RMR Wealth Builders is a wealth management organization that understands how complex the personal financial planning process is to most people. We believe our role in retirement planning for high-income earners is to remove the emotion from the process by providing solutions to your specific retirement questions and needs. And this high earner retirement planning case study and solution embody that.
By doing this, we clear the path for you to achieve your own personal financial goals and create effective wealth management, and asset allocation strategies. Our strategies help you and your family do more with your money.
RMR uses our highly effective “plan first” method to help clients accumulate and distribute your assets over your lifetime. The plan first method is designed to view your entire financial life before making any decisions. By planning first, we are able to guide you in making an educated and informed decision using your full financial plan.
In our plan first method, we focus on two phases: accumulation and distribution. In the accumulation phase, we identify the correct strategies to save money for retirement. In the distribution phase, we ensure you are set up to successfully reach your retirement goals. Once that is achieved, we focus on part 2; distribution, or legacy planning. The distribution phase allows clients to leave a legacy to either family members or a charitable cause they care about deeply. This strategy is used for a variety of clients in many different personal and financial situations, including people like Mike.
RMR’s role is to help identify what Mike’s retirement goals are and to establish a viable pathway for him to achieve those goals.
Mike* is in his mid-50s and is a high earner working for a publicly traded company. He is looking to retire within the next five to seven years. Pertinent details about Mike’s financial situation include:
- A Deferred Compensation Plan with his existing employer
- All insurance coverage through his employer
- 401(k) contribution equaling 5 percent of Mike’s salary
- Company match and Deferred Compensation match totaling approximately $28,000 annually
What we did for Mike is a customized financial plan example for others seeking to maximize their retirement income and financial management, so they can accomplish similar goals.
The Plan First Method
During the accumulation phase, cash flow analysis becomes a helpful tool. The accumulation phase focuses on , insurance planning, insurance options, saving options and estate planning. Mike’s goals were fairly simple. He wanted to retire within the next 5-7 years, preferably sooner. Afterwards, he planned to remain in his current home for three to five years before downsizing to another area. In order to accomplish this, we explored a few specific scenarios to help Mike determine his best care, such as:
- His retirement outlook, according to his current path, looking at ages 60, 62, and 65
- Potential living arrangements that included allowing him to remain in New Jersey while downsizing his home, or remain in New Jersey while purchasing a second home out of state
- Possible medical expenses and costs should Mike retire before the age of 65, when he would qualify for Medicare
RMR follows a specific technique for helping clients not only find a path to financial success and effective wealth management, but also guides clients in the process so they can make wise decisions about purchases outside the scope of their current financial plans.
It begins with developing an understanding of the client’s overall financial picture; the plans they have for the future, and their current state of savings and investments. That is only the beginning, though.
Cash flow analysis becomes a helpful tool in relation to overall life expectancy:
Once we understand these essentials, it’s time to move on to deeper understandings related to whether the individual is a spender or saver by nature. This helps to determine key things like:
- When a person can comfortably retire
- How quickly a person can accomplish his or her financial goals
- How fast they can procure certain assets
- How much money they can spend along the way
So, our first step in the personal financial planning process is to create a cash flow summary that identifies where the client’s money goes – income, assets, expenses, etc.
Once we’ve completed the cash flow summary in the accumulation phase and have a good idea of their current income situation, we move on to the SWOT analysis.
S = Strengths
W = Weaknesses
O = Opportunities
T = Threats
In Mike’s case, the SWOT analysis looked something like this:
- High net cash flow
- Solid emergency fund
- Home with substantial equity
- Consistent saving through career
- Deferred Compensation Plan
- Portfolio is highly concentrated in company stock
- No estate planning documents
- No long-term care planning
- No tax mitigation for current situation Deferred Compensation Plan payout
- Options available to increase employer contributions
- Ability to diversify portfolio
- Options to generate essential estate planning documentation
- Ability to use technology to aggregate his financial life
Using account aggregation software was necessary in Mike’s situation to address the challenge of ensuring his wife would be able to manage the “financial house” if something were to happen to Mike. RMR’s proprietary software, My Virtual Planner, is a value-added service that RMR provides to clients. This is especially the case in situations like Mike’s, where he handled the bulk of the financial details for the couple. It is certainly a conversation worth having during the financial planning process.
- Potential for the market to crash
- Lack of long-term care planning and protection
- Premature death (especially in Mike’s situation where he was the family’s sole earner)
- Concentration of stock in company stock
- Cost of healthcare in retirement prior to qualifying for Medicare
- Large tax liability due to Deferred Compensation Plan distribution at retirement
When it comes to threats, medical expenses are a greater threat than the average couple realizes. This is especially so for those who retire before the age at which Medicare coverage is provided.
