Case Study

Retired Couple Currently
Working with a Financial Advisor

Beautiful Senior couple enjoying their relaxing retirement at home together in the Netherlands

Situation

Tom and Kate both retired last year at age 64. Tom was an engineer, and Kate a pharmaceutical executive, and they had been working with the same financial advisor for several years.

When meeting with their advisor, the meetings only consisted of discussions about recent performance. Their advisor had not generated any portfolio projections to ensure they can live the lifestyle they desire or advise on how much they can spend in retirement.

Considering retirement may last 30+ years, this was a concern. They’ve heard about Roth IRA conversions, but their advisor never mentioned it. They rarely heard from their advisor and when they did meet, they didn’t receive value and left the meetings feeling like it was a waste of time.

As they got further into retirement, they realized it was time to find an advisor who offers more than just investment advice, and an advisor who provides tax and distribution strategies.

Concerns

  • What is the best distribution strategy to minimize taxes across the multiple accounts we have?
  • When should we file Social Security benefits to maximize income and minimize taxes?  
  • How much cash should we keep in the bank?
  • Should we execute Roth IRA conversions and for how long?
  • How can we minimize Medicare IRMMA premiums?
  • Tom has a concentrated stock position in his taxable account. How should we address this?

Our Solution

  • Financial Planning

  • Investments

  • Tax Strategy

Investments

  • We recommended targeting 5 years of expenses in a “War Chest”, defined as conservative investments such as Cash, CDs, Bonds, or Alternative Investments. We advised them to keep 12 months of expenses in their checking and savings bank accounts, and we invested 48 months of monthly expenses in Fixed Income and Alternative Investments across their investment accounts to round out their War Chest.
  • We implemented a Covered Call Strategy to help reduce Tom’s concentrated stock position, which generates income while setting a sale price above the current price. If his stock is not called away, this strategy can be repeated to keep producing income.

Financial Planning

  • We implemented our Guardrails approach to maximize retirement income, and advised on monthly expenses so that, if their portfolio hits a guardrail, they know exactly how they should adjust their spending.
  • We utilized our Social Security Optimizer tool, which displays lifetime Social Security income based on when they file. From there, we generated several scenarios to account for the age they file and life expectancy (i.e. if live into their 90s vs 70s).
  • We encouraged Tom to delay filing for Social Security benefits to 70 and Kate until age 67 for a couple of reasons: 1) If Tom predeceases Kate, this will allow Kate to file for survivor benefits down the road and receive Tom’s higher benefit. 2) Delaying filing decreases taxable income and allows for higher Roth IRA conversions at lower rates. However, we agreed that if stocks substantially decline during their early retirement years, filing earlier has benefits since they can minimize portfolio distributions during a stock market downturn.

Tax Strategy

  • Our team helped convert their Traditional IRA into a Roth IRA at low tax rates. Based on cashflow projections, we recommended Roth IRA conversions aggressively while their taxable income is low, prior to Kate filing for social security benefits. This is projected to save them a significant amount in taxes and minimize the widow tax.
  • We ran a tax projection for the following year and established a game plan for how much to distribute from their Taxable, IRA, and Roth IRA accounts. Since distributions from each account are taxed differently, this allows us to better manage their overall tax liability.
  • We explained that income impacts Medicare IRMMA premiums since they are based on a two-year look-back of your household income. We had them complete form SSA-44 to inform Social Security that their income has reduced at 65 and apply for lower premiums.

Outcome

Tom and Kate feel like they are better prepared with their investments and taxes, and appreciate having a plan for stock market volatility. They see value in executing Roth IRA conversions at low tax rates, which will ensure the surviving spouse is less impacted from the widow tax and they can withdraw more from their tax-free account (Roth IRA), when tax rates will possibly increase.

Completing form SSA-44 allows them to save thousands of dollars in Medicare IRMMA premiums at 65 years old, and value the fact that we do our best to minimize these costs through retirement.

Most importantly, knowing exactly how much they can spend ensures they can enjoy their early retirement years, and can withdraw more than they had been when they were simply using the 4% portfolio distribution rule. They understand that stock downturns happen, and if their portfolio hits a lower guardrail, we will advise them on how much to adjust their spending.

They appreciate that we have a process to deliver value to our clients throughout the year. Spring meetings typically focus on Financial Planning and Investment related topics, and the year-end review centers on Tax Planning. While we proactively reach out quarterly, they know we are on standby and would like to be consulted on any item that impacts their finances.