Decumulation

One of the main reasons retirees engage financial advisors is to help them save and invest while they are working primarily for retirement. This is the ‘accumulation’ phase of an investor’s life. Channeling income into taxable and tax-advantaged accounts and investments is critical to the ‘accumulation’ phase, but that is only half of the retirement equation. Once retirees stop working, they enter the phase called ‘decumulation’. Unfortunately, many retirees will fail to harvest the full benefit of their accumulated wealth because they continue to do what they always did in the ‘accumulation’ phase which does not work the same in the ‘decumulation’ phase.  

Let’s further define ‘decumulation’. Think of it as spending. The Ultimate Decumulation Plan is a type of income plan, the absolute best income plan for how to maximize the money you have saved. It is about how to get the most, and how to get it most effectively from what you have saved. It is… your plan for income when you are no longer working. Accumulation is the ‘saving’ phase. It is what you do in the working years. Think of it like you are scaling Mt. Retirement. Decumulation is the plan, the strategy that gets you safely down the other side of that mountain. It is the ‘spending’ phase. Believe me, just like mountain climbing, when it comes to retirement it is also… and truly, two different strategies. A word of caution; most deaths in mountain climbing occur on the way down. This is a greatly overlooked fact when it comes to the second half of the retirement journey, the spending or decumulation side of that mountain. It is no longer the same as going up!

During the accumulation phase, individuals focus on building and managing wealth to maximize their retirement benefits.

This can include taxable accounts comprising investment and business assets held outside of tax-advantaged accounts. They can include stocks, bonds, real estate, mutual funds, ETFs, and other investments subject to capital gains taxes. Then there are tax-deferred accounts, these are retirement accounts that offer tax advantages, such as 401(k)s, traditional IRAs, annuities, and employer-sponsored pensions. Contributions to these accounts are often tax-deductible, and taxes on earnings are deferred until withdrawal. Lastly, there are tax-exempt accounts, accounts that provide tax-free growth and withdrawals. Examples include Roth accounts (Roth IRAs and Roth 401(k)s), and cash-value life insurance policies with tax benefits.

Also worth mentioning are tax-exempt and tax-deferred Accounts such as health savings accounts (HSAs) which have a “triple-tax advantage.” Contributions up to limits set annually by the IRS are tax-free. Any growth – through interest or investments – and withdrawals are tax-free too as long as the money is used to pay for or reimburse oneself for qualified medical expenses.

An oft overlooked asset is net home equity. Reverse mortgages and downsizing strategies can convert the equity to income for retirement and or for possible healthcare costs.

Then the time comes when one needs to be thinking about Retirement Income, what money and how to best get the most out of our lifetime of saving and investing. It is time to best plan how you will convert your retirement assets into spendable dollars to meet your expected retirement cash flow needs. In addition to what you have accumulated this will include Social Security benefits, pension plans, rental income and possibly lifetime income annuities. By a very big margin, retirees that have ‘income’ they know is certain and sufficient to meet monthly needs are much better prepared and have more peace of mind in retirement than those living to some degree or another on withdrawals, or annual returns. Think about it for a moment, you have been living on ‘income’ your whole life, does it not seem stressful to no longer be getting income, income sufficient to meet needs? Most people do not think about this.

The reason those with enough income have a better retirement is simply because some years are up while others are down. Your needs spending does not go down because the market does. Yes, discretionary spending is easier to adjust when the market is down. You can take a road trip rather than a 2-week Mediterranean cruise. You can’t stop eating and paying expenses. This is where the downside of the retirement mountain, the ‘decumulation part’ gets treacherous.

Old and outdated strategies for guiding retirees in the decumulation phase involve withdrawing a percentage from all available invested assets annually (often 4%) or liquidating assets in a prescribed order of taxable assets followed by tax-deferred assets and then tax-free assets.

