Broker Check

Retiree Case Study

There Were Opportunities for Jim and Amy in the Details

In 2020, Jim had a choice about whether to take a required minimum distribution, or “RMD” from his IRA account. Because of Covid-19, the government had given retirees a reprieve—they could go ahead and take an RMD in 2020 or not. Jim had other sources of income: his social security, his wife, Amy’s, Social Security, her pension from KPERs, and funds they could take from a lower-tax, non-qualified account would provide them with the money they needed for the year.

Jim’s required minimum distributions had started just the year before, in 2019, and that year, like this one, we were trying to time the RMD in relation to a Roth Conversion from Jim’s IRA. A Roth Conversion allows someone to move funds from their IRA account to a Roth IRA account, choosing to pay tax now rather than later. Why would someone choose to do that? They might think tax rates will be going up, as Jim did, or that their beneficiaries will face a higher tax bracket. They also might want to lower their Traditional IRA account value to reduce future RMDs as a result of the conversion.Once someone begins taking RMDs, a Roth Conversion is only allowed once their RMD for the year has already been taken. And here were Jim’s choices. Was he going to take an RMD this year? Was he going to do a Roth Conversion?

After much discussion, Jim elected NOT to take an RMD in 2020, but to do a more significant Roth Conversion. Our thinking was simple: the best time to convert funds is when they have been depressed; that way, the likely rebound will take place in the tax-free Roth IRA. You get more bang for your buck by doing it this way and, having decided against taking an RMD, Jim could go ahead and do a Roth Conversion while the market was down. We moved some of the more aggressive investments Jim had in his IRA over to his Roth IRA in early April, in plenty of time to enjoy the strong stock market rebound from the pandemic low.

Seeing counsel and making decisions was second nature for Jim and Amy. When they retired five years earlier, they had several decisions to make. Would Jim keep his company stock? What choice should Amy make regarding her KPERs benefit? And what was the appropriate amount to spend on building their dream home out-of-state in Colorado? We worked through each of these, and Jim and Amy were thoughtful. He elected to sell his company stock—his goal at retirement was to grow his assets, but also to protect them, and taking a large bet on a single company didn’t make sense. And Amy had decided to go “halvsies” on her retirement benefit—taking some in the form of a lump-sum, and taking the balance as income. The new house was—is—a home-run, and they were successful in the difficult task of starting a new life in a beautiful area in retirement.

The work is never done, though—there’s always maintenance, up-keep, and as Jim and Amy became more invested in their Colorado community, they wanted to give to local charities. This, interestingly enough, also impacted their IRAs. In addition to taking an RMD each year, and determining whether Jim wanted to do a Roth Conversion, we also discussed “qualified charitable distributions” or QCDs. A QCD allows an IRA holder who is 70.5 to give to charity directly from an IRA, satisfying part or all of their RMD depending on the size of the gift, without having to pay tax on the amount that goes to charity. In effect, a person can make the charitable contributions they were going to anyways, but use the IRA to do so, satisfying part, or all, of their RMD in the process. For a couple like Jim and Amy, who really didn’t need the RMD for income, this was a great strategy.

Jim and Amy’s Long-Term Care policy has also required some maintenance in retirement. Like so many Long-Term Care policy holders, Jim and Amy and have seen the premiums increase on their policies since they bought them in 2008. In 2020, their insurance company came back asking for a second, additional increase to the premium. Long term care companies have historically done a poor job of pricing their policies, and fewer policy-holders have dropped the policies than the insurance companies anticipated. As a result, in cases where the insurance company sees dramatically higher future costs than they anticipated, they can go to each state’s insurance commissioner and seek permission to increase premiums.  If they can demonstrate this is necessary for their solvency, then they get the go-ahead.  In the policies we work with, we’ve seen this happen, on average, every 5-7 years, and Jim and Amy faced this situation again in 2020.

We did a review of their options—to pay the higher premium, to reduce their coverage and keep the premium the same, or to reduce future cost of living increases on the policies. We also did an analysis of the cost of care in their new area; this was valuable as the cost in Colorado exceeds that in many other states. Armed with the facts, Jim and Amy could see that if they do, in fact, need care, the additional cost of paying premium on the full policy value will likely be more than covered by savings within the first year they need the coverage. In other words, as long as they could afford to pay the additional premium, it likely made sense to do so. Jim and Amy decided that they would accept this premium increase, but we agreed to analyze any future premium increase with a similar rigor.

Jim and Amy worked hard for the retirement they wanted. The guidance that we provide builds on, and protects, the work that they did to get here.

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.