The information below pertains to clients, Jeannie and Scott Henley:
Married, both age 55, with two grown children
2017 combined AGI = $250,000
2017 taxable income = $226,000 (assume couple takes the standard deduction)
No current Roth IRA balance
Current Rollover IRA balance = $1,250,000 (rolled over from prior employers’ 401K plans)
Current 401K balance = $250,000
** Disregard social security benefits. Jeannie and Scott plan to delay collecting benefits until age 70. Since any SS benefits the couple expect to receive should impact all scenarios equally, you do not need to factor these benefits into your planning. **
The couple’s 401K assets are primarily invested in index funds, and over the past 5 years these index funds earned an average annual return of 13%. Jeannie is concerned about a correction in the market; she would like to know how much income the couple will have to spend in retirement under different assumptions (e.g., assume their pre-tax rate of return will be 6% vs. 12%). Scott is concerned about tax rate uncertainty. He wants to know whether your planning advice would be the same if, in the future, tax rates revert back to their 2017 levels. For simplicity compare how the couple’s retirement plans assuming their future ordinary tax rate is 24% vs. 20%.
The couple plans to fully retire at age 65 (in 10 years). Both Jeannie and Scott would like to start working part-time (50%) this year but wonder if they should keep working full-time until retirement (another 10 years). Both Jeannie and Scott have been contributing to a 401K plan at work. Jeannie’s employer matches $0.25 per dollar for full-time employees; Scott’s employer offers no match. The couple feels they can spare 5% of their AGI pre-tax, pre-match toward retirement savings each year (they’ve been contributing $6,250 a piece). Assume if the couple continues to work full-time, they will save $12,500 pre-tax, pre-match each year toward retirement. However, if the couple starts to work part-time, they will only save $6,250 pre-tax toward retirement each year. You can also assume the couple’s ordinary tax rate is 24% in years when they work full-time and 20% in years when they work part-time.
Jeannie and Scott want to make some informed decisions as they draw closer to retirement. They want a sense of their retirement outlook under different market conditions and different tax rate assumptions. They would like advice about whether to continue making 401K contributions, contribute to a Roth IRA, or contribute to a traditional IRA. Also, the couple wants to start working part-time this year, but wants to know how much of a difference in their long-term retirement outlook early retirement will make.
Jeannie and Scott have hired your team to provide them with tax-related retirement planning advice. Prepare a brief memo (maximum 2 pages, single-spaced, excluding exhibits) for Jeannie and Scott outlining your analysis and recommendation. Your memo should include exhibits (spreadsheets or calculations) to support your analysis. Make sure your submitted document clearly indicates your group number and is well formatted (could be easily printed). Your document should be entirely self-explanatory. In other words, if Jeannie and Scott were looking at the document with you should they should be able to follow along and understand your calculations.
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