Successful advisors are now adopting a "carton" approach to retirement assets.
By Joe Elsasser|November 20, 2019 at 05:00 PM|The original version of this story was published on ThinkAdvisor
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The term “nest egg” has commonly been used to describe a sum of money that was saved for the future. However, the term doesn’t actually describe retirement income for many Americans anymore. There has been a shift. People have multiple options for saving for retirement now: 401(k)s, 403(b)s, IRAs, Roth IRAs, fixed and variable annuities, home equity, certificates of deposit and more. Additionally, many working Americans receive some retirement income from either Social Security or pensions. Many people actually have a carton of retirement income options instead of a single nest egg.
Additionally, many people nearing retirement naively believe that a retirement strategy is as basic as claiming Social Security and making 401(k) withdrawals. It might be that simple for some, for many people the interactions between the different income streams can create some real headaches later in retirement. A modern retirement strategy should reflect multiple income streams and account for any unexpected challenges along the way. (This paper covers these topics in more detail.)
Strategies for Tapping Into Social Security
The foundation of any strong retirement strategy is determining the optimal time for a client to claim their Social Security benefits. Despite the fact that retirees can substantially increase the size of their Social Security checks if they want to claim, the vast majority of people claim as soon as possible. A good advisor recognizes that the best option for many clients is to consider using other income sources first in order to delay those benefits for at least one member of the household, since Social Security is guaranteed to last for a client’s life, provide potential survivor benefits, and keep up with inflation. It’s also important to consider not only how and when Social Security is taxed, but also how delaying and combining it with other taxable income sources at different times can ultimately impact the client’s spendable income.
Strategies for Creating a Tax-Efficient Retirement Plan
The United States’ income tax system is progressive — as income increases, the rate that people pay increases as well. Calculations are based on ordinary income and grouped into seven income brackets. You might assume that you simply add up a client’s taxable income and multiply it by the appropriate tax rate. However, the American tax system is complex and recent tax reform has lowered some brackets and significantly increased the size of the standard deduction. Instead, advisors should focus on the “effective marginal tax rate”—the rate that is actually paid on each additional dollar. Capital gains and qualified dividends, deductions and credits, and Social Security can all impact a client’s effective marginal tax rate and influence what a client actually pays in taxes.
Account for the Unexpected
A good retirement strategy should also account for the unexpected or stress. What if the market crashes? What if one member of a couple needs long-term care, or dies earlier than expected? You need to consider the effect of these complications on the strategies you create to ensure that each income source will be unharmed so your clients can use them at the right time.
Determine the Success of a Retirement Strategy by Analyzing:
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