Sometimes financial decisions that seem to make sense in the moment can cost individuals in the long run in both money and stress.

That is what befell a couple who became clients of Marguerita M. Cheng, CEO of Blue Ocean Global Wealth, a financial services firm based in Gaithersburg, Md. Cheng founded the firm in 2013 because having her own business was going to help her achieve more satisfaction in her career.

She says that shortly after the Covid-19 pandemic threw many lives into turmoil in March 2020, a Washington, D.C., couple approached her. The wife, 73, was a medical doctor who had worked in international development with a focus on maternal health, and she had just retired. The husband, 68, was also a medical doctor, still working in cancer research at the National Institutes of Health.

They had been referred to Cheng by one of the wife’s work colleagues after they found themselves confronting a big problem: In 2021, they had withdrawn $200,000 from a 403(b) retirement account that the wife owned, an account valued at $844,000, in order to pay down the balance of their home mortgage.

They thought they were doing the right thing financially at the time by taking money out of a conservatively invested retirement account. Yet their seemingly sensible decision cost them an extra $48,000 in taxes for 2021, in part because the withdrawal threw them into a new tax bracket, even though they’d already withheld taxes from the distributions they’d received.

Besides that, they were also paying for the health insurance of their adult daughter, who’d lost her job during the pandemic and had joined the gig economy with a limited income. For 2021, the couple had expenses of $208,000, including the extra $48,000 tax bill.

When they realized they were going to face that big tax hit, they knew they had to take a new look at their situation. “When the couple brought me in they were experiencing a deficit of $1,900 per month,” Cheng says. “For this couple, the extra tax bill really caused stress because it significantly depleted their cash reserves. They also had medical expenses and were concerned about accumulating credit card debt.”

However, she didn’t want to dictate terms to them. They had a lot of strong feelings about their debt and obligations.

“Understanding their values was critical because I realized a new loan was not an option,” Cheng says. “This couple has traditional Midwestern values and feels uncomfortable having debt.

“Sure, they could stop helping their daughter with health insurance premiums … or cut expenses elsewhere, but I found from speaking with them that providing for education and healthcare are core values for their family,” Cheng adds.

“I did not want to dictate to them what they should do, so we talked through their options.”

The Mortgage Recast
To help solve this puzzle, Cheng looked into the couple’s housing situation, including their mortgage, as well as their Social Security and retirement plan benefits.

One of the things she did was contact the mortgage company on the couple’s behalf to ask about a “recast,” which would allow them to keep the same loan with the same low interest rate. The recast was done in place of a refinancing, which would have changed the terms of the mortgage.

“The recast helped reduce that deficit significantly,” Cheng says.

With a recast, the bank would take the $200,000 payment from the 403(b) and use it to pay the principal of the mortgage, instead of putting it toward both principal and interest payments. A recast is different from a refinancing in that the holder keeps the same loan but with a large part of the principal paid off.

There is also no origination fee or settlement for a recast, only a $250 administration fee. The couple’s remaining mortgage was $258,000 after the pay-down. (The house is valued at $1.16 million.) As their cash flow improved, the clients could always pay higher amounts, but they had the benefit of the same low fixed interest rate and a lower payment.

Doing this enabled the couple to improve their cash flow by reducing the remainder of their mortgage payments from $2,750 per month to $1,376 per month (a savings of $1,374).

“Being able to reduce their expenses so that they could pay all of their expenses each month was a great relief to them,” Cheng says.

Social Security Switcheroo
The husband had previously been receiving $19,000 per year from Social Security by taking 50% of his wife’s benefit. But then he turned 70 in October 2022. At that age, he could switch to Social Security benefits on his own earning record, and those amounts would be taken at an increased amount because he had delayed taking them after his full retirement.

“When the husband turned 70, their cash flow improved significantly with his Social Security benefits,” Cheng says. Cheng helped the husband apply for the Social Security benefits with delayed retirement credits, which he began in October when he turned 70, at the point his monthly benefit for life reached the highest dollar value: about $48,000 annually.

(It should be noted that not all these benefits will be available in the future. Social Security regulations have phased in changes over the last few years for the types of applications that can be filed. One change affected the filing of a restricted application in which the beneficiary is eligible for more than one type of benefit but wants to take only one. The one taken is typically the highest benefit and enables the recipient to delay other benefits that may be higher in the future. Another change applies to the strategy of filing and suspending benefits, which also allows benefits to increase for a future date. The changes that were enacted altered who could apply for both of these types of benefits, based on birth dates, length of marriage and other  factors.)

In addition to the wife’s 403(b), the husband had a Thrift Savings Plan—the 401(k) for federal employees—of about $200,000 and a deferred annuity of $141,000. He will also receive a Federal Employees Retirement System (FERS) pension in retirement. The wife was required to take $40,000 for a minimum distribution from her 403(b) and she also receives $42,000 a year in Social Security benefits.

“I also knew that I just need to help them get through this difficult time, as in October 2022 I know the husband would reach age 70 and cash flow would improve,” Cheng says.

The pandemic was difficult for many clients. Cheng says she advised this couple, as well as her other clients, that if they didn’t need some funds they had available they should deposit the money in a savings account.

“It’s true that I would not tell clients to liquidate stocks, stock mutual funds or stock ETFs in the short term, but being able to have some funds available in cash can give clients tremendous peace of mind,” she says.

“For this couple, financial planning and financial advice made all the difference.”