from the November Advisor

A Proactive Approach To Protecting Wealth

How to help mitigate the impact of taxes

by John Kennedy

Mr. Kennedy is the head of Retirement Solutions Distribution for Lincoln Financial Distributors, the wholesale distribution arm of Lincoln Financial Group. Lincoln’s Retirement Solutions Distribution unit, wholesales Lincoln’s annuities and intermediary 401(k) solutions to financial advisors, consultants, and other intermediaries in the wire, bank, and independent planner channels.

Proactive beats reactive, every time.
The last decade has been one of economic disruptions, highlighting the need for better financial guidance that focuses on outcomes, rather than asset growth alone.

A Focus on Retirement Realities

As clients move through a more goal-based, holistic approach to financial planning, there are five retirement issues that need to be addressed and monitored regularly to ensure an effective wealth protection plan can help achieve those desired outcomes: longevity, inflation, long-term healthcare, market volatility, and tax efficiency.

To navigate these realities effectively, while keeping the personal goals of clients within reach, advisors offering wealth protection strategies also need to clearly explain to clients why and how the solutions will be effective in safeguarding assets that continue to accumulate. The best solutions address the need for consistent income through retirement, challenges associated with long-term care, tax efficiency and ensuring that legacies can be passed to heirs.

For example, annuities are excellent for growing assets tax-deferred and generating a guaranteed income stream for the remainder of an investor’s life. Long-term care combination products also help clients by providing an extra source of income to support a reasonable retirement lifestyle while reducing the impact of unanticipated healthcare costs, which can mount steadily as an investor ages. Additionally, life insurance can serve as a tax-efficient vehicle for saving and borrowing assets, and transferring wealth to heirs.

Over the last 30 to 40 years, financial advisors focused primarily on helping individuals grow their assets. Today, it’s less about the actual number and more about preserving assets aimed at a desired lifestyle during retirement, making cash available for unexpected events during retirement and, in the best-case scenario, building financial legacies that can be passed to heirs.

Skilled advisors offering wealth protection solutions also highlight the value in a clearly defined long-term plan and carefully explain the options available.

Evaluating Tax Efficient Portfolios

While it shouldn’t come as a surprise that taxes can have a substantial impact on the retirement experience, understanding tax rules can be challenging, especially when factoring in an uncertain tax environment.

As reported by a number of news sources, taxes are approaching their highest level in 30 years for families making more than $450,000 a year. According to a recent Lincoln survey, “2013 – Expense Challenges of Age 62-75 Retirees1,” many retirees significantly underestimated the impact taxes will have on their retirement. In fact, once retired, retirees have found taxes to be one of their top expenses.

Clearly, many clients do not realize they may have more control than they think over planning for the future potential impact of taxes. To help clients reach their desired financial outcomes, advisors offering approaches to wealth protection strategies need to be proactive in explaining the tax-control options available to their clients in helping to preserve wealth and income assets, especially during pre-and post-retirement years.

To help identify the right strategy, knowledgeable advisors should conduct regular portfolio reviews with clients to evaluate tax efficiency, regardless of age. Some of the opportunities they should look for include: investments providing capital gains and dividends not currently needed for income (stocks and mutual funds); low rate, taxable fixed income investments, where higher income (with growth opportunities) could help the investor better meet income needs; existing annuities that could benefit from a more tax-controlled income stream, while maintaining the tax-deferred growth of the remaining underlying investments; and, trust and gifting opportunities to help reduce the future impact of possible estate taxes.

taxes are approaching their highest level in 30 years for families making more than $450,000 a year

During this review process, advisors can specifically help their informed clients by discussing in detail
The outlook for tax increases and other demands on retirement savings. Clients are expected to carry a heavier tax burden. To pay for federal deficit reduction and expanded national healthcare coverage, income and capital gains taxes have increased. As tax rates increase, retirees may lose more to taxes. Higher income retirees are working longer than expected; meaning salaries are subject to future tax increases potentially increasing the percentage of retirement expenses going to taxes.

The sources of taxation

Federal taxes are not the only issue for clients. A major driver of taxes and retirement expenses is reflected by where a person lives. According to the Federation of Tax Administrators, 45 states have a sales tax; 43 states have an income tax; 19 states and Washington, D.C. impose an estate tax. Other sources of taxes include: city wage taxes, real estate taxes, personal property taxes, and capital gains taxes. In addition, the cost of health and long-term care also varies by state.

Proven strategies to limit the impact of taxes

There are tax and retirement planning strategies to help reduce the impact of taxes, depending on a retiree’s unique goals and circumstances. There also are broad areas that advisors can help retirees better understand, such as the impact of local and state tax policies. Advisors should review withdrawal strategies, product allocation and account types used in a retiree’s portfolio, portfolio asset allocation, and a retiree’s estate, as well.

For advisory and wealth management firms, change is the new normal. Many financial advisors today will serve a diverse client base that spans varying demographic groups. Having the knowledge and business acumen to help these clients grow, distribute and transfer their wealth in the most effective, tax-efficient way will benefit everyone in realizing the best possible outcomes.

Education is Key – Retirement is a Mindset

According to a report issued by the National Institute on Retirement Security, “The Retirement Savings Crisis, Is It Worse Than We Think?” the collective retirement savings gap among working households age 25-64 ranges from $6.8 to $14 trillion.2 It’s important to discuss a range of scenarios and tax-control options with a financial professional to help mitigate the risks, and make informed decisions around protecting wealth.

By taking a proactive approach to educating clients about the issues and options available for creating better outcomes, the financial planning process can be much more effective in ensuring financial independence, a likely comfortable lifestyle, and dignity throughout retirement.





Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives, and/or insurance agents do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein.
1. “2013 – Expense Challenges of Age 62-75 Retirees, October 2013,
2. “The Retirement Savings Crisis: Is It Worse Than We Think,” July 2013”