Case Study
A scenario closely informed by our work with clients*
Redirecting the Pre-Tax Trajectory
Starting point
We were introduced to a couple in their late 50s preparing for the next phase of life. The husband had spent over 15 years as a director at a Virginia defense contractor and planned to work for another 5 to 10 years; his wife had already shifted gears toward eventual retirement. They fit the classic “millionaire next door” profile: high earners bringing in substantial income but living modestly on about $90,000 a year. Between their future pensions and Social Security, their baseline expenses were already fully covered. They had been diligent savers, consistently maxing out their pre-tax 401(k)s and IRAs, but they were growing underwhelmed by their portfolio’s performance under their previous advisor.
Realization
A look under the hood revealed two structural problems. First, their previous advisor had them heavily invested in high-fee, proprietary mutual funds manufactured by the advisor’s own firm — a closed ecosystem that did not represent the true investing landscape.
Second, we ran the napkin math on their tax trajectory. Because their living expenses were low and their pensions were high, their diligent habit of maxing out pre-tax accounts was actually a trap. They were building a massive future tax liability for when Required Minimum Distributions (RMDs) eventually forced them to withdraw those funds. They were saving aggressively, but without direction—especially with respect to taxes.
Approach
Our first step was moving their assets into a completely open-architecture environment, eliminating the proprietary products and fees.
Next, we stopped the heavy pre-tax contributions and initiated a multi-year strategy of Roth conversions. Because the husband was still working for another decade, we redirected a significant portion of his ongoing savings into cash-value life insurance — which in this context functioned as a tax-free capital buffer and a systematic de-risking tool, not merely a death benefit.
Looking ahead
When the husband retires, the cash-value policy will allow the couple to take tax-free loans to supplement their income. This keeps their taxable income deliberately low, widening the window to execute their Roth conversions far more effectively.
The strategy reduces their lifetime tax liability and provides downside protection against bad markets. Whether they spend the money themselves or pass it to their grown children, those dollars remain as valuable as possible. As we told them during the planning process: we have never seen a client list the IRS as a beneficiary.
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*This hypothetical case study is provided for illustrative purposes only and does not represent nor is it intended to represent actual client experiences, but is rather an amalgam of several clients. An individual’s experience may vary based on his or her individual circumstances. There can be no assurance that McAdam, LLC (“McAdam”) will be able to achieve similar results in comparable situations as not all of these strategies apply to all investors and some Social Security strategies could be subject to sunset provisions. No portion of these writings is to be interpreted as a testimonial or endorsement of McAdam’s investment advisory services and it is not known whether the hypothetical clients referenced approve of McAdam or its services, nor are these writings intended to imply the firm’s strategies will be successful. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. For additional information about McAdam, including fees and services, send for our disclosure statement as set forth on Form ADV from McAdam using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
This article is provided by McAdam LLC (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss, and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.