Retirement decumulation involves turning accumulated assets into retirement income. Typically, the retirement decumulation phase begins with an event – retiring from work, transitioning to part-time employment, the death of a wage-earning spouse, or a divorce. These events require retirees or households to liquidate assets for income and financial security. During the retirement decumulation phase, retirees face several challenges that require careful planning and strategizing. One of the primary challenges is identifying the most tax-efficient ways to sell assets and make withdrawals. This involves considering the tax implications of different investment accounts and determining the optimal order in which to liquidate assets to minimize tax liabilities. Only an integrated set of strategies at the household level can meet these challenges and form a comprehensive and sustainable decumulation plan.

Coordinating asset sales with government benefits, such as Social Security, is another crucial aspect of decumulation. Retirees need to understand how their income from asset sales may affect their eligibility for and taxation of government benefits. Coordinating these sources of income ensures that retirees can maximize their overall retirement income while maintaining eligibility for important benefits.

Protecting wealth and retirement income from inflation is also a significant concern during decumulation. Retirees need strategies in place to ensure that their income keeps pace with the rising cost of living. This may involve investing in inflation adjusted annuities and/or laddered income annuities.

What Is a Retirement Decumulation Plan?

A retirement decumulation plan is a personalized blueprint for systematically drawing down on a client’s assets over time. It must be tailored to retirees’ (and their spouses’) individual circumstances and aim to achieve what retirees say they want most: confidence that they will not outlive their assets.

When developing a decumulation strategy, one must engage in discussions with a decumulation consultant which are not easy to find. Most financial professionals are just out of step when it comes to retirement income reality. Their expertise is growing assets, not spending.

Some of the key topics that pre-retirees and retirees will need to address during these conversations include fixed expenses and again a decumulation expert knows how crucial it is to understand the retirees’ fixed expenses when developing a decumulation plan. These are the essential expenses that individuals must cover to maintain their standard of living in retirement. A decumulation expert knows how to ask specific questions about fixed expenses, and other important information to determine the amount of income needed to meet these obligations. Common fixed expenses include housing mortgage or rent payments, property taxes, homeowners or renters’ insurance, maintenance costs, and utilities. Of course, food; the cost of groceries, dining out, and any dietary considerations or special food requirements should be considered. Insurance costs: encompassing health insurance premiums, long-term care insurance, life insurance premiums, and any other insurance policies, such as homeowners’ insurance, the retirees maintain. Utilities: Expenses for electricity, gas, water, internet, cable or satellite TV, and phone services fall under utilities. Transportation: This includes car loan or lease payments, fuel costs, auto insurance, maintenance and repairs, public transportation fares, and any other transportation-related expenses. Not to forget or minimize Taxes: Many retirees may have ongoing tax obligations, such as property taxes or estimated tax payments, that need to be factored into their fixed expenses. Debt payments: If retirees have any outstanding debt, such as credit card debt, student loans, or personal loans, the monthly payments should be accounted for. Other necessities: Essential items like clothing, personal care products, household supplies, and necessary services (e.g., home maintenance, cleaning, etc.) should also be considered.

An experienced Decumulation Consultant can help ensure that retirees’ decumulation plan accounts for these essential costs. This information allows for more accurate calculations of the income needed to cover these expenses and assists in designing a sustainable retirement income strategy.

Understanding if the retirees plan to work part-time during retirement and for how long, as it can impact their income needs and the sustainability of their assets. The decision to continue working in some capacity can have significant implications for their overall financial picture and the sustainability of their assets. Here are some key points to consider. Additional income: Part-time work during retirement can provide retirees with an additional source of income. This income can help supplement their retirement savings and reduce the amount of assets they need to draw down on each year. Understanding the client’s intentions regarding part-time work allows the consultant to factor this income into their decumulation plan.

By knowing the retirees’ plans for part-time work, a knowledgeable consultant can assess how much income they will require from their retirement savings when working part-time and after. This information helps in determining the appropriate strategies and products that will best ensure that their income needs are met throughout retirement providing income sustainability. Continuing to work part-time can extend the longevity of retirees’ retirement savings. By reducing the need to create income from their assets, they can preserve their savings for a longer period and potentially increase the overall sustainability of their financial plan.

