Jack & Jill

  • Is their retirement goal feasible?
  • How much should they defer to retirement plans?
  • What retirement plan option should Jill choose?
  • What tax-saving strategies are available to them?

A couple wades through all the Retirement Savings Options

Jack and Jill recently moved to the area and came to us to determine if they could achieve their goals of retiring in 10 years and building a second home at the beach as they have always dreamed.  Jill accepted a job as a professor at a nearby university and Jack is an engineer for a national software company.

In addition to their retirement goals, they are also seeking guidance on choosing investments in their various employer sponsored plans and reducing their tax liability.  Since Jill is a new hire at the university, she has several different retirement programs to choose from, including the state pension system, an optional retirement plan (457), and a 401k or 403b.

Questions to Answer

  • Is their retirement goal feasible?
  • How much should they defer to retirement plans?
  • What retirement plan option should Jill choose?
  • What tax-saving strategies are available to them?

Planning

Since they both have high incomes and live a fairly modest lifestyle they have accumulated significant net worth in their current and former 401k plans by maxing out their contributions every year.  While this has reduced their taxable income, they would like to defer more of their income from taxation if possible.  They have also built up significant cash reserves in CDs and a money market account.

As a faculty member at the university, Jill has the option to opt out of their defined benefit pension plan.  As an alternative she can participate in their optional retirement plan (ORP/457) which also offers an employer match.  With either plan she can also make unmatched contributions to a 401k.

Since Jill may not be with the university long term and is comfortable with investment risk, we decided that she would opt out of the pension plan and contribute to the ORP instead.  This will allow her to defer the maximum contribution limit and “double dip” by also contributing the maximum to the state’s 401k plan.

Jack will also max out contributions to his company’s 401k plan.  By choosing the ORP, Jack and Jill were able to reduce their taxable income considerably while saving aggressively for early retirement, keeping them on track for their target date and the beach house.

Ongoing

Since their long term picture looked promising, Jack and Jill felt confident that they could monitor their cash flows using the targets we set in the planning process.  But they still liked the benefits of our continuous service to for consistent monitoring of their 401ks and retirement accounts.

We recommended rolling over most of the plans from previous employers into an IRA to consolidate those accounts and offer a greater investment selection.  There was one plan in particular that had very good low cost investment options, so we chose to leave that account in place for now.

For their current employer sponsored plans we analyzed which funds were best within each plan so that we could balance those accounts with our preferred mutual fund choices in the accounts with a wider selection.  We also set up a joint brokerage account to hold their cash reserves and incorporate those funds into their comprehensive investment strategy.