Bob and Ruth Spangerson* are both retired physicians who have been married for thirty-eight years. They both retired two years ago, but have grown uncomfortable with their ability to manage their investments to produce a dependable income stream. Financial markets have posed real challenges in creating yield in their portfolio and they are concerned that they may be doing more harm than good after simply using high dividend stocks and watching the values decline and some of the dividends themselves get cut. They feel it is time to turn their portfolio over to a professional to manage their assets so that they can finally travel and enjoy life.

They are concerned about how to pass on their estate to their two sons and one daughter and want to know how to help a charity in Honduras they’ve spent years serving.

Overview

Dr. Bob Spangerson

  • Age 68
  • Retired Anesthesiologist

Dr. Ruth Spangerson

  • Age 68
  • Retired General Surgeon

Family Finances

  • Home at $778,000
  • Home mortgage of $63,000, 3.5% w/ 5 years left
  • Ruth’s Retirement Plan balance $3,657,000
  • Bob’s Retirement Plan balance $2,704,000
  • Joint Investment Account balance $2,308,000

Bob and Ruth’s Concerns

  • How much they can afford to spend without stressing their portfolio and running out of money? They are guessing that they spend about $30,000 per month.
  • Should their funds be invested to fund their monthly cash flow needs.
  • Do they need to update their estate plans, to make sure the outcomes of various scenarios are consistent with their values.

How We Helped the Drs. Spangerson

Taking into account their Social Security income along with portfolio income, we determined that they could spend $36,328 per month if markets perform at historical levels. However, if markets perform more poorly than historical norms, their portfolio would only sustain a withdrawal rate of $27,891 per month, a 23.2% reduction. Were they to actually spend at the $30,000 level, they would likely run out of funds at age 96. Because they were concerned that high income taxpayers could see a reduction in Social Security benefits, we re-ran our calculations without Social Security benefits. As this chart demonstrates, were this to happen, and if poor market conditions persisted, they would likely run out of funds at age 91. To offset this loss of income, they would need to spend at a monthly level of $24,258 (an additional reduction of 13.0%). In order to help them build clarity and ease into their expense monitoring process, we referred the Spangersons to a CFP® Practitioner who specializes in helping clients establish cash flow infrastructures. She uses a number of newer technologies to make the process more transparent and controllable. Clients have a better feel for their spending levels and have the tools at their fingertips to know where they stand.

spangersons-projected-assets

Using recent historical asset class data, their present portfolio had an expected return of 9.38% and had a potential downside return of -16.28%. Individual Risk Profiles were developed for both Ruth and Bob and then a joint profile was developed for them. Their combined profile indicated a loss willingness of no more than 12%. Their current portfolio characteristics are in green on this chart; their optimal portfolio is shown in navy. Their new allocation by broad categories is shown in the following pie chart.

spangersons-portfolio

With the recent changes in Estate Tax Rates, the Spangersons should not have estate taxes due under their present Will/Trust structure. Yet their goal of supporting their charity in Honduras might be achieved without impairing their cash flow needs, their income tax situation or their ultimate estate wishes by utilizing a Charitable Remainder Trust. With about $2,400,000 of their portfolio situated in Bonds, a portion of these could be shifted into an Annuity Trust form of CRT and a fixed rate paid out each year. Their Attorney and CPA reviewed the facts and options and recommended that a 6% CRAT using their joint lives be used, funded by a $1,000,000 gift. This gave them a current income tax deduction, a guaranteed cash flow from the CRAT and the comfort that the charity would be funded with the principal after their deaths.

*These case studies illustrate the hypothetical experiences of fictitious clients based on a common scenario our clients have experienced. These case studies are designed to generally illustrate how we may provide our services to our clients. Keeping in mind that no two clients, situations, or experiences are exactly alike, these case studies are not to be construed as an endorsement of the Firm by any of its past or current clients, nor any assurance that we may be able to help you achieve the same satisfactory results.   

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