Planning’s Triple Threat

Updated solutions to the retirement income challenge

by  Laurence P. Greenberg


Mr. Greenberg is President of Jefferson National, innovator of the industry’s first flat-insurance fee variable annuity with the largest selection of underlying tax-deferred funds. Connect with him by e-mail: For more information, please visit

Saving for retirement has changed dramatically. Over the next decade, Boomers will be turning 65 at a rate of 8,000 a day, and many will begin tapping into their savings. But Americans are living longer, and research consistently shows that outliving their assets is their number one concern. As the solvency of Social Security comes into question, and the safety net erodes in an economic environment that remains unstable, the retirement income challenge is very real.

The Triple Threat

Advisors are keenly aware that the game has changed. According to Jefferson National’s latest survey of over 400 advisors, more than two-thirds (71 percent) of respondents say the biggest challenge to generating sufficient retirement income for their clients is caused by a combination of three key factors: 1) a low yield environment, 2) maintaining adequate equity exposure and 3) managing volatility. This triple threat makes it tougher than ever.

Traditionally, fixed income has been the core of most retirees’ portfolios. And after the financial crisis, many Americans saw it as a safe haven from the volatile stock market. But in today’s low yield environment, advisors cannot rely on fixed income alone to meet their client’s income needs.  Likewise, in the face of lower yields, recommended withdrawal rates have fallen far below what is practical from an advisor and client point of view.

To help clients fund a retirement that could last 30 years or more, many advisors are now maintaining a significantly higher allocation of equities in client’s retirement income portfolios. But while this helps improve the chances of generating more income for more years, higher allocation of equities come with higher risks. To manage ongoing volatility in today’s market, proactive risk management has become an imperative.

The Jefferson National survey uncovered that advisors are utilizing a strategic combination of tax-optimization, dynamic withdrawal and a total return approach to investing. By being creative, dynamic and tax focused, advisors are ensuring that their clients will have enough retirement income for the future.


Faced with higher taxes, advisors are turning to tax-optimized tactics to preserve and increase their clients’ wealth. The vast majority (85 percent) say tax deferral is one of the most important solutions to accumulate more and generate more retirement savings. More specifically, 88 percent of advisors surveyed leverage tax deferral by using asset location to help minimize the impact of taxes and enhance after-tax returns. Research has shown that asset location can help to increase returns by an average of 100 bps or more – without increasing risk. In addition, a recent study from Morningstar has shown that asset location can add as much as 320 bps of additional retirement income per year.

Asset location starts by evaluating clients’ portfolios based on tax characteristics, looking at tax-efficient versus tax-inefficient assets. Locating tax-inefficient assets, such as bonds, commodities and REITs, in a tax-deferred vehicle allows income to continue compounding for years without paying taxes until assets are distributed in retirement, when clients are often in a lower tax bracket. Asset location is also beneficial for tactically managed strategies and liquid alternatives, to reallocate, harvest gains and capture more upside while mitigating the impact of any short term capital gains taxes.

Dynamic Withdrawal

Asset location starts by evaluating clients’ portfolios based on tax characteristics, looking at tax-efficient versus tax-inefficient assets

Determining optimum withdrawals during retirement is an increasing challenge. In the current low yield environment, research from Morningstar suggests a “safe” withdrawal rate is 2.8 percent. However, 83 percent of advisors believe their clients have not accumulated enough assets to live off a rate of 2.8 percent.  Instead, more than half of advisors (53 percent) would recommend a “safe” withdrawal rate of 4 percent.

Rather than figuring out a sustainable and “safe” withdrawal rate in a market that is constantly in fluctuation, 48 percent of advisors recommend using a Dynamic Withdrawal Strategy. By adjusting withdrawal rates annually based on factors such as market conditions and portfolio valuation, a dynamic withdrawal strategy will help to prolong clients’ savings and preserve their portfolio.

Equally important, 76 percent of advisors further leverage the power of tax deferral by using withdrawal sequencing to maximize lifetime income. Withdrawal sequencing is an approach to prioritizing withdrawals – the rule of thumb is first to draw down from taxable accounts in the early years of retirement and then to spend down tax-deferred vehicles in the later years. This allows clients to continue maximizing tax-deferred accumulation for as long as possible to generate more retirement income.

Tax treatment also comes into play when timing withdrawals from tax-deferred vehicles such as a Roth IRA versus a traditional IRA. The Roth IRA is funded with after- tax dollars, so withdrawals are tax- free, and in general should be timed for the years when a retiree is in a higher tax bracket. Traditional IRAs are funded with pre-tax dollars, so withdrawals are taxable and in general should be timed for years when the retiree is in a lower tax bracket, especially late in retirement years when medical expenses are high. Keep in mind that beginning at age 70½, retirees must start taking an annual Required Minimum Distribution (RMD) from a Traditional IRA. Otherwise penalties apply.

Total Return

When asked their primary investment approach to generate retirement income, more than half of advisors (58 percent) indicated using a total return strategy. Advisors can’t lean on fixed income alone in this low yield environment and many are moving away from traditional income-generating approaches such as bond ladders.

The goal of the total-return strategy is to grow the overall portfolio by maintaining a diversified mix of assets – some will produce income, such as interest paid by fixed-income, distributions and dividends, some will contribute to the bottom line by appreciating in price, and some will do both. One significant advantage of a total return strategy is that it allows clients to benefit from diversification, making it easier to spread risk, while combining the stability of income-producing securities with the appreciation potential and inflation protection of stocks.

A Strong Planning Approach

As the market continues to fluctuate and as Americans live longer and healthier lives, the retirement income challenge will remain a top priority. Fortunately, advisors are addressing this challenge by building a strong and more holistic planning approach that incorporates the strategic combination of tax-optimization, dynamic withdrawal and total return. With this approach in hand, advisors will be better prepared to take on – and solve – the retirement income challenge.
End Notes
1. The Tax-Efficient Frontier: Improving the Efficient Frontier with the Power of Tax Deferral, by David Lau, Jefferson National, June 2010.
2. Alpha, Beta, and Now…Gamma, by David Blanchett and Paul Kaplan, Morningstar, August 2013
3. Low Bond Yields and Safe Portfolio Withdrawal Rates, by David Blanchett, Michael Finke and Wade Pfau, 2013.