Tax Strategies to Ease Client Retirement Preparation

An old saying from an American founding father advises that the only sure things in life are death and taxes. It’s a very narrow outlook on life, but there is still a kernel of truth to this statement. As we enter the later stages of our life and generate more wealth, taxes play an increasingly important role in our financial lives. That is why it’s critical for individuals to regularly monitor how taxes will affect their assets and prepare for multiple outcomes. It’s a financial advisor’s responsibility to ensure no one is left to tackle this on their own. By helping clients take steps to mitigate tax obligations earlier in life and adding flexibility into their plans, you’ll set your clients up to maximize savings for retirement.

Plan for the Three Stages of Retirement

A retiree’s activity level generally follows three stages, each of which directly impacts their income and their ability to pay associated income taxes. A client in the first stage is typically most physically and mentally interested in indulging in experiences or possessions, so advisors should focus efforts on maximizing access to disposable funds during this stage.

The second phase of retirement is more passive; clients tend to lead a more conservative lifestyle and only pay for necessary expenses. This stage begins as a client’s life falls into a regular pattern, post-retirement travel becomes less frequent, and the excitement of retirement stabilizes. They may even find themselves saving during this stage. The third stage of retirement is dependent on the client’s health status, which may increase their income needs if they require more medical expenses. During this phase, you can help clients prepare for unexpected health issues and the unknown length of retirement during the remaining years of their lives. Evaluate assets on an ongoing basis and align tax obligations and needs based on the client’s stage of retirement.

Strategies for tax optimization

When you advise your clients to build flexibility into their plans, they’re able to modify depending on whether they choose to pay taxes while wealth accumulates or defer until savings are accessed during retirement. Depending on a client’s ability to qualify for insurance products or access tax-advantaged savings vehicles, there are a few strategies to help alleviate pre- and post-retirement challenges. Evaluate each of your clients’ plans to determine which combination of the following strategies will produce the best outcome:

Before retirement: Many clients do not know their current tax bracket, much less where they will fall after retirement. Salaried workers in a higher bracket before retirement should work with an advisor to secure tax savings while they are employed. These goals can be built into comprehensive financial plans, which advisors should review on a regular basis and adjust as necessary while also holding clients accountable to them.  

Motivate clients to use tax refunds to eliminate or minimize other payments and debt they may carry. One technique is to take tax savings and apply them to a mortgage or other debts. This strategy simultaneously helps save for retirement and reduce debt.

Home equity lines of credit are a good recommendation to put in place prior to retirement.  They can carry a zero balance until needed. If, during retirement, a client needs to make a large purchase, accessing funds from portfolios that trigger taxes may put clients into a higher income tax bracket. Using the line of credit, clients can withdraw funds over a two-year period. The taxes they save should handily compensate paying interest on the line of credit.

After retirement: Prepare for tax bracket changes – particularly for business owners whose taxable income may be higher during retirement because they are no longer investing in their businesses and are instead solely generating income from it. Clients’ combined income sources and savings distributions may move them into a higher bracket with increased tax obligations.

Certain life insurance products can be leveraged to help prepare for retirement. Cash value buildup that grows tax-free while invested in a permanent life policy can be used to supplement income. For instance, if the economy experiences a downturn and funds need to be accessed, clients can borrow against a life insurance policy. The loan can be paid down once the equity markets stabilize. Using this strategy, the client should be made aware of tax implications if the loan is not paid by the end of the year.

Key Takeaways

It is important that financial advisors and their clients account for income tax brackets as well as variable factors including inflation, health conditions and cost of living.

Educate clients about the status of their financial plan and help them monitor goals on an ongoing basis. When you meet with your clients, always discuss tax implications associated with any actions or plans and refer them to their tax accountant where necessary.

Taxes should not only cross clients’ minds during tax season. Review retirement plans that consider every financial goal to make sure clients can enjoy life after retirement without the burden of avoidable tax obligations.

About the Author

Aurora Tancock, CFP, FLMI, is President and Owner of Aurora Tancock Financial Services Inc., a financial planning firm located in Ontario, Canada. She is also an author with more than 30 years of experience in the financial services industry. Aurora is a 21-year member of The Million Dollar Round Table with 10 Court of the Table honors and 1 Top of the Table honor.  She served as the 2019-2020 Global Council Member for the Finance Committee; is currently Assistant Chair for the Program Development Committee for the 2022 Annual Meeting.