In this episode of ThimbleberryU, we dive into a detailed case study centered on Stan and Jan, a fictitious couple navigating the complexities of retirement planning with a focus on creating income, simplifying finances, and leaving a meaningful legacy. With $5 million in assets—$3 million in qualified accounts like IRAs - and 403(b)s and $2 million in taxable accounts—they are financially secure but face challenges in optimizing their retirement strategy.
We begin by addressing their primary goal: replacing Stan’s paycheck as he retires. Given their modest spending of $100,000 annually, the focus is on balancing stability, flexibility, and efficiency. Strategies include leveraging Stan’s Social Security at age 70, drawing from qualified accounts to manage required minimum distributions (RMDs), and addressing the 10-year fixed distribution requirements from certain accounts. Consolidating multiple accounts into a single IRA for administrative simplicity is another point of emphasis.
Once income is stable, we explore aligning their investments with their goals. A mix of bond ladders, dividend-paying stocks, and liquid investments ensures consistent income while managing risk. We emphasize a conservative-to-moderate approach for near-term needs, with some growth-focused investments to combat inflation and support their longer-term financial stability.
Taxes play a significant role, and we discuss strategies like Roth conversions before Stan’s RMDs begin, allowing funds to grow tax-free for future needs. Charitable giving through Qualified Charitable Distributions (QCDs) and donor-advised funds offer opportunities to support causes while reducing taxable income. For family, gifting up to $19,000 per year per recipient tax-free enables Stan and Jan to enjoy seeing their loved ones benefit from this money during their lifetime.
Ultimately, this case study highlights that retirement planning is about more than just numbers—it’s about aligning financial strategies with personal values and creating a fulfilling, stress-free retirement. Whether simplifying accounts, managing taxes, or crafting a legacy, thoughtful planning helps ensure a meaningful and secure future. Having "enough to retire" may only be the first piece of the puzzle.
ThimbleberryU 129 - Creating Income and a Legacy- A case study
Speakers: Jon Gay & Amy Walls
[Music Playing]
Jon Gay (00:08):
Welcome back to ThimbleberryU, I'm Jon Jag Gay, Amy Walls from Thimbleberry Financial joins me. As always, good to be with you Amy.
Amy Walls (00:14):
Jag, it's great to be talking to you.
Jon Gay (00:15):
We talk a lot about concepts in the show, and today, we're going to really do a case study and dig down deep and talk about- maybe you have your retirement squared away, but you want to think about your legacy, you want to think about what's beyond that.
Amy Walls (00:39):
Yeah, Jag, I'm excited about this. I think sometimes when clients know they have enough money that retirement isn't necessarily a concern because they don't think they'll spend it all, it's like well, what else?
And a lot of times there's a lot of opportunity to save money in taxes or to support causes or people that are important to someone. So, hopefully, we'll cover all of that for our listeners today.
Jon Gay (00:56):
Alright, so for our example today, we're going to take the fictitious couple of Stan and Jan, and I think I know where you got these names. I want to specify these are people, not bears, right?
Amy Walls (01:06):
Yes. (Laughs) Never even occurred to me.
Jon Gay (01:09):
So, it’s a subconscious thing, okay. Here's an Easter egg for the millennials and Gen Xers out there. Okay, so Stan and Jan, what is their financial situation and what are they looking to accomplish, Amy?
Amy Walls (01:21):
So, as you said, these are fictitious people. Stan in this case is about 70-years-old and getting ready to retire. Jan is a little bit older and has already been retired for a few years. Together, they have about $5 million in investible assets. $2 million of that $5 million is in non-qualified accounts, brokerage accounts if you will, meaning it's all taxable. And about $3 million is in retirement accounts, primarily IRAs and 403(b)s, 457 plans. So, work retirement plans like a 401(k).
Now, Stan and Jan's spending is pretty modest given the size of their assets. They spend about a hundred thousand dollars a year and that's why I say they aren't at risk of running out of money, house is paid off.
So, their goals, to answer that part of your question, is really replacing Stan's income with a reliable retirement income stream, number one; two, simplifying their accounts.
