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rience during their retirement period,” Blanchett says. “It’s a “For clients who have sufficient assets and who can handle
great way for advisors to project a feeling of security onto a the market volatility without making trading mistakes based
strategy built upon investments that carry inherent risk.” on fear or emotion, a probabilities-based total return strategy
Notably, the 4% withdrawal rule is about as likely to cause that draws retirement income directly from the portfolio may
overspending as it is to cause underspending for any given be the most efficient approach,” Blanchett says.
retiree. The real sustainable spending level will depend on a On the other hand, for those who are uncomfortable riding
myriad of factors, from the sequence of market returns to the out the markets, incorporating a guaranteed income compo-
anticipated retirement lifestyle. nent into the overall plan in the form of an annuity can help
Stone and Blanchett agree that addressing a clients’ toler- alleviate many of the fears clients express.
ance for income risk and their desire for safety needs to start Stone concludes that the development of income riders
well before retirement begins — with planning that takes into is incredibly important for advisors to understand, because
account both their financial and emotional needs. Something it addresses one of the most common points of hesitancy
like the 4% rule, which relies on full market participation with clients cite when refusing to consider annuities as part of their
no annuitization of assets, may very well work for a client that retirement income planning efforts — i.e., the potential loss of
has excess assets and a strong stomach for risk. principal due to early death.

Tax awareness and income planning

must be carefully intertwined.

Beyond studying up on Social Security strategies and the evolv- At a high level, portfolio longevity can often be extended
ing annuity marketplace, sources say 2023 will be a year in by more tax-efficient planning that includes knowledge about
which advisors have to improve their understanding of the way the heir’s tax rate, DiLellio and Simon say. In basic terms, this
tax issues affect and inform the optimal retirement income optimization model suggests many individuals will see greater
approach for clients. In their recent research, James DiLellio of portfolio longevity if they plan to draw income from their tax-
the Pepperdine Graziadio Business School and Andreas Simon deferred accounts up to the heir’s tax rate before then turning
of the University of Southern California found that advisors have to using taxable account funds.
traditionally followed the “common rule” for income planning.
According to DiLellio and Simon, who were recognized by
the CFP Board for a 2022 paper called “Seeking Tax Alpha
in Retirement Income,” this common rule framework sug-
gests that clients draw required minimum distributions from
tax-deferred accounts, when applicable, each year, and then
any unmet income needs are subsequently sourced from
taxable account funds until these are exhausted. Finally,
tax-deferred account withdrawals are made until these
accounts are exhausted and the portfolio closes.
This approach does lead to some degree of tax
efficiency, DiLellio and Simon say, which helps to
account for its popularity. However, the common
rule approach is suboptimal for many individuals
because it does not consider the various situations
in which it may make sense to pay taxes earlier
than is strictly necessary.
In practice, the actual optimal strategy for a given
individual will depend on the relationship between
the retiree’s net worth (including the present value
of annuities) and the retiree’s desired retirement
income and estate goals. While tax optimization mat-
ters for all clients, those with excess assets and ambi-
tious inheritance goals have the most to gain.

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