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# The Pothole in Wealth Management Good Logic vs. Bad Logic - PowerPoint PPT Presentation

The Pothole in Wealth Management Good Logic vs. Bad Logic. Case Study. 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%

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## PowerPoint Slideshow about 'The Pothole in Wealth Management Good Logic vs. Bad Logic' - garth-burris

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Presentation Transcript

The Pothole in

Wealth Management

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)

Assume Simon and Ann want \$25,000 a month in after tax retirement cash flow – compounding annually by 3.00% as an inflationoffset.

Let’s provide the cash flow but compare the “least efficient” withdrawal order to the “most efficient”.

Least Efficient Order

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

Let’s provide the cash flow but compare the “least efficient” withdrawal order to the “most efficient”.

Least Efficient Order

Most Efficient Order

Strategy 2 (Good Logic)

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

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

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.

Source: Wealthy and Wise

The Scotts’ Net Worth

vs.

Strategy 2 - Good Logic

Strategy 1 vs. 2

Long-range Net Worth is increased over Strategy 1

by 339%

simply

by selecting the most efficient distribution order.

Source: Wealthy and Wise

The Scott’s Wealth to Heirs

vs.

Strategy 2 - Good Logic

Strategy 1 vs. 2

Long-range Wealth to Heirs is increased by 286%.

Source: Wealthy and Wise

Overall Results at the End of 40 Years

Ages 95/90

Source: Wealthy and Wise

With over \$12.5 millionmore in Net Worth, let’s do a little tax planning by introducing Strategy 3which involves:

Converting the Scott’s IRAs to Roth IRAs with the income tax on the conversion withdrawn from their assets;

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 . . .

The Scotts’ Net Worth

vs.

Strategy 3 - Good Logic + Roth IRAs + W. R. T.

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

Source: Wealthy and Wise

The Scotts’ Wealth to Heirs

vs.

Strategy 3 - Good Logic + Roth IRAs + W. R. T.

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.

Source: Wealthy and Wise

Ages 95/90

Source: Wealthy and Wise

Long-Range Hypothetical Net Worth

Source: Wealthy and Wise

Ages 95/90

Text

Source: Wealthy and Wise

Ages 95/90

Text

Source: Wealthy and Wise

Ages 95/90

Ages 95/90

Source: Wealthy and Wise