Where do you start? Financial advisors are pressed for time and increasingly managing larger blocks of assets. It’s no wonder our industry stuck with the 4% annual withdrawal rule of thumb, notwithstanding that it doesn’t:
• Deliver the income needed for most people.
• Reduce unnecessary taxes.
• Create a strategic roadmap for what assets to sell when.
No, advisors need a different game plan that explains the timing and amounts of multi-account transactions and withdrawals. This used to be impossible, owing to the complexity of tax rules and vagaries of life (how long will I live?). But not anymore.
The technology is available today to empower advisors to create customized withdrawal plans for each client household. Those plans competently manage tax brackets, tax harvesting activity and Roth conversion strategies so that clients attain their financial goals.
This is not a time in life when people tolerate uncertainty. Clients want to know what to expect and what to do. You meet clients where they are with a multi-year plan that includes estimates of potential tax benefits from a series of planned account withdrawals.
Tax Alpha Frees Clients From Worry
If you’re the advisor, you can generate tax alpha in seconds using software. You can also advise clients reliably on:
• The best timing to file for Social Security benefits (including a couples’ strategy).
• When it is wise to tap an annuity for income.
• Determine the value of Roth conversions at different points in time.
• When and how to minimize the tax effects of RMDs.
One of our early LifeYield clients asked for this tax alpha-creating methodology to be scrutinized by an independent firm. EY conducted the analysis and found our methodology improves financial outcomes by 33%.
When you deliver tax alpha, you win, your clients win. You turn their retirement income from a sum game (1+1=2) to one that outperforms expectations (1+1=5) because of the multiplicative value of tax efficiency.
Paul R. Samuelson is the chief investment officer and co-founder of LifeYield.