Glen & Amber are sandwiched between their elder parents and three children, ages 15-24. Glen has been managing their investments on his own and would like to retire from his corporate job. With family pressures complicating this decision, friends referred them to us for financial advice.
In our Discovery Meeting, we learned that Glen’s parents are in their late seventies and becoming less independent. His sister lives closest to them but increasingly frequent trips are straining her family. Amber’s parents are divorced; her dad and his wife are stable, but her mom is struggling with health and financial issues.
Seeking comfort for Glen’s career decision, we started with the family needs. Through our Generational Conversations program, we provided comprehensive information on care management options. Hiring occasional home caregivers who report to Glen’s sister proved to be a good solution. Amber’s mother moved into independent senior living at a reasonable monthly cost. She is now happier in a social setting and Amber is greatly relieved. The proceeds from selling her mom’s home combined with Social Security will keep mom financially stable for many years.
The couple’s elder daughter, Olivia graduated college with some 529 funds remaining, which we transferred to their middle child. Olivia is now largely independent with a first job, and gets occasional support from her parents.
In addition to increasing 529 contributions for the younger kids, we opened custodial (or UTMA) accounts. These are irrevocable gifts that a parent controls until the children reach their state’s age of majority. Unlike 529’s, they can receive annual gifts of stock and mutual funds and get a preferential tax rate on sales. Glen gifted some appreciated company stock which was promptly sold. The proceeds can immediately cover some extracurricular expenses and later fund college costs ineligible for 529’s like cars, Greek life and entertainment.
With family issues addressed, we narrowed in on the retirement conversation. We explored Social Security strategies. Glen also expects some consulting opportunities. We all agreed to start managing Glen and Amber’s investments right away. Our paradigm of aligning investments to match expected income needs brings comfort around retirement spending, while capturing growth with longer-term dollars.
Generational Conversations also supports adult children and their elder parents to plan for housing, legal strategies and security needs.
First, let’s look at the three types of accounts by their tax treatment.
Tax-Deferred Retirement Accounts are funded with untaxed dollars (contributions are tax deductible, either through salary-deferral or on your tax return). However, future withdrawals are fully taxed as ordinary income. Examples include 401(k)s and traditional IRAs.
Taxable Accounts are funded with after-tax dollars. Dividends and gains from sales receive preferential tax rates. Because you’re paying taxes in the years that income or sales occur, withdrawals aren’t taxed. These are usually mutual fund and stock accounts.
Roth Account contributions are not tax deductible. However, they grow tax-free forever, and withdrawals are never taxed.
It’s best to spread money across these three account types while you are working. This will give you some flexibility to manage your taxes in retirement, which could help your money last longer. Having different types of accounts also provides options for early retirees.
Optimal investment and withdrawal strategies are different for everyone. Factors include age, tax brackets, employer plan features, and investable income. Powerful retirement planning is best done well in advance and then annually while taking distributions.
Retirement planning is one of the most important things that we do for clients. We would be happy to discuss your situation and how we might be of service.
For young professionals building a career, financial goals might seem far away and not get attention. It’s a fact that the sooner you begin, the greater certainty you have of reaching those goals. Not sure where to begin? Here’s what to think about first:
1) Capture all your company match – If your employer offers a retirement plan with an employer match, contribute at least enough to capture the full percentage. You must be contributing some of your own money for the employer to match it. You want your contributions to stretch through the last pay period of the year to get the last dollar.
2) Pay down credit cards – This is the next place to direct excess money if you have credit card debt. The average credit card interest rate is currently over 20%! At that rate, paying $200 per month on a $10,000 credit card balance would take you 5 years to pay off, and cost you over $5,000 in interest.
3) Emergency Savings – Set aside enough money to cover unexpected costs. Having adequate savings can help you avoid taking on debt and allow you to build investment accounts. You could automate savings by having some of your paycheck go directly into a high yield savings account.
4) Gradually contribute more to employer retirement plan (or IRAs) – Once you are debt-free and have built some savings, increase contributions to your employer plan. If your employer offers a ROTH 401(k), look here next – or open your own Roth IRA.
5) Contribute to a brokerage account – Brokerage investment accounts are where you can build wealth for goals prior to retirement, like home ownership, starting a business or any goal with a defined timeframe. Most investments here have preferential tax treatment which also provides flexibility to better manage taxes during retirement.
Investment performance is not consistent and neither is retiree spending. Early retirees usually travel more and increase spending on hobbies. You may buy a car once every 5 years. Healthcare spending increases as we age. So, why should your portfolio focus on providing a fixed income? Integras Partners adapts portfolio allocations to market dynamics and your changing needs.
We match investments to fulfill projected cash flows. First, we set aside enough money to supplement social security, etc. for up to 30 months depending on our economic outlook. Taking little risk with immediate income provides comfort to spend. The beauty is most of your assets can capture long-term returns without short-term risk.
Integras Partners uses different strategies for graduated time-horizons, optimizing market risk for each timeframe. Every client has unique circumstances and a unique allocation. As a fee-only investment advisor, we don’t charge commissions and are always acting in your best interest.
Ann was facing her next chapter in life. She was recently widowed and had been considering retirement. She wanted to live near grandchildren and downsize her home.
Almost all of Ann’s assets were in a company retirement plan, advised by the plan’s financial advisor. Because they told the advisor that they “didn’t want to lose money”, Ann’s allocation was 55% short-term bonds and 45% cash. She was eligible for a widow’s Social Security benefit but was reluctant to retire, fearful that she didn’t have enough money.
Ann’s fear stemmed from her thinking that she needed to preserve the capital and live off the interest. Our philosophy is that retirees don’t need to preserve all their capital for their heirs, they just need to not run out of money. Ann actually had enough to retire but it was too conservatively invested to meet all of her spending needs throughout retirement. Our layered risk approach allows clients to feel more peace spending in retirement. This is because we take modest risk with investments for the next several years of spending, then capture market returns with the majority of assets that can now remain invested long enough to go through market cycles. This also allows for greater spending over time to account for inflation.
Ann has since moved into her new home and is spending more time with her grandkids. She has the peace of mind to enjoy life knowing that her investments will continue to provide supplemental income with minimal short-term risks.
If you’re interested in discussing how we might help you, please give us a call at (404) 941-2800, or reach out to us here.
