resembles popular cooking shows: Take these ingredients. Create a gourmet meal. The timer is running. Go!

Most retirees have what they need in the pantry—IRAs, 401(k)s, taxable brokerage and advisory accounts, Social Security, life insurance, and annuities—but don’t understand how to coordinate it all to create a retirement spread that is tasty, filling and nutritious.

So, they turn to advisors, whose old cookbooks haven’t kept up with software advances.

What’s The Biggest Enemy Of Maximizing Retirement Income? Taxes.
Evan Simonoff, editor-in-chief of Financial Advisor magazine, recently described four approaches to converting retiree assets into income that Wade Pfau analyzes in his new Retirement Planning Guidebook. Their views have merit, but each approach misses one critical technique: addressing taxes, the most significant potential deflator of retirement income. 

For years, my father, Nobel laureate Paul A. Samuelson, and I fielded questions from friends and family about succeeding as investors. My father was close to Jack Bogle and offered him the same advice over four decades ago—keep costs low, diversify, buy and hold, to avoid capital gains taxes for as long as you can.

People With A $500,000-$3 Million Retirement Nest Egg Benefit Most
After much analysis, my father and I understood taxes are the number one threat to maximizing retirement income. Sure, the very wealthy can reduce taxes on bequests with the help of tax and estate lawyers. But people who have set aside $500,000 to $3 million for retirement are another category. And they are your clients. They have much to gain and a lot to lose if they don’t have a strategy for addressing taxes.

My father’s and my advice may have helped those who were accumulating assets, but it was inadequate for the challenge of withdrawing assets for income in retirement. My LifeYield colleagues and I addressed that shortcoming. We developed software for advisors to help clients build tax-efficient household portfolios while accumulating wealth and then maximize retirement income through tax-efficient withdrawals.

Complex? Yes. Impossible? Not when advisors embrace advanced technology.

Coordination Is The Key To Maximizing Income
Over 13 years of showing advisors how to reduce clients’ tax bills, we’ve learned the secret sauce is in the coordination of the four key levers to improving outcomes: lower costs, manage risk, minimize taxes and optimize Social Security.

Many of the largest financial advisory firms have integrated our software. Advisors can show clients how to get the most out of their retirement savings with three alpha-generating actions:

1. Evaluate asset location while maintaining the asset allocation to reduce tax drag on holdings during accumulation. Asset location is more impactful than tax-loss harvesting. That’s needed too, but only after addressing asset location and asset allocation.

2. Organize withdrawals across all accounts to minimize taxes and determine the optimal drawdown sequence, including all holdings and income sources, like Social Security.

3. Maximize Social Security benefits by taking advantage of the 8% annual raise the government gives individuals between their full retirement age (which depends on their birth date) and age 70.  

Coordinating this translates into significantly more money for the client, advisor and firm.

Ernst & Young conducted an independent analysis of our methodology and concluded it helps advisors deliver significant gains in income for retirees. In the EY analysis, a hypothetical 50-year-old couple had saved $1 million for retirement. Using traditional asset allocation, filing for Social Security at 65, and liquidating assets to support spending, they’d have an after-tax annual income of $109,628. 

But the same household could have an after-tax income of $145,967 if it applied our approach. That’s a 33% improvement over the traditional method of whipping up retirement income from various bowls of assets.

Record numbers of people are retiring. Many are leaving work earlier than they’d planned and could be missing out on their peak earning years. And, they’ll have longer retirements. They will relish the news their advisor can generate more income with this approach.

Tip #1—Use Tax-Smart Asset Location
I consider asset location one of the essential services advisors must offer clients today. Tax-smart asset location contributes the most significant part of that 33% improvement. Advisors should evaluate a household’s entire portfolio for tax drag and place tax-inefficient assets in IRAs and tax-efficient holdings in taxable accounts while maintaining the target asset allocation.

Software can scan all portfolio holdings and recommend tax-lot-level trades to shift assets and improve overall tax efficiency, leading to more accumulation and more retirement income.

Tip #2—Create And Optimal Sequence Of Withdrawals
If advisors have used tax-smart asset location and allocation during accumulation, clients will have more money available for distributions in retirement.

Of course, advisors can rely on their judgment to recommend asset location and allocation, the best time to file for Social Security, how to sequence withdrawals and coordinate all the above. But that would be hubris. Coordinating the various assets, accounts, and income sources is too complex (read my perspective) to leave this delicate unwinding of assets to assumptions and hope. And trying to anticipate tax law changes is a loser’s game.

Tip #3—Coordinate And Defer Social Security Benefits
Few advisory clients rely on Social Security for their total retirement income, but most consider it a foundation they built by paying taxes for 40 years or more.

Remember: Clients can earn 8% per year between their “full retirement age” and age 70. Many Social Security tools can analyze different filing strategies for household members and suggest an income strategy that minimizes taxes and maximizes Social Security benefits.

With some software, advisors can show clients how to fill any income gaps while adopting the filing strategy to provide them with the maximum possible Social Security benefit. Some clients may choose to convert some assets into an income annuity. As Simonoff and Pfau wisely note, many clients crave security.

Maximizing retirement income is complex—and rewarding. It’s the holy grail of financial advice. Do you think investors who learn from someone else they can enjoy 33% more retirement income might look for a new home for their assets?  

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