Case Study 2: Betty & Bob

The situation:

Betty is 61, her husband Bob is 62. They are looking forward to retirement and have big plans. They would like to get as much out of their retirement, and their savings, as possible. Their financial advisor used a ‘cookie cutter’ approach to retirement planning and suggested they use “conventional wisdom” as the way to go. 

Total Assets: $2,200,000

Anticipated spending in retirement:

$120,000 annually after taxes

This is when taxable accounts are used first, then tax-deferred accounts, followed by tax-free accounts.  He also suggested that they start Social Security as soon as possible to minimize pressure on the couple’s portfolio.  Good thing Betty and Bob came to Baobab Wealth to get a second opinion on their retirement plan, as our comprehensive analysis showed otherwise.

Betty & Bob's Financial Plan answered all of their questions - and more

Betty & Bob worked with us to analyze various portfolio withdrawal strategies to determine which one can add the most value to their portfolio.

They learned that spending their retirement assets in the typical “conventional wisdom” order – spending all of the taxable, then tax-deferred, and then tax-exempt accounts – won’t actually meet all of their income needs in retirement! There was a large income shortfall and their portfolio would run out of money before Betty would expect to pass away.

 

Betty and Bob notice in our meeting a strategy called ‘Opposite of Conventional Wisdom’, which means spending down their savings in the exact opposite order from Conventional Wisdom: First tax-exempt, then tax-deferred, and then taxable. Guess what? Opposite of conventional wisdom meant more money for Bob & Betty and would provide for Betty throughout her lifetime as well.

Just to be sure there were no better strategies, we analyzed several other potential strategies.

 

Betty and Bob were surprised to see that there were many strategies that were better than conventional and opposite conventional wisdom! The best strategy actually provided for an additional $414,465 for the couple over the conventional wisdom strategy recommended to them by their original advisor. This was accomplished by managing taxes and coordinating their Social Security claiming strategy.

 

The recommended top withdrawal strategy prescribed taking advantage of partial Roth conversions each year to minimize the total taxes owed over their retirement horizon. This also allowed them to reduce their Required Minimum Distributions (RMDs) and ultimately save on Social Security taxes as well. As you can see by the graph above, the difference in taxes with the top strategy over conventional wisdom is $268,129 by using partial Roth conversions strategically.

Saving the most on taxes and maximizing their retirement income was great, but it was also important to Bob that he didn’t leave his wife, Betty, with the widow’s penalty one day. This is when one spouse passes leaving the surviving spouse all of the inherited assets and larger social security check, but with half the standard deduction and single tax filing brackets. This can cause a lot of undue financial hardship on the surviving spouse. Great thing this was taken into account with their new retirement plan and we were able to eliminate the widow’s penalty altogether for them!

For Betty and Bob, conventional wisdom would have clearly cost them a lot of money and retirement income! There were multiple strategies that would likely garner far more for them, and their original advisor probably had no idea he was giving them inferior advice. Every scenario is different and has numerous variables that can alter the best strategy for your portfolio withdrawals. By working with us, we find you more money by helping you manage all of the important details that matter to your retirement income.

How we did it

Traditional “rules of thumb” and “conventional wisdom” used by almost every large financial services company and by advisors, are usually wrong!

 

Let us show you how maximizing your social security strategy plus smart income management and a tax-efficient withdrawal sequence can potentially add more longevity to your portfolio in retirement.

Ready to turn your savings into a reliable retirement paycheck?

The first step is to schedule an introductory call to see if our expertise is a good match for your needs.

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* For privacy reasons, the case study described above is hypothetical and the facts do not apply to an actual Baobab Wealth client. This retirement planning case study should in no way be construed as a guarantee that a current or prospective client will experience similar results or levels of satisfaction if he or she engages with Baobab Wealth for wealth management services.

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