Case Study: Retirement

Jane Brown is 55 years old and married to Bill Brown, 58. They have 2 children, one who recently graduated from college and one who is a sophomore. They own a primary residence which they refinanced 3 years ago into a 10 year loan. Jane has term life insurance through her work and Bill has a whole life policy he purchased 20 years ago. Jane and Bill have a revocable living trust they put into place 12 years ago.

Jane has worked in the high tech field for the past 20 years and has always contributed to her 401k. Bill is also in high tech and has contributed to his 401k at every job he’s been at. As a result, they each have several IRA’s they’ve rolled over from past employers in addition to their current 401k’s. They also have a joint brokerage account and joint savings account.  

When starting with Fluent Jane and Bill had some concerns about their retirement. When would they be able to retire? How much could they spend in retirement? What would the future look like?

We first started by looking at the most pressing issue, retirement. We worked with Jane and Bill to understand their finances: how much did they have saved, what was their savings rate, how much was in taxable vs. non-taxable accounts, how much did they spend each year on things like insurance, taxes, mortgage and other living expenses and what was their tax rate. Based on this information we were able to create a plan that showed the Browns how long their money would last if they retired today. We then modeled out how much longer the money would last if they worked for 2 more years. Finally, we modeled out how much more they could spend each year in retirement and still have their money last until they were 100.

By doing this modeling, Jane and Bill were able to see exactly how their future would look based on various decisions they could make today. After the retirement planning was finished, we looked at their life insurance. It turns out Bill’s was continuing to pay $1500 a year on his whole life policy that now had a cash value of $50,000. The modeling showed us that if Bill died, Jane would still be fine in retirement since they had most of their retirement money already saved. Bill and Jane decided they’d stop contributing to the life insurance policy and let the policy self fund, freeing up an additional $1500 per year.

Next we looked at the trust. The trust was started when their children were much younger. At that time they had designated uncles and aunts as executor, guardian, and gave them power of attorney over financial affairs. Additionally, since they executed the trust many estate laws have been changed. We decided they should update the trust. With the help of an attorney they were able to easily update the documents to reflect their current circumstances.

The next step was to look at their tax situation. Jane and Bill were in a very high tax bracket and needed some relief. They had bonds in their retirement accounts and stocks in their personal accounts. We rearranged their holdings and put stocks in the retirement accounts and bought muni bonds in their personal account. These muni bonds gave them a tax free income each year and dramatically reduced their overall tax picture. We also noticed they had some stocks that had losses. By selling these stocks we were able to harvest losses in the account which can be offset with future gains. Finally, we discussed the potential benefits of a Roth conversion once the Browns retired. This, we explained, could be done in stages to limit tax liability and allow the accounts to grow tax free.

Of course, of paramount importance to the Brown’s were their investments. They had IRA’s at different institutions that had never been consolidated. As a result each plan had its own direction and most hadn’t been changed in years. The 401k was invested by looking at the choices and choosing the mutual funds that had the best previous 3 year track record. And their personal accounts were invested in stocks that each had picked over the years based on where friends had worked, tips they had received, and news articles they had read. Because they tended to invest in what they understood, Jane and Bill were heavily weighted in the technology sector.

Fluent started by doing a portfolio X-Ray, determining exactly what was held in the various funds, bonds and stocks. We then used Modern Portfolio Theory statistics to view the amount of risk in the portfolio. What we found was that Jane and Bill had much more risk than they thought. Not only did they have industry specific risk, but they had a portfolio with very high volatility and only average returns. By talking with the Browns, and by looking at the retirement software we had previously run, we were able to better determine their needs. Using this information we were able to construct a balanced portfolio that dramatically decreased the volatility in the portfolio, while at the same time increasing potential returns. The Brown’s were now diversified geographically, by market cap, by sector, and by type of investment. We could now predict with much greater certainty that the Brown’s would reach their goals.

As a result of our comprehensive planning approach, Jane and Bill were able to relax, knowing that all of their financial pieces were maximized, up to date, and working together to reach their goals. Ongoing meetings were scheduled to review the plans and to update them as needed with new information. The Brown’s were now financially fit!

Fluent Wealth Partners, LLC
1530 The Alameda #115
San Jose, CA 95126

Phone: 408-217-2000
Toll free: 866-630-7583
Fax: 408-217-2011