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Academy of Financial Services Annual Meeting 2022

September 27–28, 2022

Virtual Conference via Zoom

Seeking tax alpha in retirement income

Tuesday, September 27, 2022 at 1:00 PM–1:55 PM EDT add to calendar

Optimization, retirement, tax-efficient

Short Description

This article provides a framework to find an optimal decision for tax-efficient retirement income.  By developing a model for income and capital gains tax with stock and bond investments in tax-deferred, tax-exempt, and taxable accounts, we identify three categories of retirees based on their income needs and net worth.   We propose and evaluate a simple heuristic to determine what retirement income strategy is optimal, quantifying a 0.5% annual return benefit.  We call this benefit tax alpha, which is due to paying taxes early, contrary to common wisdom, and show tax alpha robust to varying model input parameters.  We illustrate that seeking an optimal decision for retirement income withdrawals requires different strategies.  We also suggest approaches for large institutions or FinTech firms to improve their existing financial planning tools based on tax laws common among many developed countries. 

Lead & Corresponding Author

James DiLellio, PhD, Pepperdine University

Additional Authors

Andreas Simon, PhD, University of Southern California