Let’s talk about the Social Security implications of working part-time. This can impact retirees’ Social Security benefits. If they choose to work before reaching their full retirement age, their benefits may be subject to an earnings limit, which could temporarily reduce the amount they receive. Understanding retirees’ part-time work plans allows the Decumulation Consultant to coordinate the timing of Social Security filings to optimize benefits.

A Decumulation Consultant also knows how to best provide for Lifestyle Considerations, another important discussion. Part-time work during retirement may also have an impact on a client’s desired lifestyle. It is essential to assess whether they have specific goals or plans that rely on the income generated from part-time work, such as travel, hobbies, or supporting family members.

Discussing  Health Considerations, any health issues or concerns that may affect the retirees’ lifestyles or life expectancies are important, as that can influence their income requirements and potential medical expenses. Here are some key points in this category. Medical expenses: Health issues can lead to increased medical expenses during retirement. It is important to discuss a client’s current health status, any chronic conditions, and potential future healthcare needs. This information helps in estimating the costs associated with healthcare, including insurance premiums, deductibles, prescription medications, and long-term care expenses.

Hugely important, Life expectancy: Health conditions can also impact life expectancy. Longer life expectancies necessitate a longer duration of retirement income, which requires careful planning to ensure that a client’s assets can sustain their lifestyle for the desired period. Understanding retirees’ health concerns allows a good decumulation consultant to incorporate appropriate life expectancy estimates into their decumulation plans. They would discuss Insurance coverage: Health considerations may also influence retirees’ decisions regarding health insurance coverage during retirement. A Decumulation Consultant can discuss options such as Medicare, supplemental insurance policies, and long-term care insurance to ensure adequate coverage and protection against potential healthcare costs.

Lifestyle adjustments are often overlooked. Health issues can lead to lifestyle adjustments, such as changes in spending patterns or the need for specialized care. These adjustments may impact retirees’ income requirements and should be accounted for in the decumulation plan. Discussions about potential lifestyle changes due to health considerations can help the Decumulation Consultant create a realistic and sustainable financial strategy.

Legacy and estate planning: Health concerns can also influence retirees’ priorities regarding legacy and estate planning. They may wish to allocate resources for medical expenses, long-term care, or leave a financial legacy for their heirs. Some retirees may have special needs adult children they want to take care of. Understanding their intentions allows a good consultant to incorporate these goals into the overall decumulation plan. Discussing health issues and concerns with retirees can help your consultant gain a comprehensive understanding of your specific needs and tailor the decumulation plan accordingly. This ensures that potential medical expenses and lifestyle adjustments are accounted for, and the client’s income requirements are adequately addressed throughout their retirement years.

Housing Plans is another big piece of the decumulation puzzle. Understanding retirees’ housing plans is an important aspect of retirement decumulation planning. Exploring whether they intend to sell their home and downsize or relocate helps in assessing their housing expenses and available equity. Here are some points to consider. Downsize or relocate: Discussing retirees’ housing plans allows you to understand if they have any intentions to downsize their current home or relocate to a different area. Downsizing or relocating can have financial implications as it may result in reduced housing expenses, lower property taxes, and potential equity release from home sales.

Housing expenses: Depending on the retirees’ housing plans, retirees may experience changes in their housing expenses during retirement. Moving to a smaller home or a different location may result in reduced mortgage payments, property taxes, insurance costs, and maintenance expenses. On the other hand, if they plan to purchase a new property or move to a higher-cost area, their housing expenses may increase. Understanding these potential changes allows for more accurate budgeting and income planning.

Home equity: Selling a home and downsizing or relocating can provide retirees with additional home equity that can be used to supplement their retirement income or fund other financial goals. It is important to discuss the potential equity they may have available and how it can be utilized effectively within their decumulation plan. Housing plans can also be influenced by lifestyle preferences. Some retirees may want to stay in their current home for sentimental or lifestyle reasons, while others may prefer a different living arrangement that better suits their retirement goals and aspirations. By discussing housing plans, a good consultant will align the decumulation strategy with their desired lifestyle choices.

