Case Study: “Years from Retirement, But Carefully Planning It Out” Blueprints for Retirement Peace of Mind — A New Case Every Month

This case study involves John and Amanda. John is age 52 and plans to work another 13 years. Amanda is age 50 and currently unemployed outside of the home. John has been employed many years with a very big company, earning $115,000 annually, and the company does offer a pension plan. He has saved $402,000 in his company retirement fund and another $245,000 in his 401(k). John’s pension plan offers a lifetime payout of $48,384 per year projected at age 65. His Social Security benefit at age 67 would be $30,204 per year, and Amanda’s benefit at age 67 would be $14,304 per year. Amanda has a small IRA balance of $16,000. They have a nice home valued at $520,000, and 20 years remaining on a $305,000 mortgage at 4 7/8%. They have been practicing good financial management, but have recently built up $48,000 in consumer debt. They have one child, age 25, who is self-supporting.

John and Amanda’s financial objectives are: 1) retire in 2025 with $72,000 of guaranteed annual retirement income (this will be $100,000 in 2025 dollars), 2) take an in-service distribution and rollover John’s retirement funds to gain control and better investment choice (even though he is under age 59 ½, this is an option he has due to a company merger in process), 3) get their estate documents in order, 4) increase their cash reserve fund, 5) reduce their stock market anxiety, and 6) fill as many gaps in their financial pyramid as possible.

The first step of our team’s Wealth Integration Review is to map the Client’s financial resources into the various blocks on our Peace of Mind Retirement planning pyramid as shown below. Here is what we discovered in examining their pyramid:

1) Too much of their wealth was concentrated in the “Growth Investments” peak of the pyramid,

2) They had an insufficient “Uninterrupted Pension System” (UPS) to provide guaranteed lifetime income, especially since they were anxious about the stock market and wanted more certainty,

3) John was vigorously saving for retirement, but it was creating a “Tax Bomb”* in their future,

4) Their house was not titled to a living trust—an error which could have cost their estate $15,000 in probate fees,

5) In fact, they had no living trust, wills, power of attorney or healthcare directives,

6) They had no long-term care insurance,

7) John was over-paying for an inadequate life insurance policy, and

8) They have $215,000 in home equity earning zero percent rate of return.

With some repositioning of assets and creation of a new “Recommended” pyramid, our team could see how their financial objectives could be realized. We suggested a shift of $402,000 from stock market investments into UPS in order to reduce their stock market anxiety and increase their retirement certainty. We recommended that they increase their cash reserve fund and also payoff all consumer debts. We suggested that John make future retirement savings contributions to a structured life insurance contract with a long-term care rider. This would help reduce the “Tax Bomb” in their future and provide a different type of bucket of cash to be accessed in different ways—non-taxable ways.

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 works we run Retirement Cash Flow Calculation projections—as shown.

❶ John’s Retirement Accounts in the stock market were reduced by $402,000 and this money was moved into a UPS—noted at #6. The remaining $261,000 was reallocated to a more tactical investment strategy, which has an exit plan (in case of a major market crash) and a dynamic style which adjusts with the ups and downs of the economy.

❷ The Non-Retirement Account section is empty in this case, but generally would contain non-IRA assets.

❸ The Annual Cash Flow section of the projection shows the flow of money from the Retirement Account and all the other sources of income to meet their $72,000 annual income objective.

❹ John’s earned income is projected for the next 13 years.

❺ To optimize their lifetime Social Security benefits, we provided a claiming strategy which increased their benefits by $61,970, and these details are built into the cash flow projection.

❻ The Uninterrupted Pension System (UPS) is funded and then allowed to mature for 13 years, while John is working. When John retires it begins paying out monthly income distributions—which will continue for the rest of John and Amanda’s lifetimes, guaranteed by an insurance company.

❼ The Total Income column summarizes all the various income sources, including John’s company pension benefits.

❽ Their Total Living Expense objective was $72,000 per year. This projection includes an inflation factor of 2.8% in order to maintain their purchasing power.

❾ The last column on the projection is for “Over or Under” and reflects the annual income they will have over and beyond their stated objective. It is nice to see these large positive numbers. Also notice that the Retirement Account shows an $858,751 balance even out at Amanda’s age 90 life expectancy (her chosen age). John used a life expectancy age of 85. This projection shows them living quite comfortably for the rest of their lives. John and Amanda have flexibility, they’re in control and we can continue to help by updating this projection periodically.

The third illustration shown here is the Implementation Plan developed to help John and Amanda carry out the necessary action items to make this plan and their 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: Considering that John is 13 years from retirement, Amanda’s unemployment, and their level of debt, it is important for John to have adequate life insurance coverage. He was paying $2,954 for only $200,000 of coverage and we were able to find him a $750,000 policy for only $2,033 per year. This was a fantastic savings in premiums and succeeds in moving him up to the proper level of insurance coverage. The Implementation Plan concludes with a note regarding the $76,970 of savings provided by this planning. The Plan also notes that most of the action items have no monetary savings which can be calculated, but could relate to quality of life issues.

When John and Amanda first came in they were nervous and uncertain about their financial future. Going through this planning process reassured them and gave them the ability to make sound financial and retirement decisions today.