"Please Note This
Conference Has Taken
Place, This Article And
A Link Below Offer More
on This Ever Developing
A Conference to
consider tax-efficient ways to manage withdrawal of assets
Over the past six months, I have
done extensive research on the best ways to draw down assets to
create retirement income, including looking at the effect of taxes
on that process. This is an important issue, as several
studies have found that managing the draw down process correctly
can add years to the longevity of a retiree's savings.
In fact, I have been working with
New York University's Leonard N. Stern School of Business in
creating a one-day conference on the issue. The conference,
which will be held May 1, will bring together a select group of
those who have published or commented on this topic. The
goal of the conference is to establish an algorithm that can be
put into the public domain and will allow individuals to ascertain
their most effective withdrawal strategy. At the very least,
we expect to identify all the issues that could affect the
decision, and rank them according to priority for inclusion.
We invite anyone interested in this topic to attend and
Mathematical models of withdrawals have been in existence for more
than a decade. The first, by Cliff Ragsdale in 1994,
illustrates that most retirees would be well served by taking
money from their taxable accounts before withdrawing from their
tax-deferred accounts. This is especially true for those in
higher income brackets, where there are fewer complications.
But the analysis becomes more complicated when devising an optimal
withdrawal strategy for a specific individual, particularly for
those without much taxable income before any withdrawals occur.
As an example, Social
Security becomes taxable when retirees have "too much"
taxable income. The interaction between taxable income and
Social Security has been called "the tax torpedo."
Avoiding the torpedo led to the notion that some retirees should
wait until age 70 to start taking Social Security benefits and
draw down tax-deferred accounts before that date. At 70,
they would switch to lower-taxed sources. Subsequent work
pointed out the possible benefit to those in lower tax brackets of
tapping a bigger mix of taxed assets each year. The goal
would be to receive some taxable income each year in order to take
advantage of the lower tax brackets available for modest incomes.
A few practitioners have pointed
out that academic models tend to ignore what happens to an
investor's asset allocation after withdrawing all taxable account
assets first. Because many financial advisers have long
advocated that growth stocks be held outside retirement accounts
and that bonds belong in tax-deferred vehicles, the conventional
wisdom of first cashing out all taxable assets leaves the investor
with no stocks and a tax-deferred fixed-income portfolio.
That certainly isn't what most advisers would recommend.
Coming up with an optimal
withdrawal strategy, therefore, is complex. State taxes, for
example, belong in a thorough analysis but may prove too
complicated to incorporate. Factoring in the fact that
capital gains taxes are forgiven at death adds more complexity.
Whatever comes out of the conference, I think that lot-by-lot
identification of holdings in a taxable account can add value.
Established algorithms make blanket assumptions as to the cost
bases of all stocks and bonds held in such accounts. Yet
withdrawing funds by selling losing positions can be the most
effective source of cash because such sales not only create no
current tax but also create capital losses. The losses can
allow an investor to take a gain elsewhere in the portfolio
without depleting available cash by paying a tax.
And what about real estate, an
asset many advisers ignore altogether? If many baby boomers
wind up house-rich and cash-poor, reverse mortgages may become
"the" financial tool of the coming decades.
Proceeds from a reverse mortgage would prove very tax-friendly, as
the money received would have been borrowed and wouldn't have
created taxable income. While one's primary residence
theoretically may be the most efficient asset to tap for income,
retirees steer clear of borrowing against their homes for fear of
losing them. But the non-recourse nature of reverse
mortgages may allay fears that accompany leveraging the home,
leading to more use of the product.
Given the complexity and choice, it
is obvious that there is indeed more to be done in the area of
tax-efficient withdrawal strategies. May 1 should prove
You will note a $500 registration
fee, which will be waived if you reply with your details to firstname.lastname@example.org
that you would like to attend. First come, first served.
For more details of the event,
Optimal Retirement Withdrawal Strategy Conference
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