Housing alternatives: Apart from downsizing or relocating, retirees may also consider other housing alternatives, such as purchasing a vacation home, joining a retirement community, or exploring rental options. These alternatives have different financial implications, including upfront costs, ongoing expenses, and potential rental income, which should be factored into the decumulation plan. This information helps in creating a decumulation plan that aligns with their housing goals and ensures that their financial resources are optimally utilized in retirement.

Another little observed potential retirement issue that will affect some retirees plan is their intention to provide financial assistance to parents, children, or grandchildren. This is what we refer to in the decumulation plan as Financial Support.

Identifying if the retirees expect to provide such assistance is an important aspect of retirement decumulation planning as it impacts their overall budget and income needs. Some points to consider are Parents: Retirees may have aging parents who require financial assistance for healthcare expenses, long-term care, or general support. It’s important to discuss whether retirees anticipate providing any financial help to their parents and to what extent. This can help determine the potential impact on their budget and the need for additional income or resources to support these obligations. Children: Retirees may have children who are still financially dependent or may require assistance for education, housing, or other expenses. Discussing the retirees’ expectations regarding financial support for their children can help in assessing the potential impact on their budget and the need to allocate resources accordingly. This includes considering any ongoing financial obligations, such as child support or college tuition. Grandchildren: Retirees may also have grandchildren whom they wish to support financially, such as contributing to their education savings or providing financial gifts. Understanding retirees’ intentions in this regard can help in estimating the potential financial commitments and incorporating them into the decumulation plan.

Budget and income needs: Financial support provided to parents, children, or grandchildren can have a significant impact on retirees’ overall budget and income needs during retirement. It’s important to quantify the potential financial obligations and consider them when determining the required income streams and asset allocation strategies. This may involve adjusting the retirement asset allocations with more emphasis on foundational and guaranteed income sources like annuities, considering the timing and amounts of financial support, and evaluating the sustainability of the decumulation plan. Balancing priorities: Providing financial support to family members is a personal decision that needs to be balanced with the retiree’s own financial security and retirement goals. A committed Decumulation Consultant can help retirees navigate these considerations by discussing the trade-offs and potential alternatives, such as setting boundaries on support, exploring other forms of assistance (e.g., education savings plans), or collaborating with other family members to share responsibilities. They can gain a comprehensive understanding of their overall budget and income needs by identifying if retirees expect to provide financial assistance to parents, children, or grandchildren. This information allows for more accurate planning and helps ensure that the decumulation strategy aligns with the retiree’s financial goals and priorities while considering their family obligations.

Legacy Goals: Decumulation Consultants know it is important, and have been trained to discuss the retirees’ thoughts, intentions and desires when it comes to what they intend to leave as their legacy, or not in some cases. They know how to make sure everything is legal, making it easy when the time comes whether it is family, charitable organizations or something else, such as ‘special needs’. They understand it can be an important consideration as it affects their asset allocation and distribution strategies. Some key points to consider in this area are Family legacy: Retirees may have specific goals and intentions for leaving a financial legacy to their family members, such as children, grandchildren, or other relatives. This can include providing an inheritance, funding education expenses, or supporting future generations. It’s important to have open discussions with retirees about their desired legacy and the values they want to pass on to their families. Charitable giving: Some retirees may have a strong desire to support charitable causes and organizations. They may wish to leave a portion of their assets as charitable donations or establish a charitable foundation or trust. Discussing their philanthropic goals and values can help shape the decumulation plan and incorporate strategies for charitable giving while optimizing their overall financial objectives. Estate planning: Legacy goals often intersect with estate planning considerations. Retirees may have specific wishes regarding the distribution of their assets and the management of their estate after their passing. This may involve setting up trusts, naming beneficiaries, or utilizing estate planning tools to minimize taxes and ensure a smooth transfer of wealth to their chosen beneficiaries. This is an area where the financial professional putting together a solid decumulation plan will work hand-in-hand with an estate planning attorney, and/or have an estate planning process to address these aspects effectively. Balancing priorities: Leaving a legacy is another personal choice that needs to be balanced with other financial goals and considerations. It’s essential to help retirees evaluate the potential trade-offs between providing for their own retirement needs and aspirations and leaving a meaningful legacy. This may involve discussing the optimal distribution of assets and exploring strategies to maximize the impact of their legacy while maintaining their financial security. Regular review and adaptation: Legacy goals may evolve over time, so it’s important to regularly review and update a decumulation plan accordingly. Retirees’ circumstances, family dynamics, and charitable interests may change, necessitating adjustments to the planned legacy strategies. By staying engaged with retirees and having ongoing conversations, Decumulation Consultants will ensure that the retirees’ decumulation plan continues to align with their evolving legacy goals. Discussing retirees’ desires for leaving legacies to their families or other beneficiaries allows the consultant to incorporate these goals into the decumulation plan. This allows for a comprehensive and personalized approach that integrates retirees’ financial security, family aspirations, and philanthropic objectives, ensuring a well-rounded strategy that reflects their values and priorities.

