How wise is Conventional Wisdom? Turns out, it’s not always good advice.

For years, advisors – and their financial planning tools – have used the “conventional wisdom” strategy for spending down a portfolio. Conventional wisdom says to convert portfolio assets to retirement income in this order:

  1. Taxable Accounts
  2. Tax Deferred Accounts
  3. Tax Exempt Accounts (Roth)
  4. Non-Deductible IRA
  5. Non-Qualified Annuity

But is that really the best strategy for your clients? What if the planning tools you use are off by years?

We put Income Solver™ to the test on conventional wisdom.

Nate and Denise have saved a total of $679,000:

401(k)         $500,000

Taxable      $125,000

Roth           $54,000

They know they will need to spend reasonably conservatively, but they plan to enjoy retirement. Because they have multiple accounts that are taxed differently, they need advice on a withdrawal strategy to make their savings last as long as possible.

Scenario A – Conventional Wisdom

We used the Income Solver™ to determine how Nate and Denise will fare in retirement with conventional wisdom.

With conventional wisdom, they will have only 84% of their needs and wants covered – meaning they will run out of money before they run out of retirement. It will be only a few years before their only source of income is Social Security.

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Scenario B – Unconventional Wisdom

We used the Income Solver™ to analyze a withdrawal strategy we call “unconventional wisdom.” In this scenario, we used the following order of spending:

  1. Tax Exempt Accounts (Roth)
  2. Tax Deferred Accounts
  3. Taxable Accounts
  4. Non-Qualified Tax Deferred Accounts

Here is the difference it will make for Nate and Denise:

Their level of coverage – the amount of their lifetime needs and wants that their assets will cover grows to 97%. While there is still a small gap between their assets and needs, simply changing the order they withdraw from accounts means 12 more years of portfolio longevity!

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Scenario C – Multiple Accounts 15.0

Once again we used Income Solver™ to analyze a withdrawal strategy for Nate and Denise. This strategy is called “Multiple Accounts 15.0.” This means that Nate and Denise will withdraw from multiple accounts each year in a tax-efficient manner, rather than draw from a single account each year. This method takes advantage of the tax treatment of each type of account.

With this strategy, Nate and Denise will continue to have income from savings in addition to Social Security benefits. Their coverage grows to 108% with a portfolio surplus of more than $160,000 after Denise dies. And remember, the only change was to the sequence and order in which Nate and Denise draw down on their savings.

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As Income Solver™ demonstrated, conventional wisdom is not a wise strategy for many retirees. For Nate and Denise, not only will they have a surplus, they’ll have peace of mind throughout retirement.

Income Solver™ makes it easy to show clients how to get more and keep more in retirement!

This case study represents real clients. However, the details specific to their case are unique to them, and many data points were used in creating this case study. All calculations are shown in today’s dollars and may not be typical of other clients’ results.

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