Cash Flow Planning

Clients: Retired couple in their early 70s living off of income from social security, teacher’s pension and sizeable IRA account.

Situation: The couple’s sources of income and withdrawals from retirement funds were all fully taxable. As part of their estate intentions, the couple was also using the maximum annual gift exclusion in support of funding trusts for their children. The husband was managing the portfolio investments himself. They needed assistance in understanding the impact of retirement living expenses, taxes and gifts on the sustainability of their investment portfolio.

Solution: Perkins Coie Trust Company provided a financial plan that included cash flow analysis, portfolio optimization and a Monte Carlo analysis of portfolio success or failure. We identified that most of the couple’s expenses were fixed, not variable, but for the annual gifts, which were substantial. We recommended deferred or testamentary gifting versus lifetime gifting. Eliminating these cash flows resulted in significantly improved sustainability of retirement assets. We also identified that modifying the couple’s asset allocation and mutual funds enhanced the probability of portfolio success. Finally, we compared sustainable withdrawal rates to the clients’ remaining spending needs to confirm sufficiency of their investments.

Result: The clients stopped the annual gifting process and elected to downsize their residence, relocating to a retirement community. The net proceeds from the property exchange were used to fund a living trust that could provide necessary contingency funds during their lifetime but was primarily intended to provide for their children as beneficiaries after their passing. Perkins Coie Trust Company was engaged to manage the investments in both the IRA and the trust in accordance with the optimal allocation strategy.