For every client and every situation, there are countless ways to build a retirement income plan. This plan can change for any number of reasons: A change in circumstances brought about when single individuals become a joined couple; the birth of a child, or several children, requiring significant cost outlays and potential college tuition; the loss or gain of a job, or a loss or gain in income; a health event, either of the insured or one of their loved ones; risk tolerance; or market performance. The list goes on and on, with endless combinations of strategies possible to achieve the client's end goal: Enough money in retirement to maintain a lifestyle that is acceptable to them.
With that in mind, Dana Anspach, a Certified Financial Planner and Kolbe Certified Consultant, shares five real-life scenarios in which she built Social Security, insurance, and investment strategies unique to each scenario. As you read on, reflect: What's your client's path to retirement?
Forced early retirement
Scenario
Ages: 62 (male)/58 (female): He became involuntarily unemployed earlier than expected; she plans to continue work for a few more years.
Assets: His 401(k)/IRA: $260,000; Her annual pension: $15,000 to start; Inheritance: $400,000
Goal
Spend more now: They want a current annual cash inflow of $80,000 to $90,000 a year as they are less concerned about having an equivalent inflation-adjusted income later in life and more concerned with having the ability to take a few reasonable trips and enjoy life now while both are healthy.
Social Security strategy
He agreed to delay applying for Social Security benefits until his full retirement age. This will maximize the survivor benefits for his spouse, and given an average life expectancy scenario, will maximize the amount they will receive from Social Security over their joint lifetimes.
Investment strategy
$150,000 was invested into an indexed annuity with a lifetime income rider, chosen as a form of longevity insurance on the wife. $27,500 of annual income is scheduled to start at her age 70. $50,000 was invested into an indexed annuity with a lifetime income rider on their joint lives. Product guarantees $6,900 of annual income scheduled to start at his age 70.
His 401(k) was rolled into his IRA and investments chosen to match expected distributions over the next eight years. They are intentionally spending the entirety of this account to meet their current income needs until guaranteed sources of Social Security and annuity income kicks in. Their $200,000 in after-tax investments were placed in a conservative portfolio of bond and stock index funds.
Tax strategy
Distributions from his IRA investments were scheduled in an amount to "fill up" the 15 percent tax bracket in the near term. Long-term income distributions were scheduled so that the client's taxable income would remain about the same each year. This is better than having the client jump from a high to low tax bracket from year to year, which can happen in the absence of a tax-efficient distribution strategy.
Conclusion
The end result for this client is that, later in life, their entire retirement income will come from guaranteed sources. They felt a huge sense of relief once this strategy was put in place.
Significant age difference
Scenario
Ages: 84 (male)/58 (female)
Assets: His retirement assets: $775,000; Her retirement assets: $248,000; After-tax assets: $185,000; he has term certain annuity income of $11,000 a year, which will expire in 10 years.
Goal
To ensure a continuity of income for the wife upon her husband's death, one of the primary issues in dealing with the complexities of a "May-September" romance. Also hoping to maximize on tax savings and a full preservation of wealth, if possible.
Social Security strategy
At her own age of 62, she can claim either her own or a spousal Social Security benefit, whichever will provide her the highest monthly amount. Upon her husband's death, she will be able to claim a survivor's benefit. She will not get both her own benefit and a survivor's benefit -- only the greater of the two.
Investment strategy
She invested $135,000 into a variable annuity with a guaranteed minimum income rider. The annuity guaranteed her income bucket grew at the greater of either an annual step up or 5 percent a year for the first 10 years. Her future income benefit was guaranteed at 5 percent a year of the income bucket amount. Based on minimum contract guarantees, this will, at the least, replace the term-certain annuity income they have been receiving.
The remainder of both spouses' assets stayed in a diversified portfolio of bond and stock index funds, with investments matched to meet annual income needs.
Tax strategy
A monthly "paycheck" withdrawal was structured to come out of retirement assets to meet living expenses, with "one-time" travel or entertainment expenses to be paid for with after-tax assets in order to smooth out their tax bracket throughout their distribution phase.
Conclusion
The goal here was to continue with a floor of guaranteed income from Social Security and annuities, with additional income coming from a more traditional market portfolio. This strategy fit this client's risk tolerance and spending habits quite well.
