This case study involves Shannon. Shannon, age 64,is a widow, works in a sales position and would love to continue working until age 75.Shannon has accumulated $84,408 in two different retirement accounts, has a Roth IRA worth $217,857 and has $664,685 in non-retirement accounts. She has a nice home in Santa Rosa valued at $619,000, with home equity of $385,000.She has been practicing good financial management and has no consumer debt. Her two adult children are self-supporting. Shannon informed us up front that she was not a fan of annuities (see comments at the end).
Shannon’s financial objectives are:
- Earn $50,000 per year until retirement at age 75, putting $8,000 per year into retirement savings,
- have a retirement income of $4,000 per month, in addition to her Social Security benefits, and
- remain financially independent, ensuring that her children will not have to take care of her. She wants to stay in her current home for as long as she can.
The first step of our team’s Wealth Integration Review is to map the Client’s financial resources into the various blocks of our Peace of Mind Retirement planning pyramid as shown below. Here is what we discovered in examining Shannon’s pyramid:
- having no “spending plan” in place gave her great uncertainty and cause for worry,
- too much of her wealth was concentrated in growth-oriented investments,
- many of her investments, although professionally managed, were unsuitably aggressive and poorly rated when compared to other investment choices, and
- she could increase her Social Security lifetime benefits by $139,273 by following our “optimization” claiming strategy. With some reallocating of investments and creation of a new “Recommended” pyramid, our team could see how Shannon’s financial objectives could be realized. Please note: there is nothing “cookie-cutter” about this plan! It is completely driven by the Clients’ goals–not product-driven in any sense.
To illustrate how this Plan works we run Retirement Cash Flow Calculation projections—as shown.
- Shannon’s IRA and 401k Retirement Accounts use an assumed growth rate of 6% per annum. She adds $8,000 per year until age 75 and begins RMDs at age 70.
- The Non-Retirement Account section holds a Roth account (considered a “non-retirement” account here because no RMDs are required), and three trust accounts—one of those a Bypass Trust containing her deceased husband’s share of the estate.
- The Annual Cash Flow section of the projection shows the flow of money from the Retirement Account, Non-Retirement Account and all the other sources of income to meet her $86,124 annual income objective.
- We assumed no inflation growth on Shannon’s earned income.
- Her IRA will not be touched until age 70, when required minimum distributions are required.
- We helped Shannon claim a widow’s benefit from Social Security, to start almost immediately, and then allow her own retirement benefit to growth by 32% by deferring it until age 70.
- The Total Income column summarizes all the various income sources.
- Her Living Expense objective was $86,124 per year. This projection includes an inflation factor of 2.8% in order to maintain her purchasing power (no inflation was added to her home mortgage).
- The last column on the projection is for “Over or Under” and reflects the annual income she will have over and above her stated objective. Notice that the Retirement Account shows a $209,369 balance, and the Non-Retirement Account shows a $1,751,155 balance even out at Shannon’s age 90 life expectancy (Shannon’s chosen age for the projection). This projection shows her living comfortably for the rest of her life. Shannon has flexibility, she’s in control and we can continue to help by updating this projection periodically. Also, note that her $619,000 home has not been tapped into, but could be—if and when she ever needed to do so.
The third illustration shown here (right) is the Implementation Plan developed to help Shannon carry out the necessary action items to make this plan and her financial objectives a reality. This particular case includes thirteen action items all spelled out, with potential savings noted and a place to check items off as they are completed. In addition to the items already discussed above, the following issues are also addressed by the Plan: We suggested that she roll over her old 401k and combine it with her existing IRA for ease of administration. We recommended that she wait until age 70 to begin taking her Social Security benefits—resulting in a lifetime benefit increase of $139,273—and begin immediately claiming a widow’s benefit (which she didn’t know she qualified for). We recommended that her investment accounts be put under our management in our Green Label Portfolio, as it utilizes a tactical asset allocation methodology with downside risk management. We also suggested that she clean up a few other items with regard to title on some accounts she holds and to confirm correct beneficiary designations on certain accounts.
The Implementation Plan concludes with a note regarding the $139,273 of savings provided by this planning, and further notes that most of the action items have no monetary savings which can be calculated but could relate to quality of life issues.
Use of Annuities: You will notice that we did not utilize annuities in this plan, due to Shannon’s strong bias against them. However, we generally encourage our clients to keep an open mind and to allow our professional team of experts to design a plan which is in their best interest. We agree that NOT all annuities are good; we must very carefully choose the right annuity for the right client and their particular situation.
When Shannon first came in she was nervous and uncertain about her financial future and ability to retire. Going through this planning process reassured her and gave her the ability to make sound financial and retirement decisions today. She loved the plan and we began implementing it immediately. Beyond the three pages of the plan shown here, there are many, many pages of supporting documentation which point to the reasoning used in our planning. As there was in this case, sometimes our plans include multiple versions and “what if” scenarios. Once drafted, our team sits down and patiently explains the plan to our client, page by page.
Note: any terms used herein which are unfamiliar to you are explained in Monty’s book, Before It’s Too Late, available for purchase in our office or through www.amazon.com.