Pre-retiree case study

Joan was considering retirement, but wasn’t confident about pulling the trigger. She was struggling—a long marriage had recently ended, and she hadn’t seen it coming. She was 66, had worked for decades in nursing and, while she had a good sum of money saved, she also knew it was precious—she couldn’t afford a mistake. Among other things, she wasn’t sure what to do about Social Security and if she needed—or could even qualify for or afford—Long Term Care. She brought her son Glenn to our first appointment, a “fit” appointment, so that she’d have a second set of eyes and ears, and because his opinion mattered to her. Her primary goal was to leave as much as she could to her children.

In the weeks that followed, we developed a financial plan for her, confirming that she could, in fact, afford to retire. She had a choice to make, though, about her income—should she take her own Social Security, or should she take a Divorced Spouse Benefit based on her ex-husband’s earnings record, and allow her own benefit to continue to grow? If she chose this latter option, her benefit could grow by a potential 32% over the next four years before she claimed the maximum amount at age 70. However, choosing this option would mean less income for the next few years.

In Joan’s case, the decision was made easier by the fact that she was moving in with Glenn in order to help take care of her grandkids. She could afford to take the lower income knowing that, if she needed additional funds, she could always take them from her assets. Then, at 70, her enhanced Social Security benefit would more than pay for her expenses.

In addition to the timing of her Social Security decision, Joan was also keenly aware of another future date: the point in time when she’d have to start taking required minimum distributions, or RMDs, from her retirement account. That date was her age 70.5 when we had our initial conversation, but it’s been delayed to age 72 by The Secure Act, a law Congress passed in 2019. RMDs are an amount of money a person has to distribute from their retirement account each year in retirement in order to avoid a penalty. They are determined by two factors—a person’s age, and their retirement account value on the last day of the previous year. Because Joan’s enhanced Social Security would eventually cover all of her needs, she was not excited about having to take this money out each year for no reason other than to pay a tax.

She still had several years before this would start—she was just 66—and so we recommended that she consider distributing a small amount out of her IRAs each year prior to actually having to take RMDs. Our thinking was that, since her Divorced Spouse Benefit was her only “income,” Joan was in a good position to get money out of her IRA while she was in a low tax bracket. She met with her CPA to discuss the idea and her CPA both concurred with our recommendation, and also provided us with the number for how much to distribute from her IRA without bumping her into a higher bracket. Each year since she has moved funds from her IRA to an Investment Account, paying very little in tax, and also lowering future RMDs she’ll have to take.

Joan was concerned about Long Term Care and so we modeled a scenario where she needed coverage in her old age, but wasn’t insured, to get a sense of how significant of a risk this would be. We found that, with her enhanced Social Security benefit, Joan would likely have sufficient resources if she had a claim in old age, but that a longer claim would be more impactful. The cause of this type of longer stay—typically a cognitive impairment—wasn’t likely but, like so many outcomes we insure against, we had to consider the risk carefully. Joan ultimately returned to her primary goal, deciding that she did want to insure against a Long-Term Care event in order to protect the assets she hopes to pass down to her kids. There was one hitch: we had to find care that was affordable, but that also met her need.

We concluded that, if Joan needed to go into a care facility, and if our goal was to protect her assets from being depleted as a result, then we needed for her Social Security, along with the income benefit from her Long Term Care policy, to together cover the cost of care. This is where waiting to take her enhanced Social Security benefit at 70 became so helpful to planning—she didn’t need to buy as much Long-Term Care. We were able to find a policy that was affordable, but that was structured so that it would pay benefits as long as she needed them, rather than cutting her off after 2 or 3 years as most policies do.

The success of Joan’s financial position is a testament, first and foremost, to the work she did as a nurse, and her saving funds for retirement. We added value by understanding the opportunity that waiting to take her own Social Security benefit afforded her, of suggesting that she get funds out of her IRA while her taxes were lower, and of knowing how to integrate Long Term Care into an overall financial plan to protect her assets for her kids, her primary goal. It’s a true partnership.

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.