At retirement age
Scenario
Ages: 66 (male)/65 (female)
Assets: After-tax investments: $500,000; Retirement assets: $1.5 million; Social Security and guaranteed pension income: $56,000 a year
Goal
To maintain a comfortable standard of living.
Social Security strategy
Because of health and longevity concerns, both filed for their own Social Security benefits immediately.
Investment strategy
This couple has a sufficient amount of guaranteed income in proportion to their annual expenses, and sufficient assets to last past life expectancy. They were also comfortable with market fluctuations. A portfolio was constructed of 40 percent bonds, 60 percent stock index fund, with an acceptable allocation range established of 50/50 up to 70/30. Investments were chosen to match the client's distribution needs each year, so safe investments could be liquidated to meet near-term needs, and growth-oriented investments left alone to meet future income needs. This is sometimes referred to as a time-segmented approach.
Tax strategy
A monthly "paycheck" withdrawal was structured to come out of retirement assets to meet living expenses, with annual expenses such as long-term care premiums and real estate taxes to be paid for with after-tax assets in order to smooth out their tax bracket throughout their distribution phase.
Conclusion
Considering the amount of guaranteed income this client already had, their asset level in relation to their income needs and their health concerns, there was no need for additional guaranteed income products. This client was very happy with a traditional approach using a 4 percent withdrawal rate as a guideline for their distribution amounts.
Single female, divorced
Scenario
Age: 39
Assets: 401(k): $200,000; Emergency fund: $64,000 in a money market
Goal
After a recent divorce and a transition from a corporate job to self-employment work, this woman needed to know, "What now?"
Savings strategy
The first step was to create a simple budget, or a spending plan on an Excel spreadsheet. This woman was thrilled to discover she could live comfortably on $60,000 a year.
The next step was to help her set a "minimum annual savings" amount to which she would commit. As a self-employed person with no employees, she was eligible to set up an individual 401(k) plan that would allow her to contribute up to $16,500 a year as a salary deferral and an additional 25 percent of her net self-employment income as a profit-sharing contribution.
Tax strategy
The Individual(k) plans also allow a participant to contribute their salary deferral as either a Roth or regular contribution; in an average or low-income year, given her young age, the Roth would be a better choice. The higher one's tax bracket, the more beneficial the regular deductible contribution, so this plan gives her the option to do that if a strong income year occurs.
Investment strategy
Her 401(k) was currently invested in a 100 percent equity portfolio that was missing such key asset classes as emerging markets, real estate, small cap and large cap value. It was rolled over to an IRA, risk-reduced with an acceptable equity to fixed income range of 70/30 to 90/10 established, and funds were diversified across additional asset classes.
Conclusion
This client left the meeting feeling like she was back on track and that she had a plan.
Young professionals
Scenario
Ages: 40(male)/40 (female)
Assets: 401(k)/profit-sharing plan: $100,000
Goal
He was a cardiovascular surgeon who had just become a partner in a successful practice. They had two young children. They wanted advice on everything: Did they have the right amount of life insurance or disability insurance? How should they save for their children's college education? What should they be doing with their money?
Insurance strategy
A thorough review of their existing life and disability policies was conducted. The amount and type of insurance they already owned was appropriate. All policies were kept in place and left unchanged.
Investment strategy
They had no emergency fund or liquid assets, a large house with a sizable mortgage and two young children. I asked them to take what I call the $100k Challenge, which is a race to see how fast they could accumulate $100,000 in liquid, after-tax savings. After they accomplished this, then we could talk about additional investing.
They already had 529 plans; once the $100k Challenge was met, we would look at reinstating monthly contributions to these plans.
The medical practice fully funded the 401(k)/profit-sharing, but it was all in cash, as they didn't know what to do with it. A diversified portfolio was structured and implemented.
They owned units of a private surgical center and wanted to know if they should buy more. They were encouraged to focus on the basics for now, which was to work on building up an adequate emergency fund.
Conclusion
It was -- and will continue to be -- challenging to keep this client focused on the basics. High-profile professionals seem to be attracted to products with sizzle. It would be a mistake for them to pursue alternative investments without building up a sufficient liquid emergency fund.
Dana Anspach can be reached at dana@wmsus or 480-609-4336.