Other Financial Goals

In addition to income to live on, growth to maintain spending power and legacy goals, it’s important to discuss other financial goals and plans that retirees may have for retirement. These goals may involve specific expenditures or lifestyle choices that require budgeting and financial considerations. Here are some examples. Travel: Many retirees have a desire to travel and explore new destinations during their retirement years. Discussing retirees’ travel aspirations can help estimate the associated costs and incorporate them into the decumulation plan. This may include budgeting for flights, accommodations, transportation, and other travel-related expenses. Vacation homes: Some retirees may have a goal of owning a vacation home or a second property where they can spend their leisure time. Owning and maintaining a vacation home comes with its own set of expenses, including mortgage payments, property taxes, insurance, maintenance, and utilities. Evaluating the feasibility and financial impact of owning a vacation home is crucial in the decumulation planning process. Major purchases: Retirees may have plans to make significant purchases during retirement, such as buying a new car, renovating their home, or acquiring other expensive assets. These purchases need to be factored into the decumulation plan to ensure sufficient funds are available and to determine the impact on their overall financial situation. Lifestyle upgrades: Retirement can be a time when individuals want to enjoy certain lifestyle upgrades or hobbies they may have put on hold during their working years. This can include activities like golf, boating, art collecting, or joining clubs or organizations, everyone is unique. Understanding these lifestyle choices and estimating the associated costs is important for comprehensive decumulation planning. These discussions allow for a more holistic approach to retirement planning that considers not only essential expenses but also the discretionary spending that contributes to a fulfilling retirement lifestyle. Incorporating these goals into the decumulation plan ensures that retirees can pursue their desired lifestyles while maintaining financial stability and meeting their overall retirement objectives.

These conversations will differ from the ‘usual’ discussions that advisors have, focused merely on data, capital market assumptions, Monte Carlo scenarios, and financial planning aspects more typical of the ‘accumulation’ phase. However, the decumulation discussion provides additional and crucial information for effective retirement income planning. This builds trust, often leading to lifelong relationships between the retiree and Decumulation Consultant. This relationship should be thought of as multi-generational as retirees’ children become involved whether on behalf of aging parents or their own financial well-being. That can be true for the consultant as well, one that has positioned his practice safely in the hands of younger, like-minded team members. That way the consultants’ clients are never left alone, having to start over with a new advisor at an older and more vulnerable time in life. Especially one with a different mindset. Continuity of like-minded advice cannot be, and should not be underestimated.

