We sat down with Covisum Founder and President Joe Elsasser, CFP®, the author of, “The Extinction of the Nest Egg: How Successful Advisors Are Adopting a Carton Approach," to ask a few questions about his newly released white paper.
Q: For years we've been referring to retirement income as a nest egg. Why do you feel like that term is no longer really relevant?
A: The focus used to be on accumulating a certain dollar amount; let's accumulate this nest egg. But when you get into distribution, when it's time to really identify how you're going to harvest from a variety of different accounts that you've accumulated over time, it doesn't make a lot of sense to think of it as one egg. Instead, it makes a lot of sense to think about this concept of the carton. In other words, which eggs am I going to break for breakfast today and which eggs later on.
Q: You talk a lot about tax-efficient retirement strategies in the white paper. Can you tell me a little bit about how a tax-efficient retirement has evolved over time?
A: Sure. It used to be that everybody followed the same common knowledge. Take Social Security as soon as possible, use non-qualified money for as long as possible in order to keep taxes low and then defer, defer, defer on 401(k) or IRA savings. Now, that advice for some people still holds true. I'm not saying that that's not a good retirement income pattern. What we are saying is that it's not a universal retirement income pattern, and for an awful lot of people, there are better options. Whether that's doing Roth conversions or using IRA money to delay Social Security or blending IRA and non-qualified money in order to create greater tax efficiency, or more importantly spread out a tax liability you're not getting clobbered one year and getting a really low tax bill the next.
Q: You highlight Roth conversions in one of the case studies in the white paper. What are the benefits of being able to do Roth conversions?
A: In retirement income, there are a couple of key benefits. The first key benefit is the ability to avoid required minimum distributions. So, we regularly run into this problem where the client pays really low taxes until they hit 70 1/2. Then all of a sudden their minimum distributions are way more, and those excess distributions are being taxed at their highest marginal rate. So, there's a problem there. When I do Roth conversions, I'm getting money out of the IRAs, so I'm reducing the eventual minimum distribution, and that money is allowed to compound tax-free for what can be a very long time.
Q: How should advisors measure success?
A: The key metrics we focus on are: portfolio longevity, sustainable income and net after tax estate value. You think of portfolio longevity, the last thing a client wants to do is run out of money before they run out of life. That's the advisor way of talking about it. You've got to realize that the schoolteacher with a pension that's covering 95% of their pre-retirement income is in a very different circumstance than that middle manager who's only got 20% covered by Social Security and maybe no pension at all. So, if the portfolio doesn't last, then we're really concerned about sustainable income. If the portfolio does last through retirement, we care about what value is delivered to the people or causes our client cares about, and that's the estate value after tax. And that's a key consideration because obviously if I inherited an IRA, it's very different than inheriting a Roth IRA. They are two totally different values. Uncle Sam owns part of the traditional IRA.
Q: What does this shift away from the concept of the "nest egg" mean for the future of fintech?
A: All of this is eventually going to be automated. I mean, I'll just put it that simply, I fully expect that 10 years from now, this idea which account we're going to use at which points in retirement in order to create tax advantage and even the harvesting from different accounts and combining one income stream will actually probably be all automated. However, advisors who are aware of those options will be able to deliver huge value to their clients over the next 10 years.
Q: What is the main message that you really hope advisors take away?
A: I think the main message is actually how to communicate the advisor's value. When we talk about a "nest egg," were we're just talking about investing the "nest egg". When we talk about a carton, we're really talking about engineering. How am I going to put this together in a way that makes sense and delivers value to the client?