Many financial advisors consider tax brackets when recommending a withdrawal strategy for their retired clients. However, they should look at marginal tax rates. Due to the taxation of Social Security benefits and income-based Medicare premiums, the marginal tax rate for most retirees on a wide range of their income is substantially higher than their tax bracket. This study shows that, by focusing on marginal tax rates, an advisor can add significant value to clients’ financial accounts by recommending a tax-efficient withdrawal strategy that outperforms withdrawal strategies that only focus on tax brackets.
Author: William Reichenstein, PhD, CFA, is head of research at Social Security Solutions, Inc. and Retiree, Inc. He is a professor emeritus at Baylor University.
Author: William (Bill) Meyer is CEO of Social Security Solutions, Inc. (www.ssanalyzer.com) and Retiree, Inc. (www.incomesolver.com).
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