Year over year, investors say that taxes and saving enough for retirement are among their top three financial concerns according to our fourth annual Advisor Authority study of more than 1,700 RIAs, fee-based advisors and individual investors. This year, managing taxes and planning for retirement may become further complicated as advisors and their clients must navigate the nuances and changes related to the Tax Cuts and Jobs Act (TCJA), the most dramatic tax reform package in nearly three decades.
Roughly eight in 10 RIAs and fee-based advisors (79 percent) are adapting their approach to tax-advantaged investing in response to tax-reform and the same number say that the majority of their clients will benefit from tax reform—while less than six in 10 investors (56 percent) believe they will benefit—according to our most recent Advisor Authority study.
Whether clients win or lose as a result of these reforms, taxes will remain one of the biggest investing expenses your clients can face, especially for the HNW and Ultra HNW, who may owe as much as 40 percent or more on income and investment earnings every single year, when Federal and State taxes are combined.
Clients’ Concerns Create Opportunity
Taxes can be a drain on the performance of portfolios you’ve designed to help clients accumulate for retirement and generate retirement income. In fact, investors say taxes are the number-one macro factor that will most adversely impact their portfolio, and advisors say it is the number-two factor, according to Advisor Authority.
Reinforcing this point, a recent Nationwide Retirement Institute survey found that more than one-third of retirees (37 percent) say they did not consider the impact of taxes when planning for retirement, potentially losing the ability to save for six or more years of additional retirement income. The survey also revealed that the overwhelming majority of those nearing retirement (82 percent) want to learn more about the impact of taxes on their plans to prepare for and live in retirement.
Where your clients see uncertainty, you have an opportunity to differentiate your services and expand your practice by addressing their top concerns through tax-efficient retirement planning. Research including Advisor Authority has shown that advisors who serve clients using a more holistic approach such as tax-efficient retirement planning may have a greater opportunity to create a competitive advantage that will attract new clients and retain current clients.
The Foundation Of A Tax-Efficient Retirement Plan
Tax-efficient retirement planning begins by determining where you should invest different types of assets in order to maximize long-term wealth creation during the accumulation phase and provide increased control and flexibility for generating income in retirement. While there are many solutions, the foundation for helping clients minimize the impact of taxes and maximize accumulation potential is using asset location. This simple but effective strategy leverages tax deferral to potentially increase returns by 100 bps or more—without increasing risk (Source: Ernst & Young, Asset Location Strategies: A key to tax-efficient investing, 2014).
Just as asset allocation is fundamental to diversify a clients’ portfolio across various asset classes to meet long-term goals based on their risk tolerance and time horizon, asset location is fundamental to diversify a clients’ portfolio across taxable, tax-deferred and tax-free accounts to help control how much they pay in taxes—and when those taxes are paid. Locating assets to minimize taxes and maximize after-tax returns not only increases accumulation potential—it can also help a client generate more income, possibly extend the life of their retirement income plan for more years and potentially leave a larger legacy.