Have you ever thought about the true cost of income? Too often, we simply take the current payout percentage and divide that into the required annual income to find a solution. But, are we really helping the client understand the cost of generating income? Or, are we even doing the client justice by simplifying the solution with the hottest income rider?
In reality, clients need to consider many factors as they transition from asset accumulation to asset consumption for the rest of their lives. As advisors, we must create a strategy that provides a minimum level of income the client will not outlive. So many of us stop after completing the simple calculation with an income rider. However, there are other considerations.
Planning to minimize the tax impact on income received has a collateral effect on other aspects of the income stream. For example, minimizing taxable income can assist with the taxation of Social Security through the compression of the Modified Adjusted Income calculation. Reducing taxation early in retirement may allow for bracket bumping with Roth conversions for qualified assets.
More importantly, we must deliver income that is adjusted for some level of inflation. Many say inflation is the cruelest tax of all. It is silent, you don’t feel it at any particular time of the year, and it is generally in small increments; but, over time, it will reduce the effect on a retirees buying power. While it is difficult to speculate where inflation will be in 10 or 20 years, there are ways to increase the minimum income level through cost of living increase riders on some products. This should be done on a guaranteed and frequent manner.
Finally, we must consider the impact of fees on the income stream. Too often, we look at a gross number for income. But, as I’ve said before, it’s not what you earn; it’s what you keep. A 1 percent fee on a portfolio earning 6 percent reduces the return by 17 percent. As we move to a more transparent environment, discussions with clients will become more important. They’re becoming knowledgeable about the impact of fees, so they will look for advisors who will help them keep more of their assets.
Client demand for advice and solutions will remain high, so there has never been a better time to be in the industry. However, we have to think about our efficiency and effectiveness in helping them generate income. Instead of reaching for the easiest solution available in an income rider, I challenge everyone to look at more options.
Bottom Line: Taxes, inflation and fees can cost your clients a lot of income. Look deeper for solutions to make the client’s income more efficient and effective during income distribution.
© 2018 Ash Brokerage LLC.