He considered himself a hard worker who also got lucky. St. Louis raised, he graduated high school in 1975 into a post-Vietnam world in which Bob Seger and bands like Boston provided his soundtrack. He became a well-compensated corporate attorney inside two separate Fortune 500 companies. He married in his early 40’s and he and his wife, 10 years his junior, raised two daughters in a comfortable, Minneapolis suburb. Lake-based summers, a steady rotation of Vikings box seats and cold Winters colored his world. They led very comfortable but not extravagant lives more focused on experiences than the latest and greatest “things”.
Retirement savings he humbly puts in the “I got lucky” category. He was part of the generation that saw employers pivot away from pension obligations and increasingly towards the employer sponsored, Traditional 401k’s. In the end, he was grandfathered into a pension and was able to accumulate two sizeable 401k’s. Including lifetime health care coverage, part of his compensation was company stock of which he accumulated a lot in a taxable account. While he did sell some here and there for cars, college tuition and an addition to the house he still had a fairly sizeable concentration risk. Thankfully he was not one to be sentimental to former employer and over the course of a few years he divested out of both positions while being mindful of capital gains taxes all along the way. He was a successful, pragmatic person who had done all the basic blocking and tackling needed to create wealth and now in retirement faced the responsibilities of managing it.
The Business of You
The beloved Seinfeld character Kramer tried in one episode to apply business principles to his life in a company called Kramerica. He even had an NYU student interning for him and the two of them conjured up fascinating business models. That said, a great wealth plan does apply actual basic business acumen to a clients personal financial life. Let’s build your balance sheet. Let’s build your cash flow projection model. Let’s stress test spending habits from age 62-95. Let’s put it all in one place, one screen, one dashboard and let’s review the business of your retirement at a regular cadence. Our firm, like many firms, uses a sophisticated wealth planning software to help do all this. Many of you who work with an advisor have sat through planning sessions spurred on by such software. If you haven’t, do yourself and your family a favor and do so. Especially you out there with $1 million or more in pre-tax Traditional SEP, or SIMPLE IRA accounts. It can be an eye opening experience.
We have used several different software packages over the years and currently use one called eMoney. Regardless, these software packages are instruments and like any instrument you have to learn how to use it to frame clients lives within the confines of their personal business plan. Beyond capturing a clients data, an advisor who knows what they are doing can use it to weave a narrative that ties a client’s present-self to their future self and then, to their legacy. A plan answers the big question most clients want to know. Can I retire and when? But, a great plan also considers how to handle hard earned abundance. At our firm, Blake Paro is really great at presenting that narrative.
The Mass Affluent may live longer than they think. Overall, they eat a better diet and have access to better health & wellness than their parents did. Of course, people still die tragically in their 50’s and 60’s but we plan that things will work out and clients will be driving their kids nuts for some time to come.
He was 64 and the time had come to discuss tax planning with specific attention to Recommended Minimum Distributions (RMD). Intellectually, he knew what RMD’s were but their impact was only in the abstract. His wealth plan showed that when combining longevity, his already sizeable Traditional IRA balance and a relatively modest lifestyle, his RMD’s were going to be daunting. For the first time his mind was moving beyond what kind of life he would have in retirement to consideration of an “abundance graph”. A graph showing that beginning at age 70.5 it was likely a pile of largely un-needed RMD’s would appear. His word, like many who see it for the first time was ‘Wow.”
What To Do With Abundance?
Looking forward, taxes were going to be a challenge so he began the process of gradually converting some of his pre-tax, Traditional IRA into a Roth IRA. Why did a Roth conversion make sense? First, his annual income was below the phase-out level of $193,000–$203,000. If he went beyond that range, he could not convert. Also, he assumed that tax brackets were going up during his retirement. If tax brackets held steady or even lowered great but better to plan for worst case. He was not thrilled paying taxes today but starting a conversion now when taxes were relatively low made sense to him. Importantly, he didn’t need all the money coming out of the IRA. He could handle the pain of paying the taxes now and could weather the 5-year holding period on withdrawals of money that were part of the Roth conversion. Lastly, he was looking at any money that was converted to Roth as something he was ultimately going to pass on to his two daughters. Roth accounts are great to leave to beneficiaries because their income and growth are tax free.
The plan was to play the “fill up the tax bracket” game every year. For example, one year they might have retirement income of $125,000 putting them in the tax 22% marginal tax bracket. To stay in that tax bracket their income could not exceed $168,000. So, for that tax year the client could pull an additional $43,000 from the IRA, fill up his tax bracket to $168,000 and pay taxes at what we collectively considered to be lower rates. Also, over time he collectively lowered the burden of mandatory withdrawals by gradually lowering the overall pile of pre-tax, Traditional IRA dollars.
Have you done a Required Mandatory Distribution analysis of your portfolio? What’s your plan? If you haven’t considered this please give us a call at 919.861.8212 or email us here.
Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. This information is not intended to be and should not be construed as tax advice or opinion. Federal and state laws are complex and constantly changing. Readers are cautioned that this material may not be applicable to, or suitable for, your specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. You should always consult your own legal or tax professional for information concerning your individual situation. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.