Advisors have a “fantastic opportunity to raise the bar” on the advice retirement clients are receiving, William Meyer, founder and managing principal of Social Security Solutions, said Tuesday.
Meyer led a webinar for Retirement Experts Network on designing withdrawal strategies optimized to generate the most income for clients.
Managing money for clients who are already retired is different from managing clients who are still working because withdrawing money gets them “out of balance,” Meyer said.
“If you’re withdrawing money, you’re making asset location out of whack,” he said. “If we put holdings in the right account, when you withdraw you can reduce” clients’ tax liabilities.
Coordination of withdrawals is a lot more important for retired clients, he noted. “By withdrawing from the wrong place, you can increase someone’s Social Security taxes,” he said. “If you withdraw in the wrong sequence, increasing someone’s taxes from 50% to 85%, it really makes a huge difference.”
Furthermore, if a withdrawal or Roth conversion drives clients into a higher Medicare threshold, they could find themselves paying as much as 45% more in premiums, he said.
Conventional wisdom on retirement savings drawdowns is misleading, he warned. The accepted strategy is for clients to withdraw from their taxable accounts until those assets are gone, then turn to their tax-deferred accounts, followed by tax-exempt accounts.
“That is the standard rule of thumb,” he said, but this default sequence “can be beat in a very material way” by withdrawing enough from tax-deferred accounts to reach the top of the “15% tax bracket and take some taxable [income] until it’s exhausted, and then continue the sequence.”
Additional income can be put into a Roth every year, he said. “Compared to the conventional rule of thumb that almost all of you are using, we found an additional two and a half years” worth of income, he said.
Another strategy is to convert part of clients’ savings to a Roth RIA with a recharacterization, he said. “When you do a Roth conversion, you can essentially do a do-over,” he said. He suggested doing two Roth conversions, one with a stock position and one with a bond position, and convert the underperformer back.
“We have to get beyond the conventional rule of thumb that we are currently using,” he said.
Meyer’s firm created software, SSAnalyzer, that runs sequences on how clients should draw down their retirement assets.
For example, a 62-year-old client who expects to live to age 85, and who has a spending goal of $5,000 per month, and a $600,000 portfolio could receive an additional year of income by reversing the conventional wisdom and withdrawing from tax-deferred accounts first, followed by tax-exempt and taxable accounts, Meyer said.
Lower asset clients can benefit from this strategy because Social Security benefits will be taxed less when they start receiving benefits, and they reduce their required minimum distributions, according to Meyer.