Brutal-truth financial planning conversations are clearly tough for clients and advisors alike. But Chris Wentzien, founder of Natural Bridges Financial Advisors, pulls no punches in never failing to raise the possibility of a “triple whammy,” as he calls it, striking his mass affluent clientele: three bad things hitting at once — like job loss, the stock market tanking and falling ill.
That multi-calamity is of course hammering many Americans now thanks to the coronavirus pandemic.
In an interview, Wentzien tells ThinkAdvisor how advance discussions help him to successfully advise pre-retirees and early retirees, including his identifying a variety of income-tax planning opportunities to preserve their wealth.
Such clients are in what the certified financial planner calls “the bridge years,” that interval before they collect Social Security and take required minimum distributions, when high earners’ tax brackets plummet because they’re no longer receiving paychecks.
During the pandemic, Wenzien, a CPA who is a member of the Alliance of Comprehensive Planners and president of ACP’s 2020 Board of Directors, hasn’t changed his approach to planning for clients in the bridge years. He had already advised them to keep emergency cash reserves and a guaranteed income stream built out at least five years.
Nevertheless, he is spending lots of time revisiting financial plans — in some cases tweaking them — and reviewing those emergency reserves and bond ladders too.
For bridge-years clients, in the window before their tax bracket rises — when they start collecting Social Security and taking RMDs — the planner advises to fill up lower brackets by, for instance, withdrawing funds from a retirement account or converting from a traditional IRA to a Roth IRA.
That keeps their tax bracket from spiking once income rises again, he says.
Other strategies he uses for tax planning during the bridge years are donation bunching and tax-loss harvesting.
ThinkAdvisor recently interviewed the tax-focused advisor, speaking by phone from his office in Santa Cruz, California; an email conversation followed on April 6. Wentzien creates a detailed tax plan for each client upfront. This, he says, prevents their arriving at tax time with shoeboxes full of statements and receipts but his not being aware of “the past year of their life.”
Here are highlights from our conversation:
THINKADVISOR: Which years are a client’s bridge years?
CHRIS WENTZIEN: The few years when they retire early or are semi-retired before starting Social Security and taking their RMDs. During that time, they need to make a number of financial planning decisions because if they were a fairly high earner when employed, suddenly their income goes down to virtually nothing.
What issue and opportunities does that present?
No longer employed, they have to rely on other sources of income. It’s a huge mindset shift. Many clients want to start Social Security right away because they don’t want to overspend their savings. But we advise them to wait till age 70 to take Social Security.
How else do you help clients through this transition?
Because their tax bracket can drop significantly before their tax rates go up again when they start Social Security and taking RMDs, we coach them and show them, for example, the benefits of pulling income out of retirement accounts because they’re [temporarily] in a lower tax bracket.
How many years are there to this period usually?
It varies from client to client. I have a client who’s 68 with a really big IRA. So we have [only] a couple of years’ window [of opportunity] if she delays taking Social Security till she’s 70. On the other hand, if someone retires when they’re 63, it gives them several more years of tax-planning opportunity.
Suppose that during the bridge years, a client has investments that throw off income?