Stan has five 403(b)s and 457 plans plus IRAs (that can get administratively overwhelming). And then creating a plan to leave a legacy for their children and support charitable causes that are important to them.
Jon Gay (02:43):
Okay. So, that's a great starting point. What are the first steps that Stan and Jan need to look at to address their needs?
Amy Walls (02:50):
Before we can focus on goals two and three, we really need to look at goal number one, which was replacing his income. How do they recreate a paycheck in retirement in a way that balances stability, flexibility, and efficiency?
So, we're going to be looking at tax strategies in there in terms of distributions, because he's 70 and so much of this is in qualified accounts in his name – and it really doesn't matter with Jan being a little bit older. If it's in her name, required minimum distributions are going to be an issue starting shortly.
Meaning they're going to have to pull a certain amount out of these accounts. And with $3 million in qualified accounts and only needing a hundred thousand dollars a year, they're going to have a lot more income coming in than what they actually need.
Jon Gay (03:44):
Which sounds like a good problem to have on the surface, but it comes with its own set of issues.
Amy Walls (03:48):
It does. It means they'll be paying Uncle Sam a lot more, and I don't know many people that want to do that.
Jon Gay (03:54):
Exactly. Income is always a big concern in retirement, so how do Stan and Jan replace Stan's paycheck, as you mentioned, in a sustainable way?
Amy Walls (04:03):
So, first, let's look at things that are there that aren't investments. So, Social Security. Since Stan is turning 70, we want to make sure he takes advantage of that (Jan already is). So, we want to get that started, even though he hasn't yet stopped working. We want him to start that at 70 because he doesn't get any increases by waiting, and the two are close together.
Then we're going to start in this case using distributions from qualified accounts. So, let me break this down a little bit further. It doesn't mean we're going to pull all the rest of the income from non-qualified accounts, but I mentioned that Stan has a number of 403(b)s, 457 plans – inside of those because of the custodian that holds them, there is a fixed investment that requires a 10-year distribution period.
That means that we need to get started on those distributions. Whether we have that income going to Stan directly or we have it flowing into investments where we can choose how it's going to be used. That's really important because (and we see this a lot with our clients in healthcare that have these accounts) if you can't get to a chunk of that money, it's a problem. I mean, waiting 10 years to access what you thought was just regular retirement money is a hard pill to swallow. So, we want to get that started.
Then we need to look at how much is he going to need to take in required minimum distributions because that's just a couple of years away, and make sure that we have that portfolio aligned to be able to generate that income and make those payouts.
The other thing is, I talked about the number of accounts being administratively-
Jon Gay (06:09):
Burdensome, complex, pick your word, yep.
Amy Walls (06:12):
Yeah. The issue here is that he has IRAs, 403(b)s and 457 plans. Right now, the IRAs can be grouped together for distributions. The 403(b)s can't, the 457s can't, so he has to take separate required minimum distributions from everything but the IRAs.
Jon Gay (06:34):
Wow, okay.
Amy Walls (06:35):
Once he gets to required minimum distribution age that can create some problems because people often don't understand and they'll try to take it all from one account or they just forget and miss some of the distributions.
Jon Gay (06:51):
You have talked so many times in this podcast about the many, many pieces of the puzzle, and this is a pretty big jigsaw puzzle spread out across the dining room table we're looking at right now.
Amy Walls (07:01):
It is, absolutely is. And it seems so simple on the surface when you look at it for many people, “I've got $5 million in assets, I'm good.” But there's a lot of moving parts when you dig a little deeper.
Jon Gay (07:13):
For sure.
Amy Walls (07:14):
So, those are the first two pieces. The third piece is looking at how to tap the non-qualified accounts, the brokerage accounts. So, here, the $2 million that they have in here is terrific; it adds flexibility to their situation. These accounts can be used to bridge any gaps or cover unexpected expenses. The other investments distribute on the schedule we have planned.
Jon Gay (07:40):
So, one you have fixed, the other you have flexibility with.
Amy Walls (07:43):
Yes.
Jon Gay (07:44):
Alright. So, it really is about combining multiple income streams to meet their needs while keeping things efficient.
