A Tale of 3 Families: Maximizing Money for a Well-Balanced Financial Family [Part III]

In Part II of “A Tale of Three Families,” we walked through a family, the Spellmans, who were outspending their income in the present day, forcing some very difficult decisions by the time they hit age 65. 

But what if a family making the same amount of money as the Spellmans was already living a well-balanced financial life? Would there be any improvements they could make that would have a meaningful impact on their future? 

That’s what we’re set to examine in Part III of our five-part series, “A Tale of Three Families.” The short answer to the questions above is yes, there are changes they could make in the present day that would have an impact. 

First, let’s see how they would be prepared for retirement with no changes in the present day. Then, we’ll get to some recommendations a financial planner may make to them in the present day. 

The Bennetts’ Financial Planning Analysis Retirement

Bill and Brittany Bennett are relieved to hear they are in great shape to retire. In fact, they can actually increase their spending by about $5,000/month, or $60,000/year. For a couple that didn’t have a good idea of the specifics of their retirement picture, this is great news.  

The Bennetts would love to travel a lot in their first few years of retirement, but they feel that after the first few years of retirement, they won’t have a need to spend extra money. 

The planner tells them that if they won’t need to spend the extra money themselves, then they should start thinking about how they may want to use that excess money in other ways. She presents a couple of options for that excess: 

• College education: Bill and Brittany could pay for some, or all, of the cost of college for their grandchildren. 
• Family gifts: The Bennetts could gift money to their adult children during their lifetimes, so they can see the impact of their money on their children while they’re still alive. 
• Charitable giving: Outside of giving within the family, the Bennetts could give to charitable organizations. 

Of course, they can continue to let their assets grow and leave their children a larger inheritance. The Bennetts like these ideas and will definitely start thinking about these things.

The planner gives them some additional advice to make the most of their money:

1. Delaying Social Security Benefits: Even though the Bennetts are retiring now at age 65, their financial advisor recommends they wait until age 70 to start taking their Social Security benefits. Each year they put off taking Social Security (up until age 70) will result in a benefit increase of 8% each year, in addition to the annual cost of living increase provided by the Social Security Administration. This is especially important because the Bennetts are in great health and likely to live into their 90s. They will appreciate getting increased monthly checks from Social Security at that stage in life to further reduce the risk that they will outlive their assets.
2. 401(k) Rollovers: According to their financial advisor’s recommendation, the Bennetts should consider rolling their 401(k)s into IRAs since they are separating from their employer. The planner reviews their specific 401(k) plan details and explains all of the pros and cons of rolling over the assets, delving into the differences in fees and investment options.
3. Partial Roth Conversions: Bill and Brittany should also consider doing partial Roth conversions over the coming years. The timing of those conversions should be before they start taking Social Security and the start of Required Minimum Distributions (RMDs) from their traditional retirement accounts. Over the next few years before they turn 70, the Bennetts will be in an unusually low tax bracket. A partial Roth conversion would capitalize on this by moving small portions each year from traditional retirement assets into Roth assets. Such a move would lower their tax burden in future years because the Roth assets wouldn’t be taxed at distribution. 

Again, the planner recommends they continue to meet at least once a year to make sure they continue to find the right balance between enjoying their hard-earned money and not overspending. They also can then look at any changes that may happen in their lives over the years that impact their finances and how to best address the changes and strategize.

Alternative Scenarios: Implementing Recommendations in the Present

The Bennetts were on a great track and doing just about everything right. So what would have changed if they engaged with a planner at 30? 

Having a financial plan earlier in their lives and regularly revisiting the plan with their advisor would have given them the confidence they were on a great path. They wouldn’t have to regularly worry if they were saving enough and making the best use of all the tools and strategies available to them. 

The planner could also have brought up the following strategies to discuss with the Bennetts to potentially further improve their plan:

1. Roth 401(k): The planner could help the Bennetts determine if they have access to a Roth 401k. If they do, the planner could walk them through the pros and cons of making some or all of their 401k contributions as Roth contributions rather than all pre-tax contributions.
2. Saving for college: In our fictional scenario, the Bennetts made great use of 529 plans. But rather than simply contributing a fixed amount, the planner could help them determine the financial goals behind the 529 contributions. Is the plan to pay for the kids’ entire college? Or do they want their kids to take on some responsibility for paying for their education? There is usually a huge difference between a public, in-state education versus a private or out-of-state education. Additionally, there are some major downsides to overfunding the 529s, but also several solutions to addressing potential over-funding. These are all things the planner would discuss with the Bennetts and give them more guidance on.
3. Starting Roth IRAs for their Children: As their children become teenagers and start earning some income from summer or after-school jobs, the financial planner could guide the Bennetts on starting their kids’ retirement savings. This also could serve as a way to educate the kids on money and saving for the future.
4. Tax & Estate Planning: The financial planner could partner with the Bennetts’ tax accountant and estate attorney to ensure they are taking advantage of the most up-to-date tax and estate laws.

The comfort of knowing that someone is constantly on top of their entire financial picture would have been invaluable for the Bennetts to have all of these decades.

Wrapping Up Part III 

At its core, our series is meant to illustrate how there are always changes we can make to our financial habits, whether we’re taking on debt or already on a good path. 

Yes, the Spellmans in Part II badly needed to make changes in their current lives to avoid some less-than-desirable outcomes in retirement. But the Bennetts weren’t without recommendations, despite the fact they were living within their means. Among the recommendations, the Bennetts had options to share their hard-earned money with family during their lifetimes, optimize their retirement savings for taxes, and further solidify the strong odds of their money lasting throughout retirement. 

That paves the way for our dive into our third and final family, the Franklins, in Part IV. For a family living frugally in the present day, what are the possible recommendations they could make in the here and now? And what would their retirement look like without any changes? You can continue with the series by reading Part IV here.

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About the author
Carla Adams is a CERTIFIED FINANCIAL PLANNER® practitioner who specializes in helping women build strong financial plans around their equity compensation, including Restricted Stock Units (RSUs) and company stock options. With over 15 years of experience in financial services, Carla has in-depth knowledge and expertise geared toward helping clients with complex financial situations. She enjoys boiling down complicated scenarios through practical examples and down-to-earth conversations.