Taming the retirement tax bite

Tax efficiency is the key to managing portfolio volatility in retirement, Winnipeg-based financial advisor Douglas Nelson told the Distinguished Advisor Conference 2010 in Orlando, Fla.

Tax is the single greatest lifetime expense people incur, but it is also the single greatest opportunity for advisors to add value, says Nelson, who specializes in areas of wealth management that include retirement income planning, business succession and portfolio construction.

The key is to create a portfolio that is low risk, income that is more secure and an outcome that is more predictable. “The issue today is not so much about controlling portfolio volatility, but helping people manage their income volatility so the client receives a consistent, low-risk income.”

Tax plays a huge role in meeting income needs and preserving a client’s capital. “It doesn’t matter what you have, it only matters what you keep after tax, after fees, after inflation.”

An advisor’s job, Nelson says, is to understand the tax impact of every single dollar that comes out of their client’s retirement account. This calls for more tactical retirement planning. Get the short term right, particularly the tax implications, he says, and the long term will take care of itself.

He stressed the need for multiple sources of income to minimize the tax impact. What sets a client up for retirement is “getting the right amount of money in the right places, so you are drawing the right amount of income from the right source with the greatest tax efficiency.”

What clients today need is annual retirement review, rather than a retirement plan that’s not revisited for years to come, he says. “This can make tens to hundreds of thousands of dollars of difference in your client’s outcome.”