A Park City Wealth Advisors Case Study:
I have a female client, Rachel, who is in her mid-50s and is a very successful realtor. Being a realtor can make it challenging for Rachel to navigate income, because, although she made over $1 million multiple years in a row, her income is inconsistent.
In times of abundance Rachel likes to celebrate her hard work and long hours with a trip or a new purchase once she receives that big commission check. Over the years, she has done a good job contributing to a SEP IRA at her CPA's recommendation.
When Rachel came to our practice seeking investment guidance, she didn’t know what she owned, where her money was going, and she certainly didn’t know when it was coming in! She was also continually surprised by giant tax bills. One of our goals was to help Rachel create a financial plan and understand her financial situation better - how much she needed to live on now, what she hoped to live on in retirement, and when she might be able to retire. This way, we could determine the groundwork needed for her retirement, or in other words what type of nest egg she would need in her retirement accounts to be able to generate future income for her.
This proved more challenging than we thought. Rachel had a hard time tracking her spending because she used many different cards, bank accounts, and often paid in cash. We brought our financial coach, Kasey, into this project to help set up Bill Pay and organize Rachel’s bank accounts. This exercise allowed us to understand her annual spending and plan accordingly. Meanwhile, our team rebalanced her retirement accounts to be more long-term focused and growth-oriented. We needed these accounts to grow as much as possible to create the biggest landing zone for when she was ready to retire. We also set up a Roth IRA where we made backdoor Roth contributions on an annual basis directly from her investment account.
Then a life change happened. The partner Rachel had shared a mortgage and life costs with for nearly 13 years separated from her. Rachel was distraught and unsure how she would survive on just her income alone. Our team helped Rachel get a mortgage with her 1099 income (which she didn’t know was possible) and identify a home within her comfort level for her desired annual spending, in the location she wanted to be in! We also worked alongside her divorce attorneys to facilitate a lump sum payout as part of the separation agreement into Rachel's investment account. Once in her account, we sat down with Rachel to discuss her long-term goals, income needs, and hopes, such as renovating her garage and adding an addition to her home. Being in her mid-50s and now a single woman, Rachel was worried she wouldn’t have enough money to maintain her current lifestyle and would have to work forever. She feared burning through the lump sum and not being able to support herself in her later years.
We discussed expectations for a traditional investment account and what she could expect to receive when we transitioned the account from growth-focused to income producing when she retired at age 65. We chose age 65 because she would be close to receiving her Social Security income, and Rachel felt she would enjoy working for another 10 years. Since Rachel didn’t know her Social Security benefit, we logged on to the Social Security website for the first time together to find the estimated amount, which was about $35,000 a year. Tracking her checking account balance over the last two years, we determined the amount she needed in her new life as a single woman would be about $120,000 annually in today’s dollars. Once we knew that, we could subtract the $35,000 she would receive from Social Security and from there we knew she needed to generate $85,000 a year in income.
Rachel was still worried about accessing the funds in her investment account and potentially using them irresponsibly, undoing her landing zone to live on forever. To address this, we looked at an annuity as an investment for part of the lump sum payout. If we invested $500,000 of the lump sum payout in an annuity now and let it grow for 10 years, by the time Rachel reached 65 she would have about $72,000 of guaranteed income ANNUALLY for the rest of her life. This annuity income, combined with Social Security and about $13,000 of distributions from her retirement accounts (valued at $350,000), would easily provide her with the $120,000 she needed every single year for the rest of her life. If she chose to continue working, that income would be a bonus on top of this, allowing her to splurge on extra trips, first-class airplane tickets, or a new car.
When we revealed her financial plan to her, Rachel was overwhelmed with emotion. Hearing she had a landing zone to create income for the rest of her life, she started crying, hugging me, and thanking us profusely. She had gone from not knowing where her money was going to, or even when it was coming in, to having a stable, regular income. The financial plan consisting of annuity payment, her retirement accounts and Social Security, gave Rachel the peace of mind she needed so that she could move forward in her retirement with the confidence she did not have before. She could now spend her time enjoying the things she loved: walks with her dogs on the beach, evenings with friends, and reading on her porch.
This is just one of the reasons we love our jobs. The satisfaction of giving our clients peace of mind in the way they need it is priceless to us.
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