Amy Walls (07:50):
Absolutely, Jag. You used the puzzle analogy before and I think that's perfect. Here, we're building a puzzle and each piece has a very specific role to create efficiency and make that puzzle picture as beautiful as it can be in real life for them.
Jon Gay (08:05):
Got you, got you. So, a minute ago, you talked about simplifying their accounts. Why is this so important and how does Stan and Jan, again, people not bears, do it?
Amy Walls (08:14):
(Laughs) Yeah.
Jon Gay (08:18):
Got you.
Amy Walls (08:20):
You definitely got me. (Laughs) So, first of all, it's consolidating accounts. Now, do they have to? No, but again, administratively efficient. I don't know many people in retirement who want to manage many different accounts and distributions from them. It's just not efficient or where people in general want to spend their time.
So, it may or may not be cost-effective. So that always has to be taken into consideration. But they can roll all of those qualified accounts and the various IRAs, under Stan's name, into a single IRA, making one bucket that all of those distributions happen from. It just helps ensure that there aren't mistakes.
Jon Gay (09:11):
Makes sense.
Amy Walls (09:12):
It allows us and them to work around the fixed investments that take 10 years to get out of. Those sections can't be consolidated because there's a portion paying out every year. So, we can focus on everything else and then create a clear strategy for how those distributions fit in based on what we decided to do with the fixed investments.
They may come into the consolidated account, the IRA, or they may fill that income stream for 10 years. That's a decision that we have to make.
Jon Gay (09:44):
It sounds like it really would make a huge difference in their day-to-day financial management.
Amy Walls (09:49):
It does. It's a little like setting up a budget in a sense, using different bank accounts. Okay, what expenses are we paying from where, and that sort of thing – when you've got lots of accounts going on and lots of places that distribute from, sure, they can all flow into one bank account.
Jon Gay (10:06):
I think about it in the reverse a little bit. A somewhat similar analogy is I have a few different credit cards that offer different rewards points on different purchases. I know I get more points on meals for one, I know I get more points for flights and hotels on another one. So, I'm using different streams for different purposes, and yes, caveat, I'm making sure I pay the full balance every month. I knew you'd say that.
Amy Walls (10:29):
You know me well. I like that analogy. It's hard to keep track of what do I want to use when and why and how. And I mean, I can see in this case, spreadsheets being used to make sure, have I done the thing, how much have I done? Is it set up as monthly distributions? Is it set up as annual or do I need to manually process this? It's just a headache.
Jon Gay (10:50):
It is. Although spreadsheets are my wife's love language, she would enjoy that, I think. So, once the income and the accounts are simplified, we distill it down, how do you align investments with their goals, which really is what this whole thing's about.
Amy Walls (11:02):
You’re right. It is all about goals, Jag. So, first, alignment is about stability and long-term growth, we need both. So, for Stan and Jan, given their goals, this means creating a diversified income strategy. So, we might use a mix of bond ladders for predictable income; we might use some dividend paying stocks for growth, and liquid investments for short-term needs.
All of that together can make sure their income can be steady (consistent is what I'm looking for, predictable, it's one of our core values) without taking on unnecessary risk. Now, do they need all of this money to be conservative?
That's based on their risk tolerance, but the portion that we're going to be using soon, we definitely or at least I wouldn't recommend to Stan and Jan, that they have it be invested aggressively. We want it conservative enough but to produce the income we need that fits within their risk tolerance.
Second, risk management is the focus. As I mentioned, their spending needs are modest, so their portfolio can lean conservative to moderate focusing on that stability, and especially in this day and age, keeping up with inflation. So, that's what we're going to look at for the short term.
Now, they're 70, they have longevity on their side too, something we didn't talk about. So, some of this money does need to be growing for the future.
Jon Gay (12:33):
Alright. Amy taxes are a big part of retirement, how do you help Stan and Jan minimize the taxes (we talked about how important this is) but still while working toward their legacy goals?
Amy Walls (12:42):
Jag, it's a terrific question. Taxes can definitely eat away at retirement income if they're not managed well. So, a couple of strategies that immediately come to mind here is the required minimum distribution management.
