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.