You've worked hard to accumulate your nest egg, but do you have a plan for how to turn your savings into income? So many decisions need to be made, decisions about how and when to claim your Social Security benefits, how to plan for income, and how to minimize taxes. It can feel overwhelming. And there's no shortage of “experts” weighing and giving you advice.
At Mariaca Wealth, we believe retirement should be a time to enjoy doing what you love… not years spent worrying whether your savings will last.
Meet Tony and Sarah:
Meet Tony and Sarah, 67 and 65 respectively. Tony retired in 2021 after selling his company. Sarah also retired last year as a nonprofit executive. They have three children (Josh age 40, Alexandra age 36, and Marco age 29), who are all independent and raising families of their own. Tony and Sarah just moved to Florida and, while they feel like they are in good financial shape, the recent pandemic and ensuing market volatility convinced them to revisit their financial plan and reconsider some important decisions.
Pre-retirement Total Assets: $2,720,000
- How much do we need to retire?
- How long will our money last?
- Can we afford our current lifestyle?
- How do taxes affect our financial planning?
- How should we create income from our savings?
- How can we make our savings last longer?
- When and how should we each claim Social Security benefits?
- In what order should we tap into our 401k and 403b for income?
- Do our portfolio allocations support our retirement distributions while remaining protected from unnecessary market risk?
- Do we have enough life insurance so the survivor can maintain the same standard of living?
- Should we consider Roth conversions?
- How will increased Medicare premiums impact our retirement?
- How do we adjust our strategy if market conditions change?
The Current Plan:
Follow conventional wisdom & make early Social Security withdrawals
Prior to the pandemic, Tony and Sarah anticipated spending $100,000 annually in current -year dollars, adjusted annually for inflation at 3%.
They had the following plan:
- Leave retirement savings in their rollover IRAs.
- Do no Roth conversions.
- Tony planned to begin Social Security benefits based on his earnings record in the estimated amount of $2,279 in February 2022 at age 67.
- Sarah planned to begin Social Security benefits based on her earnings record in the estimated amount of $2,444 in February 2022 at age 65 and 2 months.
- Take additional withdrawals using the conventional wisdom sequence (taxable accounts followed by tax-deferred accounts) to fund the balance of their annual spending needs and tax obligations from joint investment accounts.
- They planned to begin taking their required minimum distributions at the age of 72 and make up any annual spending shortfalls and taxes from joint investment accounts.
Financial Plan & Income
Distribution Analysis & Comparison
WHAT YOU GET WITH YOUR PLAN
- Step-by-step instructions to optimize your Social Security benefits.
- Advice on how to allocate and locate your assets to reduce taxes and other costs. Comparisons showing estimates of how long your portfolio will last based on factors you can control.
- Outline of how to strategically withdraw money from your accounts. Simple schedules showing how to create income from your savings.
Whether you've saved a little or a lot, you need a plan to ensure you're making the most of your assets.
THE MARIACA BOTTOM LINE
There are thousands of ways to generate portfolio income and claim social security benefits, and many retirees make the mistake of a implementing a withdrawal strategy that ignores the implications of how drawing from different types of retirement accounts will affect taxes. But the difference between a good withdrawal strategy and claiming early, as most Americans do, can be tens, if not hundreds, of thousands of dollars and additional years of portfolio income.
Coordinating a smart withdrawal strategy with the timing of starting Social Security is arguably the most important financial decision of retirement, so it only makes sense that these decisions are incorporated in your overall strategy, however, most investors do not do this kind of planning because their advisor . . . or because they do not even know it exists/it is important.
Our retirement income planning analysis provides a comprehensive, personalized report that includes an optimal withdrawal strategy that will result in the most cumulative retirement income possible, educational text to help you/consumers understand how these different withdrawal strategies may benefit them, and detailed instructions on how to implement the plan including when to make Roth conversions and smart withdraws. Furthermore, the report will illustrate side-by-side how various strategies compare in long-term tax implications, total value benefits, lower RMDs, and managing Medicare premiums.
*Case Study Assumptions
They maintain a 50% stocks-50% bonds after-tax asset allocation with stocks earning 9% per year including 2% dividend yield and bonds earning 3% interest per year. For the stocks, 20% of capital gains are realized each year with all gains being long term. The original cost basis of assets held in the taxable account is set at the market value. His Primary Insurance Amount for Social Security is $2,500 a month and hers is $1,500 a month. They both have Full Retirement Ages of 66, begin Social Security benefits at 66, and receive their Primary Insurance Amounts. We assume one partner dies in 16 years at age 78 and the survivor lives on 75%of the real amount they lived on when both were alive. Both Strategies locate stocks and bonds in the accounts (i.e., taxable account and 401(k)s) in a tax-efficient manner, while maintaining the 50% stocks-50% bonds after-tax asset allocation. We can help clients with this asset-location decision, which may further extend the portfolio's longevity. Based on today's Tax Code, they will usually be in the 25% tax bracket in retirement. They take the standard deduction each year. Inflation is 3% per year with all tax brackets, standard deduction, over 65 tax exemption, and personal exemption amount rising with inflation. This information is provided for general informational purposes. The securities and strategies referred to in the information may not be suitable for you; therefore, it is important that you consider the information in the context of your own investment needs and objectives, including risk tolerance, investment goals and time horizon. This information is not intended to be a substitute for specific individualized investment planning advice.
Important Disclosure: The above case study is hypothetical and does not involve an actual Mariaca Wealth client. The case study is for illustration purposes only and it is not intended to provide you with any customized investment advice. Nothing in this case should be considered as a recommendation or advice to buy, sell or continue to hold securities or other investments, or take any specific action regarding any tax matters. Accordingly, certain of the securities and strategies referred to may not be suitable for all clients. No portion of the content should be construed by a client or prospective client as a guarantee that he/she will experience the same or certain level of results or satisfaction if Mariaca Wealth is engaged to provide investment advisory services.