Study Finds Retirement Calculators Not Tax Efficient

According to research published in The Financial Analysts Journal, most retirement calculators cheat investors out of at least six years of retirement income by using inefficient drawdown strategies.

An article written by William Meyer, CEO, Retiree Inc.; William Reichenstein, Co-founder, Retiree Inc., and Kirstin A. Cook, professor at Texas Tech University, suggests that most retirement tools are based on the flawed conventional wisdom that retirees should withdraw funds from one account at a time starting with tax-deferred accounts and moving on to tax-exempt accounts. The authors argue this method is not the most tax efficient.  

“Through our research, we found there are better strategies for creating retirement income than the ones the industry is currently using,” says Meyer. “These strategies provide greater tax efficiency, creating six or more years of income. That’s a game changer for a retiree.”

The research published in the CFA Institute’s Financial Analyst Journal demonstrates that the most tax-efficient strategies take into account progressive tax rates, consider drawing from multiple accounts concurrently and using Roth conversions—all while taking advantage of years when the investor has lower marginal tax rates. The research shows that using these unconventional strategies can add more than six years of portfolio longevity compared with a conventional strategy.

Other studies including one by Corporate Insight found concerning differences in retirement income calculators even when inputting the same data.

Retiree Inc., produces retirement income planning software for both financial professionals and consumers. The authors’ complete research can be accessed online here.