Decumulation Planning Considerations

By understanding retirees’ income expectations, evaluating their assets, and discussing potential lifestyle adjustments, a Decumulation Consultant can create a decumulation strategy that aligns with retirees’ goals and maximizes their financial outcomes. These conversations provide crucial information for effective decumulation planning, including:

1. What income expectations do retirees have for retirement?
2. Can their assets cover those expectations for as long as they may live?
3. Will retirees need to consider significant actions, such as a home sale or downsizing, or other lifestyle changes (e.g., less travel) or spending (e.g., fewer or smaller gifts to children) now or in the future?

A decumulation strategy emphasizes examining expectations, evaluating assets, and counseling retirees when they may need to adapt their plans to produce the best results. While these conversations may be unfamiliar territory, and even outside the realm of service for many advisors, they should be natural and easy for a Decumulation Consultant.  Playing a vital role in creating a decumulation plan that aligns with retirees’ goals and maximizes their financial security in retirement is what makes a Decumulation Consultant different, it is what sets them apart.

More About What Decumulation Planning Is?

A decumulation plan is a tangible application of the decumulation strategy that is tailored to each client’s unique circumstances. It is concrete and actionable, helping to keep retirees well-informed and providing them with a road map to help retirees stay on track throughout their retirement journey. A good plan is coherent, transparent, and realistic, based upon a solid strategy and bullet-proof tools. It is responsive to changes in markets or the retirees’ circumstances, such as health issues or death, that require revisiting and revising the ‘family’ decumulation plan. A comprehensive decumulation plan for retirees typically includes the following components:

1. Tax-Efficient Withdrawals: A decumulation plan provides a guide for systematically converting assets into the income needed by retirees on an annual basis during retirement. This helps optimize tax efficiency and ensure that the income generated aligns with their financial goals.
2. Social Security Filing Strategy: The plan incorporates a target date for retirees to file for Social Security benefits to maximize their overall benefits. By considering factors above and beyond what most advisors consider such as life expectancy, expected longevity, and other income sources, a Decumulation Consultant will help retirees make informed decisions about the most opportune time to begin claiming their Social Security benefits. Waiting for a higher benefit, for several reasons may not always b the best decision. Every retiree’s individual and/or family scenario is unique.
3. Close-the-Gap Plan: If retirees need to bridge an income gap during a period when they choose to defer Social Security filing to increase their lifetime benefits, or when they do not yet qualify for pension payments, the plan outlines alternative income sources or strategies to ensure their financial needs are met.

Some knowingly, some not, it is important that retirees need to know the clear steps to convert assets into income. Though they have been living on income their whole life this comes often, as a surprise. They also need to understand how their investments will support their income expectations on an annual basis. They ‘should’ expect to have a transparent view of how their investments will support their income expectations on an annual basis. Often this is not the case with many retirement type strategies presented. Regular check-ins with their consultant and consultants’ team are super valuable to evaluate the feasibility of their decumulation plan on a regular and ongoing basis. This assessment addresses questions such as:

• Is their decumulation plan still on track?
• Do they need to adjust it for conditions like inflation, recession, market drops or even unanticipated situations? Sometimes life throws you a curve ball.
• Have there been changes to tax laws that affect their plan?

By addressing these questions and ensuring regular communication and monitoring, the right consultant can help retirees maintain confidence in their decumulation plan and make necessary adjustments as circumstances evolve.

How Do Taxes Affect Decumulation?

Decumulation Consultants are much more likely to improve client outcomes by focusing on three key variables: cost, risk, and taxes. Among these, taxes have the most substantial impact on income sources and investor returns, which can be surprising and should absolutely not be overlooked. Taxes have a significant impact on decumulation and can influence the overall success of a retirement strategy. By understanding and effectively managing the tax implications, consultants can help improve client outcomes and enhance their portfolios.