We believe it’s important to inform couples that even if Medicare is an immediate option, there are still medical expenses Medicare does not cover. In fact, Fidelity estimates that the average couple will spend roughly $280,000 on medical expenses not covered by Medicare between the ages of 65 and 90. That’s a huge consideration that must be addressed in the personal financial planning process. The expenses that aren’t typically covered by Medicare Part B and many supplemental insurance plans include things like:
- Prescription medications
- Hearing aids
- Dental care
- Long-term care
- Vision care
If you plan to travel in your retirement, Medicare Part B coverage also excludes medical care received abroad. Ultimately, these are all deficiencies in Mike’s financial planning that need to be addressed before he retires.
RMR’s Observations & Recommendations for Mike
The main observation, at first glance, was that Mike has a high net cash flow and has saved significantly throughout his career. The concentration of company stock in his portfolio, which represented roughly 25% was a concern. Furthermore, the current layout for the Deferred compensation payout structure proposed a significant potential tax burden at retirement. Finally, limited insurance coverage and a lack of estate planning documents posed a more significant threat to his family’s financial well being.
In Mike’s situation, we created three specific financial plans. In one, he continued working until the age of 65. Another had him retiring at the age of 62. The final plan had Mike retiring at the age of 60.
With each one, we created a financial plan where he would accomplish many or all of his current financial objectives, one included him downsizing to a home in Arizona.
In each plan, we mapped out a series of scenarios that helped Mike see which goals and objectives were realistic and if any adjustments needed to be made to make them more easily attainable. As part of the distribution phase, we also made specific recommendations for changes that could be made to achieve certain goals and results more quickly for Mike and his spouse, including:
- Suggesting building out an emergency fund to cover unexpected expenses.
- Changing allocations to their brokerage account to a more conservative approach.
- Presented options for long-term care insurance, while educating them about the high risk of experiencing long-term care events in retirement (more than 70 percent of people will need long-term care at some point in their future).
- Recommendations for attorney to draft will, power of attorney, and health directives for the couple.
- Suggesting that Mike increase his 401(k) contribution to take advantage of “catch up” contribution maximums and netting $1,400 in tax savings for the year.
One rather unique benefit Mike’s company offers is the ability for employees to make “after tax contributions.” These contributions are made after taxes are deducted and can be rolled out into Roth IRAs today for tax-free income later.
Because of Mike’s deferred compensation plan, he will be able to cash out approximately $1.6 million at retirement. Unfortunately, he was set to take that payment as a lump sum payment. With current tax laws, that meant Mike would lose nearly half of that payment to taxes, which would be a painful hit to take.
After in depth cash flow analysis, we were able to recommend that he adjust the payout schedule, allowing him to take payouts over a 10-year period. This decision couldn’t have been made in a vacuum; it could only be made after looking at many variables, social security, cash flow, insurance, etc.
The bottom line is that Mike will be able to save a significant amount of money in taxes by making a simple shift in the way his deferred compensation plan pays out. That simple shift was only possible due to cash flow analysis our two phase approach.
That’s not all RMR was able to do to help Mike and his family accumulate and distribute their assets over their lifetime. We were also able to make recommendations inside his 401K and his Deferred Compensation Plan that helped to reduce the fees he was paying.
We also encouraged Mike to review his insurance coverage for home insurance, auto insurance, and umbrella coverage to make sure he had sufficient coverage and make increases or reductions where needed. In Mike’s case, we encouraged him to increase his umbrella insurance protection.
Start Your Personal Financial Planning Process
While we were able to make many recommendations that would increase Mike’s bottom line, reduce unnecessary fees, and eliminate the overpayment of taxes, Mike is still the one who must act to set these recommendations into motion.
We were able to find plenty of opportunities for Mike to make his money work harder for him. RMR also acted as a liaison for him to follow up with the attorneys, insurance agencies, and retirement plan providers to implement the recommended changes.
Motivated savers, like Mike, are usually quick to jump in and take care of what needs to be done to make sure they have a system in place that puts their money to work for the retirement they desire rather than risking it working against them.
However, some clients require a little more hand-holding and tough love lessons.
RMR is a full service wealth management and financial planning firm. We understand there are many different types of people in need of our services and can create plans that will accommodate all their needs with actionable steps designed to help them accomplish their financial goals.
Our role is to offer a roadmap that will help educate clients on the best options to meet their retirement goals and objections. We believe in presenting multiple possibilities to clients, so they can choose the options that best meet their goals and their financial planning comfort zones.
RMR Wealth Builders is dedicated to helping individuals, families, charities, and businesses accomplish their financial goals with realistic steps based on their current financial states and the assets they have to work with. Using our two phased approach, we can help clients in their accumulation and distribution phases of life.
We are here to offer personal finance and wealth management services with direction so our clients can achieve their financial goals as quickly as possible based on their unique financial situations. Work with a CERTIFIED FINANCIAL PLANNER® Professional, (“CFP®”) today and see what a difference it can make for your personal financial planning process for retirement.
*name has been changed for privacy