Today, we're diving into a detailed case study of a married couple in their early 50s who are aiming for a secure and enjoyable retirement. With approximately $1 million in investable assets and a goal to retire in 12 years, this case study will illustrate how careful planning can help them meet their retirement objectives. We'll explore their primary concerns, including maximizing Social Security benefits, tax-efficient planning, and investment strategies. By the end, you'll have a clearer understanding of how to approach similar retirement planning scenarios.
The Couple's Financial Profile
Our case study revolves around a couple in their early 50s. The husband earns around $200,000 annually, while the wife has a salary of about $50,000. They have accumulated nearly $1 million in investable assets, with a significant portion held in tax-deferred accounts and only a small amount in Roth accounts. They are targeting retirement around 2037, and their desired monthly income in retirement is $7,000.
Primary Concerns and Objectives
When the couple approached us, they expressed several key concerns and goals for their retirement planning:
- Maximizing Social Security Benefits: They wanted to understand how to optimize their Social Security benefits to ensure a steady income throughout retirement.
- Tax-Efficient Planning: They sought strategies to minimize their long-term tax liabilities, given their substantial tax-deferred assets.
- Employer Benefits and Guidance: They needed advice on how to make the most of their employer-provided benefits.
- Alignment of Financial Components: They aimed to harmonize their various financial assets and plans to support a successful retirement.
- Investment Strategy: They were interested in optimizing investment returns while managing risk.
- Pre- and Post-Retirement Investment Planning: They wanted a clear investment strategy for both before and after retirement.
Social Security Optimization
One of the couple's major concerns was maximizing their Social Security benefits. Social Security calculators often suggest delaying benefits until age 70 to maximize lifetime benefits. For this couple, waiting until age 70 could result in cumulative benefits of approximately $1.9 to $2 million, assuming they live to age 90 or beyond.However, maximizing Social Security isn’t just about the highest possible payout. It involves considering how claiming strategies might impact other aspects of their retirement plan. In this case, we recommended a strategy where both the husband and wife claim their benefits in 2039. This approach would provide them with about $72,000 in annual Social Security income.
Tax-Efficient Planning
Tax efficiency is crucial, especially given that a large portion of their assets is in tax-deferred accounts. To address this, we proposed several strategies:
- Roth Contributions and Conversions: We advised making annual Roth 401(k) contributions and Roth IRA conversions. This strategy involves gradually shifting assets into Roth accounts to create a more tax-diversified portfolio. Over the next decade, this could include contributions totaling about $212,000 and conversions of around $200,000.
- Balancing Tax Brackets: The goal is to manage current and future tax liabilities by reducing taxable income now in exchange for tax-free withdrawals later. This approach ensures that in retirement, a significant portion of their income can be tax-free.
Investment Strategy
With a 12-year horizon until retirement, the couple’s investment strategy should focus on growth while managing risk. Here’s what we recommended:
- Growth Focus: Emphasize investments that offer growth potential, such as dividend-paying stocks and equity investments, to align with their long-term goals.
- Minimizing Volatility: While growth is essential, it's also crucial to manage volatility. We recommended strategies to mitigate extreme market fluctuations and ensure that the portfolio remains on track.
- Diversification: We advised positioning their investments to optimize returns based on their risk tolerance and retirement timeline, ensuring a balance between risk and reward.
Bridging the Gap Before Social Security
Since Social Security benefits won’t start until 2039, we developed a plan for income bridging:
- Cash Management: Withdraw from cash reserves to cover expenses until Social Security begins.
- Tax-Deferred Withdrawals: Use funds from tax-deferred accounts like IRAs to bridge the gap and then switch to Roth accounts for withdrawals once Social Security benefits kick in.
Summary of Financial Projections
Based on our planning:
- Pre-Retirement: The couple is projected to have around $2.3 to $2.4 million by the time they retire. They could safely spend $9,000 per month. If the portfolio performs better than expected, they could increase their spending to $10,000 to $11,000 per month.
- Investment Plan: The couple’s portfolio will aim for an annual return of about 8.5% to 9%, incorporating growth-focused and dividend-paying investments.
- Tax Strategy: Effective Roth conversions and contributions will help manage their tax liability, with a focus on making their income tax-efficient both now and in retirement.
Planning for retirement is not a one-time task but an ongoing process that requires adjustments and regular reviews. For this couple, the plan involves a balance of growth, risk management, and tax efficiency to meet their long-term goals. By addressing each concern methodically, they can look forward to a comfortable retirement that aligns with their aspirations.Thank you for joining us in this detailed exploration of retirement planning. If you have similar concerns or need personalized advice, don’t hesitate to reach out to a financial advisor. Stay tuned for more case studies and financial planning tips in our upcoming posts!-You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This video is intended for educational purposes only. Nothing in this video constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. MOKAN Wealth Management is a registered investment adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training.