Though secure and certain income sources should be the foundation of any decumulation plan, it is still important to maximize everywhere one can and that includes tax management. One key aspect of tax management in decumulation is maximizing tax alpha. Tax alpha refers to the surplus of a portfolio’s after-tax return over its pre-tax return. It measures the additional returns that can be achieved by implementing tax-efficient income and investment strategies. A high tax alpha indicates the skill and proficiency of the account manager in minimizing the impact of taxes on the portfolio’s performance. Essentially, tax alpha refers to the additional returns investors can achieve by implementing tax-efficient investment strategies. Maximizing tax alpha offers several advantages for retirees:

1. Client retention of gains:By implementing tax-efficient strategies, retirees can retain a larger portion of their investment gains and savings. This means they have more funds available to contribute towards their financial objectives, such as retirement income, lifestyle fulfillment and/or legacy planning.
2. Increased assets under management:Effective tax management consultants and their firms tend to retain more assets under their management, with clients finding good reason not to go elsewhere. When taxes are minimized, retirees often experience higher net returns, reducing the need for withdrawals to cover tax obligations. This increased client retention, in turn, can lead to additional income for consultants and firms, reducing the need to charge more for the considerable ‘extra’ time spent with clients, maximizing every area of their decumulation path.
3. Wealth preservation:By considering tax implications, a Decumulation Consultant can help retirees preserve their wealth more effectively during the decumulation phase. Strategies such as tax-efficient asset allocation, harvesting capital gains strategically, and utilizing tax-efficient withdrawal strategies can minimize tax liabilities, allowing retirees to sustain their wealth over the long term.

It is crucial that the retirees’ consultant proactively address tax considerations during the decumulation phase. This includes analyzing the tax implications of various investment decisions, understanding the tax-efficient ordering of asset sales or withdrawals, and exploring tax optimization opportunities such as utilizing tax-advantaged accounts, properly re-allocating and managing RMDs (Required Minimum Distributions, and systematically converting assets to ROTH when it makes tax-sense. By incorporating tax management strategies into the decumulation plan, consultants can help retirees maximize their after-tax income and improve their overall financial outcomes during this financial phase of retirement.

Tax Alpha Success Strategies

Tax alpha strategies are based on algorithms and software that will be a part of a Decumulation Consultants’ toolkit. There are five drivers of success in achieving tax alpha – tax-smart asset location, multi-account tax harvesting, tax-aware transitions, multi-account rebalancing, and optimal retirement income sourcing.

1. Tax-Smart Asset Location:Investors can lower tax drag and boost wealth by locating assets in the most tax-saving account registrations (taxable, tax-deferred, or tax-free). Leveraging household portfolios amplifies the effectiveness of the technique. By strategically locating assets in the most tax-saving account registrations, investors can minimize tax drag and boost their wealth. This involves considering whether assets are best held in taxable, tax-deferred (e.g., traditional IRA), or tax-free (e.g., Roth IRA) accounts. A knowledgeable consultant, taking advantage of this software can assist in optimizing asset location by scoring tax efficiency alternatives and suggesting specific trades to achieve the best results. For example, holding safer, lower-return assets in traditional IRAs and risk oriented, higher-return assets in Roth IRAs can have a beneficial effect.

2. Multi-Account Tax Harvesting:Offsetting capital gains by selling investments at a loss is a tax-efficient strategy. However, it’s even more effective when considering all household accounts when pairing winners and losers. The best strategies should support multi-account tax harvesting, helping retirees reduce taxes, avoid wash sales, and spread gains over several years to take advantage of lower capital gains tax rates in retirement. For retirees participating in charitable giving, a knowledgeable consultant will be able to operate at the tax-lot level to optimize the deductions for charitable giving. Additionally, with the right software the consultant can help isolate stocks in a separate account created for the spouse with a shorter life expectancy, providing a way for the surviving spouse to benefit from the basis step-up and lower capital gains.

