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MDRT INSIGHTS

Address The Three Eroding Factors Of Wealth

If you are climbing a mountain and have the choice of two guides — one who is experienced at helping climbers to the top, and the other who has never lost someone on the way down — which one would you choose? There are no do-overs on your way down the mountain just as there are no do-overs in retirement.

Many advisors focus only on wealth accumulation, helping their clients get to the top of the mountain, but don’t discuss how their clients should decumulate their portfolios during retirement. Refocus your clients’ frame of mind from simply accumulating a certain retirement account balance to actually living through retirement by addressing the three eroding factors of wealth: taxes, fees and market volatility.

Shift The Client Mindset

A client’s journey down the mountain often requires a different set of products, level of discipline, asset allocation and outlook on retirement. You must also encourage clients to avoid making decisions based upon common traps, such as “that’s just the way things are” or “that’s what my parents did.” Tell clients stories such as the mountain metaphor and give them facts backed by mathematics or history to effectively communicate the need to address wealth erosion.

Ask clients this question: Imagine that, on the day before you retire, taxes double and/or the market corrects by 20 percent or more. What would you do? If everything your clients saved was in a qualified account such as a 401(k) that had never been taxed, then suddenly a much larger portion of their retirement funds would go to the government. It is easy to see how taxes can be the No. 1 factor of wealth erosion.

Importance Of Tax Diversification

The average person planning for retirement typically does not consider the impact of taxes on their portfolio. They may see they have a comfortable amount of assets ahead of retirement, but it’s easy to put into perspective how an amount between $2 million and $2.5 million can run down to zero in eight to 10 years.

Tax diversification is critical so that clients have the ability to pull from multiple sources of income based on the tax environment at that time. If taxes are high, they can pull out of nontaxable assets such as a Roth IRA. If taxes are low, they can pull out of their qualified accounts such as an IRA or a 401(k).

Help clients understand the tax treatment of their money by showing them how to classify their accounts into one of three buckets: taxable (anything with a qualification that will be treated as ordinary income regardless of their bracket or income threshold such as a 401(k) or IRA), never taxed again (Roth IRAs or properly structured and correctly funded life insurance contacts with tax-advantaged access) or accounts that are taxed over a lifetime (anything that has a capital gains treatment such as a brokerage account). Proper segmentation within these three buckets helps combat the effect of taxes on wealth erosion.

Plan For Fees

Fees are inevitable and sometimes not as visible as other expenses in life. Most clients never project or add up what these costs amount to over time. The aggregate effect of these costs can really impact account balances during both the accumulation and distribution phase.

In a fee-based model, the advisor makes money whether the market is up or down, both while the client is saving and working and also during retirement when the client drawing an income. Have your clients ever thought about that?

Prepare For Volatility

Clients love the variability associated with investments when the market is on the upswing but rash decisions often occur when the market declines. Keep in mind that markets fluctuate and it is important for clients to know their actual rate of return, not just their average rate of return. 

A diverse portfolio with a solid component, such as investment-grade whole life insurance or other financial products that have guarantees, can provide the balance necessary in a volatile market. These products are beneficial as a client approaches the top of the mountain and once again, if designed properly, can become a safe and steady income stream for the journey down the mountain. 

As advisors, we also must shift our mindsets. For those who traditionally focus on wealth accumulation, put yourself in your clients’ shoes. If taxes doubled or tripled or you also faced a major market correction the day before you retired, how would you react? Take what you would do to protect your own income and mitigate taxes in retirement, and transfer it to your clients’ plans.

As my friend Matt Love with Matt Love Financial says, “You don’t need a qualified retirement plan to retire. You need money.” Just remember, where that money sits is as important, if not more important, than what it earns.

Brandon Green, ChFC, CLU, CLTC, LUTCF, is a 9-year MDRT member with The Fitzpatrick Group in Houston, Texas. Brandon may be contacted at [email protected] [email protected].


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