Client Case Study:

Juan and Gabriela recently retired at ages 63 and 58 respectively with several million dollars of net worth and a modest monthly pension.  They have three grown children and two grandchildren.  They live well below their means and are debt-free.  They prepare their own tax returns, self-manage their retirement and brokerage accounts, and are highly risk-averse with well over half of their investable assets in money market funds and the remainder in equity index mutual funds.  They previously had term life insurance policies and disability insurance policies which lapsed once they retired.  They have private health insurance consisting of High Deductible Health Plans and standard coverages for homeowner’s and auto insurance.  They last updated their estate planning documents consisting of reciprocal wills and advance medical directives several decades ago when their children were younger.  They are concerned about running out of money in retirement and are not sure how much they can afford to spend each year.  Their other goals include annually gifting to their children and grandchildren, annually donating to charities, helping pay for some of their grandchildren’s college expenses, and leaving an inheritance to their children and charities.

Here are some of the issues we identified and recommendations we provided after a comprehensive financial consultation:

Development of specific, measurable, and realistic financial goals
- Helped them articulate and quantify their retirement income goals, annual gifting and charitable donation goals, college education goals, and inheritance goals; determined whether or not they could fund all of these goals given reasonable forward-looking assumptions and their current asset allocation

Identification of financial inefficiencies and potential problems
- They had four different equity index mutual funds in their retirement accounts which overlapped such that the vast majority of their equity asset allocation was in U.S. large cap equities

Establishment of an appropriate emergency fund
- Helped them reduce their emergency fund to a reasonable size

Risk management/insurance planning
- Recommended a personal liability umbrella policy and long-term care insurance policies for asset protection purposes
- Recommended repositioning a portion of their excess cash into permanent life insurance policies to build a tax-advantaged non-correlated asset, borrow from the accumulated value if needed during a prolonged market downturn, and for the tax-free death benefit to provide estate liquidity and more efficiently fund their legacy goals
- Recommended purchasing annuities over time to cover their essential expenses during retirement not met by their pension and future Social Security benefits and hedge longevity risk

Estate planning
- Discussed the pros and cons of will-centered and trust-centered estate planning
- Helped them work with a local estate planning attorney to draft revocable living trusts subsequently flowing into beneficiary-controlled trusts and update their other estate planning documents to reduce future costs and publicity, better address any incapacity issues, and provide future asset protection
- Helped them coordinate beneficiary designations and titling issues to align with their estate planning goals

Cash flow planning
- Calculated their current essential and discretionary expenses
- Identified several expenses they could either reduce or eliminate without materially affecting their standard of living

Tax planning
- Recommended opening Roth IRAs and helped them determine the optimal amount of Roth conversions to perform each year to obtain tax diversification and minimize their expected lifetime tax expenses, taking into consideration issues including income tax brackets, Medicare Income-Related Monthly Adjustment Amounts, and the Net Investment Income Tax
- Recommended a deduction clustering strategy and use of a donor-advised fund to minimize their expected lifetime tax expenses
- Recommended opening and funding Health Savings Accounts for their tax advantages
- Identified several recurring errors and omissions on their income tax returns; recommended they amend their recent income tax returns to correct these issues
- Identified that they had inadvertently exceeded the gift tax annual exclusion amount in their annual gifts to their children; recommended they file a gift tax return and consider limiting their annual gifts to the annual exclusion amounts to avoid reducing their lifetime gift and estate tax exemption in the event they were to have a future estate tax liability

Investment planning
- Explained that their main risks in retirement are longevity risk and purchasing power risk, not market volatility
- Helped them diversify their investment portfolio and change their asset allocation to better align with their risk tolerance, risk capacity, and the time horizons of their various financial goals
- Helped them maintain investment discipline during market downturns
- Showed them how to rebalance their investment portfolio

Retirement planning
- Performed retirement projections and sensitivity analyses to help them arrive at a reasonable annual retirement spending goal while maintaining a low probability of running out of money and a high probability of meeting their other financial goals
- Helped them estimate their future Social Security benefits and choose the optimal age to claim Social Security benefits

College education planning
- Recommended 529 plan contributions and qualified transfers to meet their college education planning goals

Charitable planning
- Discussed various trust strategies to fund their charitable goals
- Recommended qualified charitable distributions once they reach the eligible age

Certain details of this case study have been modified to maintain client confidentiality.