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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:

  1. Portfolio Longevity — How long does the portfolio last? Does it last through the client’s retirement?
  2. Sustainable Income — If the portfolio doesn’t last through retirement, how much of a client’s after-tax monthly income need will be met by their monthly income streams such as Social Security and pensions? Obviously, a retired teacher who has 95% of her monthly income need met by these sources is much less concerned than a retired upper manager whose Social Security is his only monthly income source and it’s only meeting 20% of his income need.
  3. Estate Value — If the portfolio does last through retirement, what is the net, after-tax estate value that is left behind to the people or causes your client cares about.

The Right Tech

New financial technology can deeply integrate retirement considerations in a process that is easy for both the advisor and the client to understand. Graphs and charts can visually demonstrate for clients, that retirement decisions should not be made in a vacuum and show how the different decisions interact. Advisors can even test the strategy against unexpected stress events like a down-market or an early death with the right tools.

With the right knowledge and technology, financial advisors can deliver smart, sophisticated retirement income plans that pull from many income streams, not just one, and add significant value to their clients’ lives.

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Joe Elsasser, CFP, CovisumJoe Elsasser, CFP, developed his Social Security Timing software in 2010 because, as a practicing financial advisor, he couldn’t find a Social Security tool that would help his clients make the best decision about when to elect their benefits. Inspired by the success of Social Security Timing, Joe founded Covisum, a financial tech company focused on creating a shared vision throughout the financial planning process. The firm introduced Tax Clarity software in 2016 and acquired SmartRisk in 2017.

Covisum powers some of the nation’s largest financial planning institutions and serves more than 20,000 financial advisors. Based in Omaha, Nebraska, Joe co-authored “Social Security Essentials: Smart Ways to Help Boost Your Retirement Income,” is a regular speaker at industry events and is frequently interviewed by trade and national media.