Wanting to retire early
Representative client case (names changed)
Sheri and Lee came to us with two problems. They had an especially high combined income year (a nice “problem” to have) and they: 1) wanted to reduce taxes if possible starting this year 2) were hoping to retire early but did not have a plan in place. They wanted a highly personalized retirement strategy, based on their goals, for when this would make sense, especially since they hoped to ensure a nice retirement income over a long time (40+ years).
Their CPA suggested they find a Fee-Only advisor, instead of their present Fee-Based portfolio advisor – so they’d have an advisor who would be a true fiduciary for them and have a transparent all-inclusive fee (that is, no extra imbedded investment fees!). They needed immediate advice since the end of the calendar tax year was fast approaching and they were in a high tax bracket.
Fortunately, being an intentionally small firm, we were able to juggle our schedules to meet with them three times before the end of the year to run a retirement plan, conduct an in-depth analysis of their tax situation, and start implementing their plan. This included a donor advised fund for the current year and a lifetime plan to significantly increase their tax efficiency and reduce the high projected taxes on required distributions from their sizeable retirement accounts. Fortunately, we are able to do this without raising their near-term tax burden through a series of strategic Roth Conversions we will carry out when they reach their low-tax Golden Window™ years between retirement and age 72 (when IRA distributions become mandatory). Other effective tax strategies that worked well for them was rebalancing bonds into stocks during the recent market correction, and significant tax loss harvesting on their prior holdings. As it turned out, the latter served well to avoid capital gains when funding a pre-IPO stock option that later became available from one of their employers.
They are now on track to retire in only a few years with a considerable retirement accumulation that should provide a great family legacy as well. Perhaps more importantly, they tell us, is how our holistic approach has greatly simplified their financial lives and given them peace of mind.
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It started with a simple tax question
Representative client case (names changed)
Liam came to us wondering if there was a way he and his wife could contribute to their IRAs using money he had earned as an independent contracting physician in the gap between practicing at two hospitals. He had changed employers at the start of the year and, as typically the case, there is a one-year waiting time before he would be eligible to contribute to his new hospital’s retirement plan. What was confusing was he had heard two conflicting opinions on whether or not he could do this, and he just wanted a third opinion. Also, like many other people, he had a longer-term question of when he and his wife could reasonably expect to retire. Actually, this was a multi-faceted question, a balance between three factors — time to retirement, their present savings, and the retirement lifestyle they’d like.
After reviewing his tax returns and learning more about his situation, it looked to us to not be so much a question of whether or not they could contribute to their IRAs, but an opportunity to consider a third option that solved several problems at once. Since he had self-employment income, why not set up a solo 401(k) plan that would shelter many multiples of what they could contribute to their IRAs? Solo 401(k)s are neither difficult nor expensive to set up (compared with regular employer 401(k) plans, subject to ERISA laws). Used in combination with IRAs, they also provide great vehicles for carrying out more advanced tax strategies.
We find this happens often in our small practice, that what starts out as a simple tax question results in setting up a holistic plan that includes, not just a series of tax-saving strategies, but a larger plan that addresses their individual risks associated with health, insurance, estate planning, as well as smart portfolio management. Perhaps the greatest end-result, though, is the opportunity for people to look at the very core of their relationship with money, and to start to center their financial lives around their most important values. We find this to be one of the most rewarding aspects of working with our clients.