Competing Responsibilities,
Aspirations for Growth

The Situation

Indira works hard and earns a lot. When she came to us, she was saving a lot of money and needed help investing it. She had a fairly good understanding of financial issues, but she wanted her portfolio to be taken care of by a professional without her having to think about it. John, Indira’s husband, is a music professor. He’s never had much interest in learning financial concepts and tends to defer to Indira on these issues.

Our Approach

As with all clients, we began our process with a qualitative overview of their situation. Indira had moved quickly up the corporate ladder from the start of her career, but her income increased significantly five years ago when she became a senior executive in her company. John is passionate about his work, but didn’t expect to see large increases in his earning potential. Their primary financial goal had long been to get their kids (ages 14 and 16) through college – beyond that, they did not mention any other goals aside from making sure that they save enough to give them the freedom they want later in life. When pressed on this, they shared that they have dreamt of owning a beach house, but never took concrete steps toward making this a reality.

Until recently, most of their extra take-home pay was going into college savings accounts for the kids. With both college savings accounts adequately funded, they needed help figuring out where to put their excess cash flow. Our first step was to evaluate where their savings was going – some was being deferred to their retirement accounts at work (a 401(k) for Indira and 403(b) for John) and the remainder was building up in their bank account. They were each contributing enough to their retirement accounts to get their respective employers’ full match, but they could have been contributing more on a tax-deferred basis. We suggested that they “max out” their contributions to retirement accounts to take full advantage of the tax deferral. After doing so, they still were left with a few thousand dollars in extra cash flow each month, so we suggested that they open up a joint investment account to invest the proceeds.

As we worked to ensure that their investment profile was appropriate for their situation, we looked beyond just the account that we would be managing directly. Indira was confident that her earnings would continue to increase and was comfortable with market risk. We recommended that she get more aggressive with her retirement account than the joint account, as the retirement account would not be touched for many years, but the joint account could be spent down if they decided to purchase a beach house. Beyond that, the 529 accounts for their kids had been invested entirely in stocks, which was appropriate as their kids were growing up and had a longer time horizon before the funds would be needed. But with college only a few years away, we suggested that they decrease the risk in those accounts.

In our analysis, we pointed out that their 529s were probably actually over-funded. We helped them understand what their options would be if assets remain in their accounts after the kids finish school, including the possibility of funding college education for future generations of their family with tax-free funds.

We also took a look at their estate plan. They had their beneficiaries appropriately named on their 529s and retirement accounts, but they had no wills or powers of attorney, which essentially meant that the state would determine what would happen with their assets and who would take custody of their children upon their deaths. We strongly urged them to have these documents drafted and recommended several qualified estate attorneys to help them through the process.

Several years after we started working together, Indira became CEO. She began receiving stock options and saw large jumps in her wealth. We helped her formulate a plan for the orderly and tax-efficient disposition of her various types of options. We also started looking more closely at estate planning and worked to determine how she and John could leave the legacy they want in a tax-efficient way. In cooperation with their attorney, we explored various trust structures that would allow them access to their assets during life while also removing some assets from their taxable estate to reduce the likelihood of federal estate taxes. They also started to think about how they could use their wealth to have a positive impact in their community, so we helped them understand how a donor advised fund, a charitable remainder trust, or a charitable lead trust could allow them to maximize the impact of their donation while minimizing their tax liability.

Indira and John came to us for investment help, but we went several steps further and worked on many other areas of their financial lives.

Disclaimer: These case studies are being shown for illustrative purposes only. Actual performance and results will vary. These case studies do not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted.