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(Presentations in this blog were created using Wealthy and Wise®.)
Recently, a friend forwarded me a link to a Forbes magazine article entitled “4 Tax-Efficient Strategies In Retirement”. I have the greatest respect for the articles in Forbes, and I recommend this one to you (click here to review it); however, I have some issues with parts of it.
The article is basically a primer on what to do year-by-year once you retire. Its Strategy #1 (consider the basic retirement withdrawal sequence) follows essentially what InsMark’s Wealthy and Wise? does in recommending access of the weakest assets first.
I agree with RMDs-first for IRA-type accounts as they are unavoidable, but I disagree with their recommendations for the sequential use of other liquid assets for cash flow which are:
- Taxable accounts;
- Tax-deferred retirement accounts such as a traditional IRA, 401(k), 403(b), 457;
- Tax-exempt retirement accounts such as a Roth IRA or Roth 401(k).
This lacks substance. For instance, in its reference to taxable accounts as those assets to access next, the article does not distinguish between accounts that produce all taxable income, like money market funds and CDs, compared to equities with tax-favored capital gains and dividends. That is a serious overlook as money market funds or CDs are typically the first place to access cash flow (after RMDs), and an equity account is generally one of the last.
Also, tax exempt private accounts such as muni bonds are totally overlooked.
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That said, you can't establish the proper order by guessing. Each asset classifications must be assigned a yield or growth or dividend that is satisfactory to the client. Then that client's particular cash flow needs must be integrated with that asset base so as to provide the best long-range net worth and wealth to heirs. |
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OK, so how do you do that? The only way to do it effectively is with the Wealthy and Wise? algorithm available by using the Maximize Net Worth selection on the Prioritize the Use of Assets sub-tab located on the Illustrations Detail tab. You can't generalize the best prioritization order because you can get pretty wide yield, growth, and dividend assumptions from client to client.
Click below for a video of Wealthy and Wise in action that demonstrates the analytical power of what we call Good Logic vs. Bad Logic?.
Case Study Video, Good Logic vs. Bad Logic? (8 minutes):
If this is your initial introduction to Wealthy and Wise, you may want to watch the comprehensive version of the above video (17 minutes) where we take you through the sample case step by step using this unique InsMark planning system.
Comprehensive version including the Case Study (17 minutes):
Good Logic vs. Bad Logic? Video (Comprehensive)
Management and adviser fees and portfolio turnover assumptions can also vary widely by client as well. These are specific to each client and different assumptions can change the recommended order of withdrawal.
Another flaw in the Forbes article is the recommendation that withdrawals from a tax deferred account (like a deferred annuity) should be made prior to withdrawals from an equity account. I disagree. You can’t tell unless you compare yields, taxation, and account charges. I have often seen a tax deferred account outperform an equity account when withdrawals occur in later durations. The Wealthy and Wise algorithm takes the guesswork out of it, client-by-client.
I agree with the Strategy #2 logic in the Forbes article (avoid having withdrawals bump you into a higher tax bracket), but that strategy can only be managed in each retirement year as the adviser administers the working parts of the plan. You can’t possibly do this accurately years in advance with a wealth projection as it is too dependent on variables in place at the time. In this sense, Wealthy and Wise has two functions: 1) a long-range projection and 2) a source for annual evaluations in order to modify assumptions as conditions change.
Note: Another great advantage of using Wealthy and Wise is the ability to do various “what if” scenarios based on client preferences. For example, my Dad gifted me some shares in a small country bank when I was a kid. They are not the greatest investment, but (sentimentally) I’ve always held onto them. In my personal Wealthy and Wise prioritization, they ended up higher in the “spend now” listing for sources of retirement cash flow. Nevertheless, I moved them to the bottom of the list to a category I call “spend only if no other liquid assets are available”.
InsMark’s Digital Workbook Files
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Digital Workbook Files For This Blog
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Licensing
To license Wealthy and Wise, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275) or go to insmark.com. Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or (925) 543-0513.
Testimonials:
"As I’ve said to anyone who will listen, Wealthy and Wise is the best piece of software in the industry."
Simon Singer, CFP?, CAP?, RFC?, International Forum Member and Past President, InsMark Platinum Power Producer?, Encino, CA
"I am writing to give you a ringing endorsement for the Wealthy and Wise System. As you know, I am a LEAP practitioner. The Wealthy and Wise software has helped me supplement my LEAP skills in the over age 60 client base. I have been paid for many cases using Wealthy and Wise as support, the smallest of which was $27,000, the largest was $363,000. With those type of commissions, you would have to be nuts not to buy it."
Vincent M. D'Addona, CLU, ChFC, MSFS, AEP, InsMark Platinum Power Producer?, New York City, New York
"If you don’t get the client to distinguish cash flow from net worth, you won't make the case sale. In my experience, Wealthy and Wise is the only system that recognizes this important estate planning component."
Stephen Rothschild, CLU, ChFC, CRC, RFC, International Forum Member, Saint Louis, MO
Important Note #1: The hypothetical life insurance illustrations associated with this Blog assumes the nonguaranteed values shown continue in all years. This is not likely, and actual results may be more or less favorable. Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.
Important Note #2: Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner. Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.
Important Note #3: The information in this Blog is for educational purposes only. In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.