Is Your Million-Dollar Retirement Plan Truly Optimized? A Case Study in Maximizing Legacy

Imagine a couple, both 62, each earning $30,000 annually. They've diligently saved over $1 million in assets and investments, contributing 10% of their income to their 401(k) with a 3% employer match. Their goal? To retire in three years with $8,000 per month in after-tax income. Their primary concerns: Are their investments properly allocated? Are they on track to retire comfortably? And are there any hidden pitfalls they need to consider?

Many might glance at their situation and think, "They're fine." With an 86% probability of success using their current investment strategy, they appear to be on solid footing. They could even leave a substantial legacy of around $1.1 million to their beneficiaries at age 100. But is "fine" good enough?

Beyond the Surface: Uncovering Hidden Opportunities

As a CFP®, my role isn't just to confirm existing plans; it's to uncover hidden opportunities and optimize your financial future. In this case, simply maintaining their current investment allocation would indeed provide a comfortable retirement. However, we need to ask: could we do better?

Surprisingly, altering their investment allocation or delaying Social Security would actually decrease the legacy they leave behind. Why? Because it would necessitate drawing down more from their retirement accounts earlier, ultimately resulting in a smaller final balance.

The Power of Strategic Roth Conversions

The real opportunity lies in strategic tax planning. Currently, this couple resides in the 22% tax bracket. Upon retirement, their bracket will significantly decrease. This opens the door for Roth conversions. By strategically converting pre-tax retirement funds to Roth IRAs during these lower tax years, we can lock in lower tax rates now, potentially saving them substantial amounts in the long run and maximizing their legacy.

The Results Speak for Themselves:

• 12% Tax Bracket Strategy: By filling up the 12% tax bracket with Roth conversions, we projected a potential tax savings of approximately $500,000 and an increased legacy of $4.6 million.
• 22% Tax Bracket Strategy: More aggressively filling the 22% tax bracket resulted in an astounding $1,000,000 in projected tax savings and a $5.5 million increase in their potential legacy.

Why Does This Work?

• Elimination of Required Minimum Distributions (RMDs): Roth IRAs have no RMDs, providing greater flexibility in retirement.
• Tax-Free Growth and Withdrawals: Once converted, all future growth and withdrawals from Roth IRAs are tax-free, leading to a potentially zero tax bracket in retirement.
• Tax-Free Social Security: A lower tax bracket in retirement means less or no taxation of social security income.
• Enhanced Estate Planning: Roth IRAs offer significant estate planning advantages. Beneficiaries inherit the accounts tax-free, and they have the option to spread withdrawals over ten years, potentially allowing for further tax-free growth.

The Conversion Timeline:

In this scenario, we would strategically convert funds starting at age 65, aiming for a complete conversion to Roth IRAs by age 73. This would transform $1.2 million in taxable accounts at age 65 into $1 million in tax-free accounts at age 73, providing immense financial flexibility.

The Legacy Advantage:

Imagine leaving each of your two children a $3 million Roth IRA. They could potentially double that amount tax-free over the next decade. This is the power of strategic planning.

Conclusion:

While a comfortable retirement is achievable with a basic plan, true financial mastery lies in optimizing every aspect of your financial strategy. By proactively addressing tax implications and leveraging the benefits of Roth conversions, we can significantly enhance your retirement and leave a lasting legacy for your loved ones.

Call to Action:

Are you ready to discover the hidden potential in your retirement plan? Don't settle for "fine." Let's create a customized strategy that maximizes your financial future and ensures your legacy. Contact me today for a personalized consultation.

Disclaimer:

This blog post is for informational purposes only and does not constitute financial advice. Case studies are hypothetical examples of the various approaches that can be taken to assist clients with their planning needs.  The results depicted within this communication are unique to the case presented and should not be construed as a guarantee of future results. Each client has unique circumstances and this may not be indicative of all client experiences with our firm.