Wellness as defined by the Oxford English Dictionary is the state of being or doing well in life; happy, healthy, or prosperous conditions; moral or physical welfare. New Year’s Day has come and gone, resolutions have been made and hopefully you have eaten your fill of black-eyed peas and cabbage to bring you good luck and prosperity. The foundation of financial wellness, in my opinion, starts with preparing a financial plan. I cannot think of a better example than sharing with you the story of my clients, Tom and Kate.
Tom and Kate have been clients of the firm since 2003. They diligently saved throughout their careers to build a respectable portfolio of assets. In the fall of 2016, Tom and Kate agreed to prepare a financial plan. Kate had recently retired and Tom was contemplating following suit. The financial plan was prepared and the results were no surprise, Tom and Kate could comfortably retire. However, Tom and Kate were concerned the bulk of their savings were in pre-tax retirement plans that would be subject to required minimum distributions and might negatively impact the taxability of their Social Security benefits and the cost of their eventual Medicare premiums. Tom and Kate were both in their early 60s at this time. I prepared a recommendation for them to start with a multi-year Roth conversion regimen to manage their income and tax brackets to shift as much money as possible to Roth IRA accounts. While they would pay tax now, they would not owe tax on the distributions in retirement which would alleviate their previously mentioned concerns related to Social Security and Medicare. We began the annual Roth conversion regimen in the spring of 2017 and stuck to it religiously with the hopes of completing the entire conversion by the end of 2025.
Fast forward to March 2020. In the midst of a major market downturn caused by a pandemic with unknown impacts at the time, I received a phone call from Kate panicking about their portfolio and second guessing the decision to retire so young. After calming Kate down some, I pulled up their financial plan to update the numbers in real time. The pre-pandemic results showed a 95% chance of successfully funding all of their retirement goals. That day’s results yielded a 91% chance of success. Kate, while relieved that their retirement wasn’t sunk, still felt the need to “do something”. I told her I would be in touch after reviewing available options. I called Tom and Kate back the next day and proposed we accelerate 4 of the 5 remaining years of Roth conversions in to 2020 and take the final conversion in 2021. Tom and Kate reluctantly agreed and the results have been nothing short of stellar for them. Their portfolio is at an all-time high and they have completely alleviated their concerns in retirement about Social Security and Medicare taxation.
Tom and Kate are a great example of the value a financial plan can provide to make sound decisions in real time. As you review your New Year’s Resolutions, I would challenge you to add preparing a financial plan to your list. A CFP® professional can help assist you in preparing and maintaining this plan. You can find local CFP® professionals by visiting letsmakeaplan.org.
Published in the Victoria Advocate
Kyle W. Noack CPA/CFP® is Chief Financial Officer for Keller & Associates CPAs, PLLC and KMH Wealth Management, LLC.