Case Study #2: Six-Figure Household Planning for Early Retirement

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Overview

Jim & Sue Taft came to us to help them transition into an early retirement.  Both are employed by the county, Jim as a Deputy Sheriff and Sue as a high-level chairperson.  Jim is 50, and Sue is 48.  They have two sons, the first of whom is 23 and employed by a local business, while their youngest is 21 with one year of college (and college expenses) remaining.  Combined, they earn roughly $200,000 annually.  

Jim's & Sue's Goals

  • Jim retires at 55 when police officer pension reaches peak value
  • Sue works another 2-5 years after Jim retires, but retires no later than age 55
  • Bridge health care gap between Sue’s retirement and Medicare
  • Give back to family and community via paying for future grandchildren’s college expenses, helping sons with first down-payments, and donating regularly to church and other organizations

Financial Plan

We calculated their pension benefits and retirement cash flow needs and, via consultation with Jim & Sue, concluded that monthly expenses (ex-health care premiums) would be adequately funded via their respective pensions, especially once they pay off their mortgage in 10 years.  However, health care premiums from private and public exchanges could cost as much as $1,000-2,000 per month.  In addition, Jim and Sue only had about $75,000 in retirement accounts (such as IRAs) and $50,000 in a taxable joint investment account. 

With their oldest just finishing college and their youngest almost done, Jim & Sue’s cash flow was set to improve dramatically on a go-forward basis.  We decided to allocate this excess monthly cash to their respective 457(b) plans, and both Jim and Sue decided to contribute $18,500 respectively, or $37,000 total. This would also reduce their annual tax bill, with the tax savings applied to their existing taxable joint investment account. 

Additionally, based on their annual health care expenses, we decided they would be better served by switching to a high deductible plan.  Instead of paying a higher monthly premium, Jim and Sue would contribute the family maximum of $6,900 to their HSA account, expecting to use about half of that per year.

Though health care costs are highly unpredictable at present, the best solution for them is to save substantially via their HSA and investment accounts.  More, the unique structure of the 457b plan means funds are available to them as soon as they retire instead of age 59½, allowing for withdrawals as soon as Jim retires, if needed. 

Assuming Sue retires at age 55, she will have to fund 10 years of health care costs out of pocket, while Jim will have to fund 8 years until Medicare kicks in for both. 

To account for this, instead of spending their excess cash flow on additional consumption, Jim & Sue decided they will save as much as possible on a tax-efficient basis.  Over the next 5 years, if invested at a conservative 6% rate, Jim & Sue could have a total investment portfolio nearing $500,000.  Using a withdrawal rate of 4%, Jim & Sue could hypothetically withdraw 4% annually, or $20,000 without digging into retirement principal.  This would provide for $20,000 in investment income to subsidize out of pocket health care costs, a more than adequate amount for their needs.

Conclusion: Reduce Tax Burden & Bridge the Medicare Gap 

By calculating retirement cash flows, ex-health care, and allocating savings to the most tax-efficient vehicles available (including employer-sponsored retirement plans and an HSA), we could help Jim & Sue plan for unpredictable health care costs during retirement, helping to bridge the gap between early retirement and Medicare benefits at age 65.

Are you looking for a fee-only financial planner to help you plan for a long and worry-free retirement? 

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Disclaimer: These case studies are for informational purposes only. They are based on our experiences with real clients; however, all names and identifying information has been changed to protect their privacy. Financial planning is a personalized process and the recommendations created for you may be different.