Many advisors whose firms don't permit them to give clients tax advice have found "a creative way" to do so: They use a tax-efficient account withdrawal sequence, or a strategic order, to generate retirement income.
"Advisors need to figure out the right way to tap clients' accounts so you don't torpedo Social Security or Medicare," says William Meyer, founder and CEO of Retiree Inc., which seeks to add value to retirement accounts by using the U.S. tax code.
A tax-efficient withdrawal strategy coordinates Social Security, Medicare and taxes, Meyer explains.
That entails what he calls "an over-time tax analysis" [covering a multi-year period]. Without that, you're "leaving money on the table instead of finding more money," he says.
Meyer's firm offers software to calculate decumulation planning, including the products Income Solver and Social Security Analyzer.
Meyer, together with William Reichenstein — head of research at Retiree Inc., and of the partners' other firm, Social Security Solutions, of which Meyer is CEO — developed the software for financial professionals and consumers. (Reichenstein is a professor emeritus of Baylor University.)
In the interview, Meyer describes good intentions gone wrong, such as how a Roth conversion can increase the client's Medicare premium, an outcome that "will likely" get the advisor "fire[d]," he says.
Social Security claiming is complicated, no doubt, but an area about which advisors would be wise to learn more, especially how benefits interact with Medicare and taxes.
"People tend to claim Social Security sub-optimally," Meyer argues, which sometimes costs them "hundreds of thousands of dollars."
Further into the interview, Meyer, a 30-year industry veteran, previously with H&R Block, Advisor Software and Charles Schwab, reveals how voluntarily suspending Social Security payments after claiming early can capture an additional 8% for each year delayed.
ThinkAdvisor recently interviewed Meyer, who was speaking from Overland Park, Kansas, where Retiree Inc. is based.
An enthusiastic advocate for retirees, testifying at a 2016 hearing before the Senate Special Committee on Aging, he suggested changes the Social Security Administration could make to help improve people's retirement years.
"The largest opportunity for advisors" will be the area of retirement income, Meyer predicts.
Those "who adopt new processes and focus on the right details," he says, "will be able to differentiate [themselves] and garner more clients and all their assets."
Here are excerpts of our conversation:
THINKADVISOR: How can financial advisors help clients with tax planning?
WILLIAM MEYER: Most large institutions in financial services don't allow their advisors to consider taxes and give tax advice.
But many advisors have figured out a creative way to do tax planning.
For instance, you can talk about a withdrawal sequence, which is the strategic order in which you should tap clients' savings — what asset classes and holdings — to generate income that clients need to live on in retirement.
What do FAs typically leave out of the mix?
What advisors have missed is looking at the non-financial decisions: How do you coordinate the Social Security claiming decision? How are you generating retirement income? Are you sensitive not to increase the client's Medicare premium?
Social Security is very complicated, and how you tap into assets impacts how much you pay for Medicare.
What strategy do you recommend?
Essentially, you want to fill in the low tax years so that later on, you pay less taxes or less Medicare premiums. The coordination of Social Security and Medicare is part of a tax-efficient withdrawal strategy.
What's the foundation?
You need to have the right ingredients: asset allocation and where to put the stocks and bonds; taking multiple accounts as part of the withdrawal sequence, not one account at a time; and how to rebalance at a household level or one account at a time.
What's next?
Once you get the right ingredients at a detailed level, you want to look over time [years] to figure out the right way to tap the client's accounts so you don't torpedo Social Security or Medicare.
What should the advisor say to a client in broaching this subject?
"Let's coordinate these decisions to make sure you don't pay additional premiums for Medicare. I'm going to ensure that you pay less taxes and keep your Medicare premiums as low as possible."
A lot of clients know what their tax bracket is, but they're unaware that [for some workers] Social Security is taxed, and that a tax calculation is used to determine Medicare premiums.
Medicare premiums are based on the tax calculation called MAGI [modified adjusted gross income], which is essentially the adjusted gross income on one's tax return plus tax-exempt interest.
Should all this be part of the financial planning process?
Yes. Advisors need to calculate provisional income for Social Security and then calculate MAGI for Medicare. How they're generating income will impact Social Security and Medicare premiums.
