It is November 2018 and you are working with Jim and Cherie Johnson (both retired living in Georgia). They have just come to you for a second opinion on their financial situation. They have been retired for two years and a friend (client of the firm) encouraged them to come in and meet with you.

Jim is 63 and is planning on taking Social Security when he is 70. His SSB at 70 will be $40,000 per year. Cherie is 62 and decided to start taking her Social Security now and receives $14,000 per year. Jim enjoys coaching high school sports and working with young people. He earns $15,000 per year (paid on a 1099 Miscellaneous Form) for this work, but it is largely for the fulfillment, not financial benefit. Jim and Cherie have taxable interest income from their investments of $24,000 per year and $31,000 of qualified dividends. While Jim and Cherie do not sell capital assets very frequently, their current portfolio manager generates about $4,000 of long-term capital gains each year. Jim and Cherie are currently taking $15,000 per year in IRA distributions from Jim’s IRA. Jim is also receiving a pension of $16,000 per year.

Jim and Cherie are generally in good health and they pay $13,000 a year for private health insurance. They have property taxes of $8,000 per year and can’t recall what they pay in Georgia income taxes (you will need to estimate this). They also paid mortgage interest of $6,000 on their home. They give 10% of their gross income to their church each year. They are currently making federal-estimated tax payments of $1,500 and state-estimated tax payments of $1,000.

Overall Jim and Cherie live a fairly conservative lifestyle. They have a lake house that they enjoy spending time with the grandkids. Their children are all doing well and they usually have money left in their checking and savings accounts at the end of the year.

Jim and Cherie also brought you their account statements. Their current portfolio manager has them in a 60% equity / 40% bond allocation, which is consistent with their risk tolerance. The allocation within each of their accounts follows this overarching asset allocation model. Their account balances are Jim’s IRA - $1,250,000; Cherie’s IRA - $560,000; Joint brokerage account - $1,900,000. Currently, Johnson’s portfolio is invested using ETFs, mutual funds, and just a few individual stock positions (the individual stock positions are largely at the request of Jim and Cherie). They are primarily invested in US Treasury Bond funds for the fixed income portion of their portfolio. All of the portfolio estimates expect a weighted average return of 6.7% annually. Equities (60% of the portfolio) are expected to return 8.15% and bonds (40% of the portfolio) are expected to return 4.5% over the foreseeable future.

Key Questions

What planning suggestions do you have for Jim and Cherie this year? Do you have any planning suggestions for Jim and Cherie for 2019 and 2020? Also, do you have any planning suggestions for Jim and Cherie looking forward 10 years when Jim and Cherie are both in their early 70s and required minimum distributions have begun? Please prepare a letter and analysis for Jim and Cherie looking at their current immediate future and long-term future tax issues that they face and any strategies or suggestions you have for them. Remember, you want them as a client.

Answer rating: 100% (QA)

Dear Jim and Cherie Johnson We are pleased to provide you with our analysis of your current financia... View the full answer