A financial adviser in Colorado responds to Harper Willis’s “PRACTICE MANAGEMENT: Adviser Helps Client Survive a Pink Slip”:
In this scenario I would have advised the client to leave her money in the 401(k) because at age 55 she could have taken money out of the 401(k) without any tax penalty and without having to start SEPPs.
In addition this would have given her some time to test the job market waters and see what might develop.
In the meantime she could have lived off some of the $800,000 she had set aside in savings.
Here is the original item:
PRACTICE MANAGEMENT: Adviser Helps Client Survive a Pink Slip
–A sudden layoff hits a client
–Adviser works to find the income the client needs to cover her expenses
–A new plan helps the client feel more comfortable taking a risk
By Harper Willis
The client felt betrayed by her employer, a financial services company that laid her off abruptly after 20 years. But she was considering reapplying for a lower-paid job at the same place, because she felt she needed a paycheck and health insurance.
Her financial adviser, Charles Hamowy, saw an alternative. “With careful planning, I saw she could avoid several more years working at a company she hated,” says Hamowy, of Hamowy, Conigliaro & Associates in New York City.
The client was 54 years old–six years short of her planned retirement age–when the pink slip arrived. Gone was an annual salary of $135,000 plus bonuses, and her health plan. She did still have $1.5 million in her retirement plan, as well as $800,000 in taxable investment accounts and about $400,000 of equity in her house.
Hamowy had built a $7,000-a-year buffer into his client’s annual savings to cover unknown health costs, so paying for her own insurance wouldn’t significantly affect her retirement plans. For the next eighteen months, she would be able to purchase her company’s health insurance through Cobra, and after that she would have to purchase it on her own.
She needed about $6,000 a month to pay her mortgage and cover other expenses and taxes. And the bulk of her assets were stuck inside her retirement plan, which she couldn’t access until she turned 59 1/2 without incurring a 10% penalty.
There was a possible work-around, Hamowy knew: With the funds rolled into an IRA, the IRS would allow her to take substantially equal periodic payments from her account without incurring the penalty. Once she turned 59 1/2 she could stop SEPPs at any time.
Based on IRS rules governing SEPPs, Hamowy calculated she could withdraw $60,000 a year, which totaled about $5,000 a month. To make up the extra $1,000, Hamowy suggested she refinance her mortgage at a lower rate and a longer term, and also draw a little income from the $800,000 in taxable accounts.
Hamowy preferred taking withdrawals from the IRA instead of the taxable accounts because he believed it would help her save on taxes later. “If she waited to make withdrawals until retirement, she’d have more savings and higher required minimum distributions,” he says. “Add income from Social Security and the client would find herself in a much higher tax bracket than she was currently.”
The client was almost ready to take the leap. But she still worried about running out of money later, if she started making withdrawals five years earlier than planned.
Hamowy reassured her. “Even if we changed nothing in her portfolios, I figured she had at least another 25 years before she ran out of money,” says Hamowy. He also told her that, in a pinch, she could move to a smaller house and use the proceeds to fund the remainder of her retirement.
Prepared for the worst-case scenario, the client began taking SEPPs from her IRA. As luck would have it, in six months she’d already found part-time work that she loves–and which pays $50,000 a year. Though she was already locked into the SEPPs, Hamowy says she will be able to stop those withdrawals as soon as she turns 59 1/2, helping to preserve her nest egg.
“The real service I did my client was making her feel comfortable enough to take a risk, get out of a bad situation and create a better life for herself,” says Hamowy. “Now she’s realizing that things aren’t always as scary as they seem once you take a closer look.”
(Practice Management is a column that looks at ways financial advisers can build and improve their business. Harper Willis can be reached at 212-416-2245.)