Co Planning Group

Co Planning Group Helping Asian Americans live better lives, powered by financial independence.

08/28/2024

Why did I recommended a high-earning couple in their early 30s contribute to a Roth 401k instead of a traditional 401k, despite their 24% tax bracket?

I cover how age, career potential, and state of residency influence the decision. Also 3 psychological reasons Roth 401k can lead to a better retirement.

If you're interested in early retirement, tax optimization, or maximizing your 401k strategy, this video is for you.

This is for educational purposes only and not meant to be financial advice.

Visit coplanning.co for more information on retirement planning strategies, whether you're 3 or 30 years away from your goal.

08/27/2024

Do you think this 47 year old can retire at 50?

My one time planning client and his spouse have $1.9M saved up in various accounts, pensions covering 30% of expenses in their early 60's, and Social Security will cover over 100% at 70.

Below are some baseline assumptions for when he turns 50:
- $100k/yr spending
- No additional income
- Taxable: $300k
- Traditional 401(k)/IRA: $1.5M
- Roth 401(k)/IRA: $300k

Here’s the plan for each stage of his early retirement.

For his immediate income needs of $100k/yr between ages 50-55:

1. Begin 72(t) Substantially Equal Periodic Payment of $60k per year. With $10k out of $60k reserved for taxes. Spending down $600k from their 401(k) over 10 years.
2. Use taxable assets of $50k per year. This would spend down $250k from his taxable savings over 5 years.
3. To prepare him to be able to withdraw an additional $50k/yr starting at age 55, he must begin to convert $300k of Traditional 401(k) assets to Roth IRA at a pace of $60k/yr between the ages of 50-55. Reserve $10k for taxes.

For his income needs between 55-59 1/2:

1. 72(t) payments will continue at a clip of $60k/yr before tax. spending down an additional $300k.
2. After his converted Roth IRA season for 5 years, he can begin to tap into them at the clip of $60k/yr before tax, spending down an additional $300k.

Once he reaches 59 1/2, he starts spending down Trad IRA and Roth IRA assets normally.

I recommended the money he’ll tap into between 50-59 1/2 to be invested in target maturity TIPS bond ETFs to protect his required annual spending needs from inflation, changes in interest rates, and stock market risk.

Since $1.15M (55%) of his assets would be in bonds, I suggested the remaining portion of $900k to be invested in global equity ETFs for a decade later. There’s no guarantee that a decade will provide a positive return in the stock market, so he should continue to buy new TIPS ETF to refill his bond ladder each year.

The plan's success hinges on market performance, so they should reduce stock exposure now and be flexible about working longer if markets underperform before he turns 50.

If he chooses to retire at age 55, his early retirement planning becomes significantly easier as he can access his 401(k) penalty-free using the Rule of Age 55 and he can keep his employer health care plan until Medicare.

After seeing this plan, my client realized that retiring at age 50 is possible and he welled up with emotions.

I advised him to make his work more enjoyable, even if it means a pay cut or reduced workload. This trade-off could make waiting until 55 more pleasant, when he'll be even better prepared for early retirement.

If you are interested in learning how you can best prepare for an early retirement whether you are 3 years or 30 years away, you can learn more at coplanning.co

*This is for educational purposes only and not meant to be financial advice. Please consult a financial professional before making any investment decisions.

08/18/2024

Why I Advised Against Maximizing Savings for Early Retirement: A CFP® Case Study

I work with a Chinese immigrant couple, both PhDs in their early 30s with a combined income of over $300k. They would like to retire by age 50.

They're already maxing out their Roth 401(k) and Backdoor Roth IRAs, saving $60,000 annually. They wanted to know how much more they needed to save in a taxable account to achieve their goal.

I ran several scenarios, and here are the key findings:

1. Current trajectory: Retire at 53 with 84% confidence
2. Save $20,000 more annually: Retire at 51
3. Save $40,000 more annually: Retire at 49
4. Save $60,000 more annually: Retire at 48
4. Save $80,000 more annually: Retire at 47

At first glance, more than doubling their savings rate to retire six years earlier might seem appealing. However, here are three reasons why I advised against this aggressive approach:

1. Diminishing returns: Increasing their savings rate by 33% only reduced their working years by 9%. Increasing by 133% only cut working time by 27%.

2. Life balance considerations: Saving an additional $80,000 per year would significantly impact their current quality of life. A more balanced approach of saving $20-40k more would capture most of the benefit while allowing them to enjoy life now.

3. Personal experience: I shared my own journey of extreme frugality that led to financial independence at 35. While I achieved my goal, I regretted not developing meaningful relationships and neglecting personal health in my 20s. This lead to a decade of a tumultuous marriage until we sought the help of a marriage therapist and having to deal with chronic health issues personally to this day.

