Super Saver
Meet Jen
Jen is a single physician making $400,000 a year as an employee at a hospital. Despite her substantial salary, Jen has never been a big spender. Just 10 years out of residency, she has already paid off her student loans and has no other debt apart from a mortgage on a modest home. She maxes out her retirement accounts offered through her employer (403b and 457b), Health Savings Account and manages to save another $10,000 per month into a taxable brokerage account. She also has a small Roth IRA and an IRA she rolled over from her retirement plan in residency.
While she knows she’s in a good position financially, Jen still wonders if there’s anything she’s missing. In the early years out of residency, it was easy to just throw everything she had at the student loans. But as her assets have grown to a considerable level, she can’t shake the feeling that there may be something she has overlooked.
The growing anxiety has led her recently to spend a lot of time online reading financial advice blogs and other educational content. Though she feels she’s learned a lot, she’s frustrated with the endless opinions that sometimes seem to contradict each other. In addition, she is having a hard time knowing exactly which ideas are relevant to her situation and how to implement those strategies properly.
She also struggles at times to understand what her financial situation actually allows for. Can she retire early? If so, how soon? Would it be a good idea to buy a second home now or later? And should she pay cash or finance such a purchase? She wishes she had an impartial sounding board to help make these sorts of decisions.
At the end of the day, Jen feels she is capable to manage her own finances, but over the last few months she’s felt that she’s just not interested enough to make it worthwhile. She knows her time at work is extremely valuable, and she’s decided she’d rather pay to delegate the management of her finances to a professional so she can spend her time outside of work pursuing her passions.
Our Approach
The first step with Jen was to help her understand where she stood financially. We looked at existing assets and debts, as well as cash inflows and outflows. While Jen had always felt like things were “tight”, the reality is she had imposed a frugal budget on herself by aggressively paying off debt and saving.
Once she was able to truly understand the progress she had made up to that point, she was ready to explore options for the future.
At her current spending and savings rates, she could potentially retire by age 50. While that early of a retirement wasn’t a specific goal, knowing it was in reach excited Jen. It also opened her to other options like purchasing additional property as well as helping family members go to college. Final decisions weren’t made at this point, but Jen felt she was finally starting to understand the possibilities her hard work could provide.
We next took a deep dive into Jen’s investment accounts. A strict index-fund investor, Jen had a well-diversified, low-cost portfolio that overall needed little tweaking. However, there were some opportunities for improved tax efficiency.
First, we helped Jen improve the tax location of her investments. She had invested each account 80% stocks and 20% bonds. We encouraged her to shift her taxable account to 100% stocks and her retirement accounts to a heavier bond allocation. This way, she maintains the same level of risk overall, but the interest that the bonds kick off gets tax-deferred.
Second, in reviewing Jen’s tax return, we discovered that she had almost $50,000 in basis in her IRA. This happens when high-income earners contribute to IRA’s, but are not able to deduct the contribution due to income limits imposed by the tax code. Jen, the great saver that she is, continued to contribute the maximum, even when her income jumped and she wasn’t able to deduct the contribution.
Leaving those contributions in her IRA would mean that all growth becomes taxable upon withdrawal in retirement. We were able to help her isolate that basis by rolling over the pre-tax amount to her 403b. Then we could convert the $50,000 of basis to her Roth IRA without triggering a taxable event. Going forward, all growth on that $50,000 will now be tax free, potentially saving many thousands in taxes. In addition, with her IRA now emptied, she is able to do backdoor Roth contributions every year, adding even more to her tax-free bucket in retirement.
The last piece that was particularly impactful for Jen was giving her permission to spend a little bit more than she was. After seeing that the path she was on gave her the option to do so many things in the future, she decided that she needed to prioritize her current well-being a little bit more. Rather than pinching every penny, she decided to take an extra $2,000 per month and give herself permission to splurge on things occasionally, whether that be travel, food, or outdoor gear.
She now enjoys an added measure of peace of mind understanding better where she stands financially and knowing she’s not missing anything important.
The Results
- Reduced anxiety knowing someone is overseeing finances on an ongoing basis
- Gained confidence about what options she has when it comes to retirement and other goals.
- Freed up time on both research and implementation
- Improved tax efficiency
- Avoided exorbitant % of AUM fee of traditional advisors
Note: The above case study is hypothetical and does not involve an actual specific client of SwitchPoint. No portion of the content should be construed by a client or prospective client as a testimonial or guarantee that he/she will experience the same or certain level of results or satisfaction if SwitchPoint is engaged to provide investment advisory services.