Retirement Planning

John and Amy

A Case Study

John (54) and Amy (52), are both high-level professionals in the Southern California region. John is an Equity Partner at Cooley LLP and Amy is a Senior Manager at Intuit. They have a two adult children that are just beginning their own professional careers. They would like to know if they can pursue an early retirement without reducing their lifestyle.

Their Goals

• John and Amy have chosen to partner with Bull Oak Capital, spurred by their need for a more comprehensive suite of financial planning and investment management services. They believe their current wealth management firm falls short of their expectations
• Looking to retire in approximately 18 months, John and Amy’s principal objective is to ascertain whether their assets and entitlements will suffice for a comfortable early retirement. They want to maintain their current lifestyle and also want to ensure they can leave a significant legacy for their children
• Having invested significant time and effort into upgrading their home, John and Amy express interest in retaining it throughout their retirement. They seek advice on the feasibility of this, or whether downsizing would be a more prudent financial decision
• John, as a Partner Attorney, stands to receive pension benefits once retired. However, the amount he receives is contingent on his retirement date. He seeks insights into the wisdom of potentially reducing his benefits if they opt for early retirement
• As parents to Sarah (24) and Daniel (22), and with hopes of future grandchildren, John and Amy are keen to leave a lasting legacy. They require guidance on best practices for this endeavor, aiming to provide well for their family
• In light of their anticipated early retirement, John and Amy are also eager to explore strategies to reduce their future tax liability. They look forward to gaining a deeper understanding of potential approaches in this area.
• Lastly, they express dissatisfaction with the performance of their investment portfolio with their current financial advisor and wish to enhance it. They are actively seeking a more effective investment strategy that would yield higher returns than those experienced with their current wealth management firm

Resources & Facts

• As John is an equity partner, his average annual salary ranges between $800K to $1.2MM per year.
• Amy’s annual income, which includes salary, RSUs, and bonuses, averages $400K per year.
• John and Amy have a combined 401(k) and deferred comp balance of $1.7MM and several brokerage accounts (IRAs, Roth IRAs, and a Trust Account) with a combined balance of $3.8MM located at their current wealth management firm.
• Their primary home is worth $3.1MM, with a mortgage balance of $1.4MM.
• John’s estimated pension benefit (non-qualified) at the age of 55 would result in a reduced benefit of $5,600 per month, as compared to an estimated benefit of $9,100 per month if he were to retire at the age of 60. John and Amy’s estimated Social Security Income FRA benefit is estimated to be $3700/mo each.
• They each have a term life insurance policy and an estate plan created 15 years ago, but they are not sure the beneficiaries are the way they want and if the successor trustees are the right people for the job.
• They have a savings account balance of $800K in the bank.

After an in-depth analysis of John and Amy’s financial situation, we identified key steps to secure their future financial health and offer a more streamlined approach to their financial management.

Primarily, we recommend establishing an emergency fund equivalent to 3 to 6 times their monthly spending needs. This serves as a financial safety net and provides a cushion for any unforeseen financial crises. It will foster financial stability and will allow them to better manage any unplanned expenses.

Considering their substantial assets, we suggest that John activates his pension early, despite a potentially larger amount if he retires at the age of 60. Their robust financial position allows them this flexibility, and it will enable them to retire early while still maintaining their lifestyle.

John and Amy are also in a good position to retain their house, offering a comfortable living space for themselves, and a warm, welcoming place for entertaining friends, children, and future grandchildren. Their financial stability also enables them to continue their term life insurance policy, providing additional security.

Regarding long-term care, our analysis shows they can comfortably self-insure, given the size of their assets. Their trust was also carefully reviewed and we found some areas needing attention. Specifically, they need to update their beneficiaries and listed trustees. To facilitate this process, we connected them with a highly skilled estate attorney to update their estate plan.

With respect to their current debt, our recommendation is not to aggressively pay down their mortgage, as their mortgage rate is already at a very competitive rate. This allows them to free up cash flow for other potential investment opportunities or life experiences.

In terms of investment, we noticed their current strategy lacked clear direction and had substantial overlap in individual securities. To rectify this, we recommended an update to the Bull Oak Capital Moderate Aggressive portfolio strategy. This would better align their investments with their financial goals and risk tolerance. As part of this strategy, we were able to implement a tax-loss harvesting strategy to offset some of their higher income, which should lower their effective tax rate.

We also reviewed Amy’s deferred comp plan and recommended an update to her payout to avoid overlap with other income options. By pursuing a 10-year payout option, they can lower their overall taxes. Alongside this, we proposed a series of Roth conversions for John and Amy between ages 55 and 65 before they turn on Social Security income. This would help to lower their future tax liability. A tailored strategy was also provided for Amy to manage her stock comp plan more effectively.

Lastly, considering their wish to pass on assets to their children, we developed a strategy for John and Amy to gift assets to their children while they are alive, offering more immediate benefits to their family.

Remember, financial plans should be adaptable and responsive to changes in circumstances or goals. We, therefore, ensure we are available to review and update this plan as and when required. This flexibility allows us to deliver a financial strategy that evolves with John and Amy’s needs and goals, providing a secure financial future.

John and Amy should:

• establish an emergency fund equal to 3-6 times their monthly spending needs
• activate John’s pension early for an earlier retirement while retaining their current lifestyle
• update their trust by revising beneficiaries and trustees, while retaining their term life insurance policy
• modify their current investment strategy to the Bull Oak Moderate Aggressive portfolio and pursue a series of Roth conversions to lower future tax liability
• develop a strategy to gift assets to their children while they are alive, rather than after they pass away