Case Study: How I Helped an Engineer & His Wife Plan for Retirement Using Tax-Efficient Strategies

Case Study: How I Helped an Engineer & His Wife Plan for Retirement Using Tax-Efficient Strategies

October 29, 2021

As a professional engineer, you know the ins and outs of complex mathematics, applied force, and what Sir Isaac Newton said when an apple fell on his head. But do you know how to maximize your retirement plan in a tax-efficient way? If you’re like many of our clients, you probably don’t enjoy thinking about, calculating, or paying taxes—and that’s okay. At CWM Financial, we know the intricacies of retirement planning and have helped many clients plan for their golden years in a tax-efficient way. Consider the following case study of a client we recently helped.

The Client

In this case, our client was a successful engineer aged 64. His spouse, also aged 64, had recently retired from her job as a government employee, and he was hoping to join her in the near future. 

The Goal

This client came to us unsure of what to do with his retirement distribution options. He could either take a lump-sum pension or a lifetime annuity. His spouse was already receiving a pension of over $50,000, and both were eligible to collect Social Security benefits totaling another $60,000-70,000 per year, depending on the age at which they were to collect. With retirement right around the corner, the client needed to make a decision soon and he wanted to make sure it was well-informed and logical.

The Process

In order to make a decision, we had to first assess this clients’ full financial situation and project their future retirement cash flows. This involved conducting a retirement needs analysis, running different scenarios, and completing a comprehensive tax analysis.

We found that their investment assets totaled roughly $2.5 million before the client’s pension plan was considered. If he took the lump-sum pension, their investment assets would jump to over $3.5 million.

With the lifetime annuity, however, their total investment assets wouldn’t change all that much. Additionally, if the clients were to elect the annuity payout from the pension plan all of their needs would be met by their two pensions alone. By adding Social Security benefits on top of this at some point the clients would actually find themselves with far more income than they need, and potentially push themselves into a higher tax bracket with little ability to control the situation going forward.

While having a surplus of income is certainly a better problem to have than not having enough, it presents an unfavorable tax situation, especially in retirement. This is compounded by required minimum distributions (RMDs), which are mandatory amounts that must be withdrawn and taxed annually starting at age 72. RMDs apply to all qualified retirement accounts except Roth IRAs (more on this later).

This is a very important consideration because RMDs will not be an issue for these clients for another 8 years, since both spouses are only 64 now. This goes to show just how important it is to plan ahead! Because while it may seem like a no-brainer to take the lifetime annuity in order to receive a steady income stream for the rest of the client’s life, it actually makes less sense once the RMDs are considered.

The Outcome

Because of the tax considerations surrounding RMDs, we recommended that both spouses delay their Social Security benefits until age 70 and that they take the lump-sum pension instead of the lifetime annuity. These recommendations have several benefits:

  • Lower tax bracket. By delaying the additional income source from Social Security, they can stay in a lower tax bracket for as long as possible.
  • Roth conversions. Delaying Social Security will also allow the clients enough time to execute a series of Roth conversions which in turn would help reduce their RMDs. Roth conversions involve shifting pre-tax retirement savings to a post-tax retirement vehicle. The clients can convert funds from their pre-tax retirement accounts to a Roth IRA, where it can continue to grow tax-free since Roth IRAs do not require RMDs. By not collecting their Social Security benefits right away, and because they do not have the lifetime monthly income from his pension plan, they are able to execute these conversions in a more efficient manner than they would otherwise be able to achieve.
  • Retirement Income. By not electing the lifetime annuity the clients are able to better control their income in retirement. Being able to determine how much income is needed in addition to the spouse’s pension and pulling only that amount from their assets ensures that they can better capitalize on the lower marginal tax brackets in their early years of retirement, specifically for the purpose of executing the Roth conversion strategy.

Once they reach 72, the clients will still have too much income coming from their RMDs, but it won’t be nearly as much since almost half of their pre-tax accounts will be converted to tax-free Roth accounts by that time. Choosing the lump-sum pension will save them big on taxes.

Our final analysis also showed a significant increase in their net worth at death (over $3 million more!) when the lump sum was chosen instead of the lifetime annuity. This outcome was almost entirely due to the change in tax treatment of the remaining retirement assets. Remember, it’s not how much you make but how much you get to keep after taxes have been paid!

This is a case study example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.

How We Can Help You

This is just one example of the type of tax-efficient planning we can do at the Center for Wealth Management. If you have similar questions about your retirement distribution options, or would like to review tax-efficient strategies, reach out to us today. It’s never too early to start planning for your golden years, and it could save you big on taxes. Schedule a free introductory meeting online, call (248) 220-4321, or email me

About Justin

Justin Williamson is a senior partner and co-owner of Center for Wealth Management, an independent, fee-based wealth management company in Troy, Michigan. Justin has been serving clients in the financial services industry since 2001. He spends his days helping his clients achieve their financial goals and make the best decisions for their families so they can spend time on what they love and experience financial peace of mind. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers and other professionals who are close to retirement or recently retired and helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker and presents at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in Business Administration majoring in Personal Financial Planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER® (CFP®). 

Outside of work, Justin enjoys spending time with his family. He lost his wife of 18 years, Heather, to brain cancer in 2020. He and his son, Carter, and twin daughters, Jaden and Kelsey, work to honor her and make her proud each day. Outside of work, you can usually find him coaching baseball, softball, and basketball, and spending time at their family cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.