The Pothole in Wealth Management Good Logic vs. Bad Logic

Simon and Ann Scott, age 55 and 50, plan to retire in 10 years. They have the following liquid assets: $ 1,000,000 Certificate of Deposit -- assumed yield: 4.00% $ 1,000,000 Muni Bond Fund -- assumed yield: 3.50% $ 3,500,000 Mutual Funds -- assumed yield: 7.00% growth; 1% dividend (cost basis: $2,000,000) $ 500,000 Simon’s IRA -- assumed yield: 8.00% $ 500,000 Ann’s IRA -- assumed yield: 8.00% $ 6,500,000 Total (plus $900,000 in home value & personal property) Case Study Assume Simon and Ann want $25,000 a month in after tax retirement cash flow – compounding annually by 3.00% as an inflation offset.

Efficient Distribution from Assets Least Efficient Order Strategy 1 (Bad Logic) Let’s provide the cash flow but compare the “least efficient” withdrawal order to the “most efficient”. 500,000 Simon’s IRA 500,000 Ann’s IRA 3,500,000 Equity Account 1,000,000 Tax Exempt Account 1,000,000 CD

Source: Wealthy and Wise  The order in which liquid assets are accessed for cash flow should be prioritized in order to produce the highest possible long-range Net Worth. This is generally the most overlooked aspect of wealth planning – even by the most sophisticated Monte Carlo simulations -- due to the complex coding required. The order in which liquid assets are accessed for cash flow should be prioritized in order to produce the highest possible long-range Net Worth. This is generally the most overlooked aspect of wealth planning – even by the most sophisticated Monte Carlo simulations -- due to the complex coding required. Most Efficient Order Strategy 2 (Good Logic) 1,000,000 CD 1,000,000 Tax Exempt Account 3,500,000 Equity Account 500,000 Ann’s IRA 500,000 Simon’s IRA Efficient Distribution from Assets Least Efficient Order Strategy 1 (Bad Logic) Let’s provide the cash flow but compare the “least efficient” withdrawal order to the “most efficient”. 500,000 Simon’s IRA 500,000 Ann’s IRA 3,500,000 Equity Account 1,000,000 Tax Exempt Account 1,000,000 CD

Strategy 1 vs. 2 Long-range Net Worth is increased over Strategy 1 by 339% simply by selecting the most efficient distribution order. The Scotts’ Net Worth Strategy 1 - Bad Logic vs. Strategy 2 - Good Logic Source: Wealthy and Wise 

The Scott’s Wealth to Heirs Strategy 1 - Bad Logic vs. Strategy 2 - Good Logic Source: Wealthy and Wise  Strategy 1 vs. 2 Long-range Wealth to Heirs is increased by 286%.

Overall Results at the End of 40 Years Ages 95/90 Source: Wealthy and Wise 

With over $12.5 million more in Net Worth, let’s do a little tax planning by introducing Strategy 3 which involves: 1.Converting the Scott’s IRAs to Roth IRAs with the income tax on the conversion withdrawn from their assets; 2.Adding a Wealth Replacement Trust (“W.R.T.”) that is funded with $2 million of survivor life insurance covering both Simon and Ann. With Strategy 3 (Good Logic + Roth IRAs + W.R.T.), the Scotts will make annual gifts of $20,000 a year to fund the policy owned by the irrevocable trust drawn in favor of their three adult children. The funds for the gifts are also withdrawn from their assets so their retirement cash flow is unaffected. This will reduce their Net Worth. Perhaps not. Let’s see...

Strategy 1 vs. 3 Long-range Net Worth is increased over Strategy 1 by 436% due to the efficiency of the Roth IRAs (even though the income tax cost of the Roth conversions is withdrawn from assets). Source: Wealthy and Wise  The Scotts’ Net Worth Strategy 1- Bad Logic vs. Strategy 3 - Good Logic + Roth IRAs + W. R. T. Source: Wealthy and Wise 

The Scotts’ Wealth to Heirs Strategy 1 - Bad Logic vs. Strategy 3 - Good Logic + Roth IRAs + W. R. T. Source: Wealthy and Wise  Strategy 1 vs. 3 Long-range Wealth to Heirs is increased by 615% -- caused by the efficiency of the Roth IRAs and the life insurance in the trust.

Overall Results at the End of 40 Years Ages 95/90 Source: Wealthy and Wise 

Long-Range Hypothetical Net Worth An Additional Advantage for Heirs

Let’s take a last look at all three Strategies... Ages 95/90 Text Source: Wealthy and Wise 

Ages 95/90 Text Let’s take a last look at all three Strategies... Source: Wealthy and Wise 

Ages 95/90 Let’s take a last look at all three Strategies... Source: Wealthy and Wise  Ages 95/90