Obviously, throughout this podcast, I've said required minimum distributions quite a few times. So, we want to withdraw from those qualified accounts if they're separate strategically to meet the requirements. Now, we have three years for Stan, three years before Stan has to start taking distributions – he's about to retire.
So, if we've looked ahead and said, “Okay, here's what they're going to be,” what if we do some Roth conversions once Stan stops working before he has to start taking those distributions to get some money out of those qualified accounts, reducing once he has to start taking distributions, the account balance that they're calculated from.
So, because they have taxable accounts, we may be able to draw off of the taxable accounts now, not creating a big tax bill because we have capital gains instead of income tax (again, once Stan retires) and do some Roth conversions out of these $3 million that the tax will be due – again, they have the taxable assets to pay that tax bill, but that money can now grow in Roth accounts tax-free for the future. We have about three years to do that. So, I think Roth conversions are a strong thing to look at.
And then charitable giving. These clients have indicated they are interested in donating to charity. So, they could use qualified charitable distributions, which allows them to donate up to a hundred thousand dollars annually from Stan's IRAs or retirement accounts, satisfying at the point in time required minimum distributions and avoid the income tax.
Jon Gay (14:49):
Got it.
Amy Walls (14:50):
So, it saves the money compared to deducting the charitable contributions. They just don't realize the income.
Jon Gay (14:58):
Ah, okay, and that ties into the goal you mentioned earlier about giving back. What are some other ways that Stan and Jan can leave a legacy, Amy?
Amy Walls (15:04):
So, beyond the qualified charitable distributions, or QCD is what they're called, they could consider donor-advised funds. This allows them to set aside money specifically for charities now and decide later when they're going to donate.
They could also set up charitable remainder trusts. These trusts provide them with income during their lifetime, and the remainder in those trusts goes directly to charities. Additionally, they can be gifting to their family. They can each gift in 2025, $19,000 per year to anybody tax-free. So, they've got a couple kids, guess what? They can each give 19,000 to those kids.
Jon Gay (15:51):
Okay. I want to clarify this and put a final point on it – each parent can make a donation to each kid?
Amy Walls (15:56):
Each parent can make a $19,000 gift to each kid and to their spouses and to their grandkids.
Jon Gay (16:03):
Oh, okay. So, you start multiplying that $19,000 out, 19, yeah, $38,000 and then $57,000, if I do my math there. Yeah, and goes on, yeah.
Amy Walls (16:14):
So, there's a lot that can happen there. And a lot of people really enjoy watching people experience things they may not otherwise experience because they've had that gift. So, a question for you to ask yourself is, “Do you want to see them enjoy it now or do you want them to enjoy it after you're gone?”
Jon Gay (16:35):
We've talked about that in previous podcasts. You actually get to see them enjoy it and be here to physically experience it or see it.
Amy Walls (16:40):
Yes.
Jon Gay (16:41):
Alright. So, as we kind of zoom back out to the bigger picture as we wrap up here, Amy, what is the takeaway for listeners who might see themselves in Stan and Jan’s shoes?
Amy Walls (16:50):
Jag, the big takeaway here is that retirement planning isn't purely about numbers and are you okay? It's about creating a plan that's manageable, provides confidence, lets you do the things you want to be doing.
Meaning it aligns with what matters most to you. And that can be hobbies in retirement, it can be supporting family, giving back to the community. But overall, it's about enjoying retirement without stress.
Jon Gay (17:20):
That is a great way to sum it up. Thanks for breaking it down so clearly as always, Amy. And if our listeners want to come talk to you about planning their future at Thimbleberry Financial, how do they best find you?
Amy Walls (17:28):
They can find us online at thimbleberryfinancial.com or by giving us a call at 503-610-6510.
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Jon Gay (17:38):
Excellent stuff, we'll talk again in a couple weeks.
Amy Walls (17:40):
Sounds great, Jag. Look forward to it.
Jon Gay (17:42):
Securities offered through registered representatives of Cambridge Investment Research, Inc, a broker dealer, a member of FINRA/SIPC, advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research, Inc, a broker dealer, a member FINRA/SIPC, advisory Services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.