Today’s case study dives into the retirement planning journey of John and Mary, a Kansas couple in their late 50s, who are preparing to retire in about five years. Let’s unpack their story and the strategies that helped them plan for a secure, enjoyable retirement.
Meet John and Mary
John and Mary, both 59 years old, live and plan to retire in Kansas. They’ve worked hard to build a combined taxable income of $188,000 and a healthy retirement nest egg of $1.7 million spread across tax-deferred accounts like 401(k)s and IRAs.
Their goals are straightforward:
- Retire Together: Both plan to leave the workforce around December 2029 or January 2030.
- Maintain Their Lifestyle: They don’t want to downsize their spending or compromise their current lifestyle.
- Smart Tax Strategies: They aim to reduce lifetime tax burdens while optimizing their Social Security and investment withdrawals.
The Challenges They Face
- Tax-Deferred Account Overload: With all their savings in tax-deferred accounts, they’re concerned about future Required Minimum Distributions (RMDs) and the taxes they’ll incur.
- Advisor Transition: Their current advisor, affiliated with LPL Financial, plans to retire around the same time they do, prompting them to seek a retirement-focused advisor.
- Investment Restructuring: Their current portfolio needs adjustments to balance growth, income, and protection against market volatility.
Crafting the Plan
1. Retirement Spending Goals
John and Mary currently spend $10,000 per month, with $7,000 allocated to discretionary expenses like travel and dining out. To avoid underspending in their "go-go" retirement years, they aim to spend $12,400 monthly post-tax, with flexibility to adjust based on market performance.
- Projected Balance in 2030: $2.4 million.
- Guardrails: Spending would only need adjustment if their portfolio drops to $1.7 million, at which point they’d cut $1,000 monthly.
2. Social Security Strategy
While conventional advice often suggests waiting until age 70 to maximize Social Security benefits, John and Mary chose a different route:
- Start in January 2030: At 65 for John and 64 for Mary.
- Annual Benefits: $40,000 for John and $32,000 for Mary.
This strategy prioritizes enjoying benefits earlier while reducing withdrawals from their investments during their active years.
3. Tax Optimization
To reduce lifetime taxes, Roth conversions became a cornerstone of their plan:
- 2024–2026 Conversions: Up to $48,500 annually, staying within their current tax bracket.
- Long-Term Goal: Diversify tax exposure, minimize RMDs, and leave behind tax-free income for heirs.
By 2030, their income plan aims to maintain a 12% marginal tax rate, significantly reducing their federal tax burden.
4. Investment Adjustments
Their investment philosophy involves a “war chest” approach:
- Five Years of Cash: Setting aside $500,000 in laddered U.S. Treasuries to fund early retirement withdrawals, protecting against market downturns.
- Balanced Portfolio: Allocating remaining funds for growth to ensure their money lasts through retirement.
The Outcome
By aligning their retirement goals with a comprehensive plan, John and Mary now have:
- A clear spending strategy to enjoy their retirement without fear of outliving their savings.
- An optimized Social Security strategy tailored to their lifestyle and preferences.
- A robust tax and investment plan to protect their wealth and reduce unnecessary taxes.
What You Can Learn from John and Mary
Whether you’re in your 30s, 50s, or already retired, planning is key. Here are the takeaways from this case study:
- Start Early: Retirement planning isn’t a one-time task; it’s a dynamic process.
- Diversify Tax Strategies: A mix of tax-deferred, Roth, and taxable accounts gives you flexibility.
- Plan for Flexibility: Market changes, tax laws, and life events require adaptability in your plan.
Retirement is about more than saving; it’s about creating a roadmap to live your best life. If you’re ready to take the first step, start your journey with a personalized retirement strategy.
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