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You’ve helped your clients invest and save for retirement. What can your firm do now to guide clients on how to draw down on their assets and create a longer runway in retirement?

What is Accumulation? What is Decumulation?

One of the main reasons clients engage financial advisors is to help them invest in ways that will let them achieve their desired lifestyles in retirement. This is the “accumulation” phase of an investor’s life. Channeling income into taxable and tax-advantaged accounts and investments is critical to accumulation, but it’s only half the solution.

Once clients stop working, they enter a phase called “decumulation.” And many retirees will fail to harvest the full benefit of their accumulated wealth.

What is Accumulation? What is Decumulation?

Accumulation Phase

The accumulation phase of clients’ lives involves understanding and managing three types of wealth to maximum benefit before retirement:

Decumulation Phase

The decumulation phase begins when an individual starts withdrawing or taking income from accumulated assets, usually when they decide to retire fully or partially from work. Old (and outdated) strategies for guiding clients in decumulation involved withdrawing a percentage from all available invested assets annually (often 4%) or liquidating assets in a proscribed order (taxable assets followed by tax-deferred assets and then tax-free assets).

Both approaches have at least one significant flaw. They overlook the considerable impact of investment taxes on net returns during the accumulation and decumulation phases. LifeYield offers firms an API (advanced programming interface) library of solutions that can be deployed individually or, for the greatest impact, in concert to minimize taxes on a household portfolio over time and optimize timing of filing for Social Security benefits.

What Is Decumulation in Retirement?

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, death of a wage-earning spouse, a divorce, etc. Those events make it necessary for a client or household to begin liquidating assets to make up for income and provide financial security. 

During the retirement decumulation phase, the challenges include identifying the most tax-efficient asset sales and withdrawals, coordinating asset sales with Social Security and other government benefits, and protecting wealth and retirement income from inflation. Only an integrated set of strategies at the household level can meet these challenges.

LifeYield offers retirement decumulation solutions to maximize post-tax retirement income that can be integrated with an advisor’s proprietary systems without replacing technology or requiring new database development. What’s more, LifeYield tax-efficiency APIs can be applied to assets that aren’t under an advisor’s management but must be factored into a plan for decumulation and retirement security.

What Is a Retirement Decumulation Strategy?

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

Some of the things that advisors need to talk about with their clients as they prepare a decumulation strategy include:

These may not be comfortable conversations for advisors who are used to working more with data, capital market assumptions, Monte Carlo scenarios, and other aspects of financial planning.  But they will help advisors know information that will be important to decumulation planning:

A decumulation strategy emphasizes examining expectations, evaluating assets, and counseling clients when they may need to adapt their plans to produce the best results.

income sourcing - household income

What Is Decumulation Planning?

A decumulation plan applies a decumulation strategy to a client’s circumstances. It is concrete and actionable, helping to keep clients on track and well-informed. A good plan is coherent, transparent, and realistic, based upon a solid strategy and bullet-proof tools. And it is responsive to changes in markets or clients’ circumstances, such as health issues or death, that invoke a need to revisit and revise the decumulation plan.

A decumulation plan for clients includes:

This bears repeating: Clients want to know the steps to convert their assets into income. They want to see how their investments will fund their expectations for income for each year. As their retirements progress, they also expect check-ins with their advisor on the viability of their decumulation plan:

How Do Taxes Affect Decumulation?

How Do Taxes Affect Decumulation?

There are three main variables that advisors can use to improve outcomes for their clients: Cost, risk, and taxes. And of those three, taxes have the most significant effect on an investor’s returns. That comes as a surprise to some. But it shouldn’t.

Advisors can benefit their clients (and their reputations) by paying attention to how they can raise the tax alpha of client household portfolios. Tax alpha is a vital contributor to a successful decumulation strategy, too.

Tax alpha is a portfolio’s excess after-tax return minus the excess pretax return. “Excess” is the difference between the returns of an actively managed portfolio and a passive benchmark. High tax alpha implies that an account manager is skilled at reducing the bite of taxes on a portfolio’s performance.

Essentially, tax alpha is the lift in returns investors get by implementing tax-efficient investment strategies.

Achieving tax alpha has several adjacent welcome effects: Clients retain more of their gains and savings to put toward their financial goals, including retirement. Advisors and firms keep more assets under management, generating higher fees because they lower the outflows needed to pay taxes.

Paul R. Samuelson is LifeYield’s chief investment officer and co-founder. His work is the basis for the algorithms that are the engines that power the LifeYield tax-smart APIs for financial firms. Samuelson has written about tax alpha and identified these five drivers of success in achieving it.

How Does LifeYield Help You Develop and Communicate a Decumulation Plan?

The LifeYield Retirement Income Sourcing API enhances a firm’s financial planning system.  It uses all the inputs from planning to create tax-efficient decumulation plans that quantify the value – in dollars – of being tax efficient when using strategies like asset location, withdrawals, required minimum distributions (RMDs), Roth conversions, product choices, and Social Security optimization. All of these strategies used together are the recipe for a long, prosperous retirement.

Retirement Income Sourcing supports how to address “what-if” scenarios with clients by providing multiple options for determining the sequence of tax-smart withdrawals over time. It produces federal and state tax breakdowns incorporating all relevant factors. And as a stateless API, Retirement Income Sourcing can be configured to match any firm’s preferences, assumptions, and need for detail.

Retirement Income Sourcing allows you to personalize each client’s retirement strategy at scale without disrupting your technology investment.

What Else Can I Expect from LifeYield?

Firms must weigh the benefits of adopting new technology with its costs. LifeYield meets this challenge in critical ways:

Let us show you how LifeYield can improve client outcomes and increase your asset under management and your earnings.

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