3. Tax-Aware Transitions: Tax-aware transitions include the process of transitioning a portfolio from one investment strategy to another in the most tax-efficient way. For example, it’s surprising how unprepared some investors are as they transition from the accumulation phase to the decumulation phase in retirement planning. While investors understand that investing involves risk and market volatility, they may be less familiar with the need for portfolio rebalancing when transitioning from accumulation to decumulation to defuse the riskier positions. No one wants to find themselves in a position where they must take (spend) money from an account when it is down in value. This oftentimes means it is smart to include ‘principal protected’, guaranteed annuities, something many retirees will be new to. This strategy can provide a sufficient ‘bucket’ of assets that retirees can spend from in down markets, allowing them to sleep at night, as their market-oriented assets can remain in place as the markets come back and ‘historically’, grow on. This can sometimes be difficult for retirees to grasp as their investment history, their investment experience during the accumulation or saving phase has been one of only stocks, bonds and mutual funds. This can make it difficult to switch gears to safer, more certain products, which is almost always required for the decumulation phase. A good Decumulation Consultant will excel here, helping clients to understand and get comfortable with a bit of a different balance, one geared to maximizing assts in the decumulation or spend down phase. In some cases, it may only be 10% of assets that need reallocated to foundational income sources for certain spending, on the other end, it may be 70%. Every retiree’s situation is different. Transitioning from the accumulation phase to the decumulation phase requires portfolio rebalancing to manage risk and tax exposure, and most importantly position the retiree to receive income vs. having to withdraw money to live on for basic needs and expenses when, as stated above, when the markets are down.

4. Multi-Account Rebalancing:If retirees deal with multiple advisors, custodians, and accounts vs. having everything under one roof multi-account rebalancing, asset allocation may be limited to individual account levels, leading to suboptimal outcomes and a mismatch between retirees’ asset allocation and target risk tolerance. It is therefore worth considering finding a team you can count on for all your needs and trust them to maximize assets in the decumulation phase of life.

5. Optimal Retirement Income Sourcing:The transition from accumulation to decumulation is a critical phase for retirees for another reason. Significant decisions about income sourcing and sequencing in retirement must be made as they can often mean the difference between leaving something as a legacy and running out of money. Various considerations arise, such as annuity purchases, annuitization timing, Social Security, Roth conversions, required minimum distributions, and more. Relying on the old and outdated “4% Rule” for withdrawals has proven inadequate for this task for quite some time now.

An effective Decumulation Consultant will utilize Retirement Income Sourcing strategies to assist retirees in creating personalized withdrawal plans at the household level. It considers factors such as annuitization timing, Social Security, Roth conversions, required minimum distributions (RMDs), and more. By creating a strategic roadmap for asset sales and benefit streams, it ensures retirees have sufficient funds to meet their financial goals while minimizing unnecessary taxes throughout their life expectancy. By incorporating decumulation strategies combined with the best software tools, and ‘hopefully’ many years of experience a Decumulation Consultant can help retirees enhance their overall financial outcomes in retirement in many ways. They will help to minimize income tax liabilities, make the best Social Security claiming decision, assist in properly re-allocating assets for the spending phase of ones’ financial life, help manage RMDs, direct and help to get the estate planning completed, including trust, will, medical directives, POAs, etc. They should be able to help one be prepared for the possibility of long-term health costs, life insurance issues, even debt management if needed.

A note of caution: by far, not the only thing but the most important aspect of what a Decumulation Consultant does is help to determine what percentage of one’s ‘accumulation period’ assets should be repositioned for certain income for basic needs and expenses. Remember, living on income will always provide more certainty and peace of mind than having to continually withdraw money from investments to live on, especially when the market is down. This means that the retiree should be very comfortable with and trust the consultants’ knowledge and experience with annuities, as annuities are the primary tool for the safe and certain portion of a retiree’s assets that must provide the certainty of income. Though it has been a long road, annuities have proven themselves best for this purpose, and many retirees have now learned that from their personal experience. ‘Annuity’ is not only no longer a dirty word, but also a necessary and often used decumulation phase ‘tool’. There are many providers and hundreds of products with varying purposes. It is valuable to know though, that when needed by the retiree, there is always one annuity that is best for each specific and individual scenario that a retiree may have. A Decumulation Consultant is in the best position to have the knowledge, expertise and the software to make certain every annuity is considered and properly matched to the retiree’s scenario, and properly balanced with all other assets for longevity and peace of mind.