My recommendation?

They're already doing a great job starting young, investing prudently, and maintaining a strong savings rate.

Instead of maximizing early retirement, I suggested they focus on making their lives more meaningful and impactful now. Time and compound interest will do most of the heavy lifting for their retirement goals.

What's your take on balancing aggressive savings with living your best life now?

Would you live on rice and beans for over a decade in order to retire a few years earlier?



Disclaimer: This post describes a specific case and may not apply to all situations. Always consult with a qualified financial advisor for personalized advice. This is for educational purposes only and not meant to be financial advice.

08/11/2024

Why I Advised Against Long-Term Care Insurance for a High-Net-Worth Couple: A CFP® Case Study

As a financial planner with over a decade of experience, I often encounter situations that challenge conventional wisdom. Today, I'd like to share a recent case that illustrates why sometimes, forgoing insurance can lead to better financial outcomes.

I work with a Filipino immigrant couple, both nearing retirement - the husband is 59, and the wife is 55. They have a combined income of over $300k and a substantial retirement savings of $2.5 million. Despite their high-income status and the common advice to secure long-term care insurance at their age, I made a professional recommendation against purchasing it. Here are three reasons why I encouraged them to self-fund their potential long-term care needs:

Lower returns compared to market investments: We evaluated policies from Nationwide and Securian, with Nationwide's shared care policy offering the best value. The annual premium is $20,374. 10 pay means it's going to be paid over 10 years. So the total premium paid will be $203,740. It provided a $6,000/month benefit (growing 3% annually) with a total benefit pool of $640,000, growing to $1.1M by age 80. However, even with these attractive numbers, the potential returns were still lower than what they could achieve in the stock market on an after-tax basis, especially if they don't start using the benefit until after age 80.

Retirement location flexibility: The couple is considering retiring abroad, possibly back to the Philippines. If they do so, their insurance benefits would be cut by half, significantly reducing the policy's value. Self-funding gives them more flexibility and consistent coverage regardless of where they choose to retire.

Risk of underutilization: Long-term care insurance is most beneficial if used for extended periods. If they don't end up needing long-term care for the full benefit period (8 years in this case), their effective returns on the insurance investment would be even lower.

This exercise proved invaluable in eliminating potential future regret and helped us earmark funds specifically for long-term care expenses within their investment portfolio. We'll continue to review this decision annually, adjusting as needed based on their circumstances and the evolving insurance market.

What's your take on long-term care insurance for high-net-worth individuals? Have you encountered similar situations in your practice?



Disclaimer: This post describes a specific case and may not apply to all situations. Always consult with a qualified financial advisor for personalized advice.

08/03/2024

Why I Advised High-Income Clients to Choose Roth Over Traditional 401(k): A CFP® Case Study

As a financial planner, I often encounter situations that challenge conventional wisdom. Today, I'd like to share a recent case that illustrates why sometimes, paying more taxes now can lead to significant savings in the future.

I work with a Chinese immigrant couple, both in their early 30s with PhDs in STEM and Finance. They have a combined income of over $300k and fall into the 24% marginal federal tax bracket.

Despite their high-income status, I made a professional recommendation for them to contribute to their Roth 401(k) instead of a Traditional 401(k).

Here are three reasons why I encouraged them to pay more taxes today – about $11k more each year – even though they're high earners and technically considered accredited investors:

1. Youth and aggressive investment appetite: They're maximizing their 401(k)s and backdoor Roth IRAs, expecting to save $60,000 annually, plus an additional $20-30k in a taxable account with a low-cost global stock index portfolio. With 2-3 more decades of compound interest, they could accumulate a substantial retirement nest egg. Having this money tax-free is an excellent way to prepay taxes they'd typically owe in retirement.

2. Career growth potential: They're just starting their careers, and their income is likely to rise much faster than base inflation as they grow in professional competency and experience. This means they're probably in the lowest tax bracket of their working career right now.

3. State tax considerations: The biggest factor is that they live in Washington state, which doesn't tax income, resulting in a relatively low effective tax rate. If they were to save all their money in a Traditional 401(k) and retire in a high-income tax state like California, they could end up paying significantly more in taxes during retirement.

This strategy isn't set in stone, and we'll continue to evaluate this choice annually.

For now, though, it makes more sense for them to pay higher taxes now to potentially avoid even higher taxes in the future.

What's your take?



Disclaimer: This post describes a specific case and may not apply to all situations. Always consult with a qualified financial advisor for personalized advice.

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