Question

Ashley Wood is single (divorced) and works for American University as an administrator. Her current income is $42,000. She is aged 62 and is thinking of retiring in the near future. The University has a defined-benefit pension plan and a 403(b) plan. The benefit formula in the defined-benefit plan is one and one-half percent of final-average compensation times years of service (limited to 30 years). Ashley currently has 12 years of service. She has an account balance of $95,000 in her 403(b) plan.

Ashley has come to you to help her determine whether she can afford to retire now and, if so, how she should take her distribution from her qualified plans. After talking with Ashley about her retirement planning goals, you find out that she was married for 15 years and several years ago, she got a large house in the divorce settlement. The house has a small mortgage payment, high taxes, and a significant amount of equity buildup.

Other than the house, she has no significant investments. You also find that she would like to live closer to her adult children so that she can spend more time with the grandchildren. She has little interest in travel, but would like to get additional education. State the asset distribution strategies you would recommend for Ashley Wood.

Describe in details of your strategies and explain your rationales.

Answer 1

Various asset distribution strategies that can be recommended for Ashley wood:

• Create a floor:

Some retirement incomes provide guaranteed income. In this example of Ashley, 403 (b) plans is considered to be a guaranteed income. A floor strategy is built to ensure guaranteed income to meet the basic needs. This can be done by purchasing annuities or delaying the social security benefits. For each year, Ashley can delay the start of benefits past your full retirement age until age of 70. In which case, Ashley can get a 8% boost in monthly security plans. A strong financial floor provides a peace of mind no matter how the market performs, the person can be assured of paying necessary expenses.

• Bucket your money:

For funds, that ensure guaranteed income such as 401(k) s, a bucket strategy can be created that ensures some money is protected for short term while other money is allowed to grow for long term. While the details can vary depending on the person’s needs & life expectancy, a typical strategy involves three buckets. The first may put needed for next three years in cash or bonds, money that will be needed for three to ten years may be put into mix of stocks & bonds where it can see a moderate growth. Funds needed for ten years or more can be invested in growth funds.

• Make systematic withdrawals:

Ashley can be advised to withdraw money frequently. However a smart approach can be withdrawal of same amount every month, quarter or year rather than withdrawing whenever needed. The rule in this scenario is withdrawing 4 percent from a retirement fund in the first year followed by inflation adjusted withdrawals every year should ensure money is available to sustain a 30 year retirement. Though this concept is sound in theory, the right percentage should be customized to account for a person’s age & expectancy.

• Using account sequencing:

Account sequencing is the optimal order for withdrawing funds is the one that can minimize taxes. Lower taxes can keep more of the money invested & build wealth. For those ages of 70 1/2, government requires certain minimum withdrawals be made from traditional retirement accounts. This again depends on person’s individual circumstances. It might be best to pull money from taxable brokerage accounts or tax exempt Roth accounts.

              Considering the above strategies, they seem to be logical & can be advised for Ashley wood that would help her in managing her future in a better manner. It requires some amount of planning for investing the money in suitable buckets to get the required benefits.