Client Experiences

Business owner:

Jim, age 58, owns a second-generation construction company.  He is married with three adult children.  The business is an S-corporation.  Jim’s income is derived from W-2 salary, S-corp distributions, and rental income.  Jim enjoys working and, health permitting, plans to work for another 10 to 12 years.   

The company has an employer-sponsored 401(k) plan and profit-sharing plan.  Jim currently contributes the maximum but is frustrated by his inability to make higher contributions due to regulatory requirements.  He is in the highest marginal tax bracket.  His net worth is approximately $10 million.   

Jim’s number one priority is personal retirement planning.  He has indicated he would like to contribute an additional $250,000 annually toward his own retirement.  He is extremely motivated to save on income taxes.  He is not opposed to making some additional contributions for his employees, but since he already makes a generous profit- sharing contribution, he wants the majority of the contribution going to him.  

Our solution for Jim:

We recommended a cash balance plan whereby the corporation contributes $250,000/year to the plan.  Like the 401(k)/profit-sharing plan, the contributions are tax-deductible saving Jim around $100,000 each year contributions are made.  Because of Jim's age and the company demographics, 93% of the contribution will go to Jim.  The plan will run alongside the 401(k)/profit-sharing plan and does not replace it.  If Jim works another 10 years, he will contribute an additional approximately $2,300,000 toward his own retirement.  The total tax savings over 10 years will be in the $1,000,000 range.     

Recently retired couple:

John (65) and Amy (62), both recently retired.  John was a doctor and Amy worked part-time while raising the family.  They have 4 grown children and recently became grandparents.  Their house is paid for, they have no debt, and their net worth is around $5,000,000.  They have approximately $3,000,000 in retirement assets across multiple accounts: IRAs, 401(k)s, 403(b)s profit-sharing plans, and another $2,000,000 in CDs and savings accounts.  They have done a great job saving and investing, however, their assets are in multiple accounts with no semblance of any asset allocation.  They want their portfolio to match their current age, risk tolerance, and goals.  Their combined annual income has just gone from $500,000 down to around $40,000.  Their number one priority is creating a diversified portfolio generating tax-efficient retirement income.  Their secondary goal is to leave an education legacy for their grandchildren.  John is “tax conscious,” feeling that they have been paying taxes in the highest bracket for many years.  Amy, is concerned with the potential high cost of health care in retirement.  She has two parents currently requiring in-home care and is saddened to watch their hard earned savings be depleted.      

Our analysis focused on creating an income plan that would keep them in a 22% to 24% marginal tax bracket.  We consolidated their multiple qualified plan assets into single IRA accounts for each spouse.  The new IRA accounts were structured to better reflect their investment objectives and legacy goals.  The new portfolio is balanced with equities, fixed income, and real estate which is more suitable for their current risk tolerance and long-term goals.              

Additionally, we designed a Roth conversion strategy to convert $500,000 from John's traditional IRA to a Roth IRA.  As a result, they will reduce future required minimum distributions, create additional tax-free income in later years, reduce Medicare premiums and social security taxes.  Ultimately, they don't expect to need the Roth money and plan to leave it to their grandchildren.  We did this while managing their income plan not to exceed the 24% marginal tax bracket (based on current tax rates).  At the same time, we recommended a social security claiming strategy whereby John delayed his benefits to age 70, and Amy claimed her benefits at her full retirement age, thus maximizing the family social security benefits.  Finally, to address Amy's concern of rising long term care costs, we repositioned a small portion of their CD's and leveraged those funds to cover care, tax-free, if needed.   If care is not needed, the money is not lost.           

Retired Firefighter and teacher:

Tom (55) and MaryAnn (52) are both planning to retire this year.  They ave 3 children, one still in college.  They both have pensions which will cover their monthly living expenses.  Tom has a 457 plan with $700,000 and MaryAnn has a 403b with $500,000.  Both plans are invested 100% in large cap growth mutual funds.  They also own a rental property worth approximately $1,000,000.  They bought it over 20 years ago and would like to sell it, but don't want to pay the large capital gains tax.  They are tired of managing the property.  Their number one priority would be to sell AND minimize the tax liability.  Their 2nd concern is the lack of diversification in their retirement accounts.  They have been very aggressive investors, but understand they are entering a new phase, and want to have their nest egg professionally managed.     

Our analysis of their rental property concluded with a recommendation to sell and invest the proceeds in an institutional real estate investment utilizing a 1031 exchange.  The result - NO more management headaches and NO taxes due on the sale.  They receive the income and, ultimately, if they hold the new investment until their death, their heirs will get a step-up in basis and all capital gains taxes will be avoided.  Our analysis of the retirement accounts concluded with a recommendation to reduce their equity allocation, diversify the holdings and reduce costs utilizing ETF's and individual stocks.                    

This is a case study and is for illustrative purposes only.  Actual performance and results will vary. This case study does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. This case study does not represent actual clients but a hypothetical composite of various client experiences and issues. Any resemblance to actual people or situations is purely coincidental.