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

That is what befell a couple who became clients of Marguerita M. Cheng, CEO and founder of Blue Ocean Global Wealth, a financial services firm based in Gaithersburg, Md. 

Shortly after the pandemic turned almost everyone’s lives upside-down in March 2020, a Washington, D.C. who couple was referred to Cheng by a work colleague of the wife, after they expressed concern about a problem they were experiencing. They had withdrawn $200,000 from a 403(b) retirement account that the wife owned that was valued at $844,000 in order to pay down the balance of their mortgage.

They thought they were doing the right thing financially by taking money out of the conservatively-invested retirement account. At that time in 2021, the wife, a medical doctor who had worked in international development with a focus on maternal health, was 73 and had just retired. The husband, also a medical doctor still working at the time in cancer research at the National Institute of Health, was 68 years old.

That seemingly sensible decision cost them an extra $48,000 in 2021 taxes, in part because the withdrawal threw them into a new tax bracket even though they already had taxes withheld from the distributions as they received them. When they realized they were going to face a substantial tax bill they knew they had to take a new look at their situation.

“For this couple, the extra tax bill really caused stress because it significantly depleted their cash reserves,” Cheng said. “They also had medical expenses and were concerned about accumulating credit card debt.”

Cheng contacted 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. 

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 using it to make payments that would go toward both principal and interest. 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 also is no origination fee or settlement for a recast, only a $250 administration fee. The remaining mortgage was $258,000 after the pay down. As cash flow improves, the clients can always pay the higher amount, but they have 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 on the home that was worth at least $1.16 million from $2,750 per month to $1,376 per month, which improved their cash flow by $1,374. Cheng then helped the husband apply for Social Security benefits with Delayed Retirement Credits, which he began when he turned 70 in October last year, when his monthly benefit for life reached reach the highest dollar value of about $48,000 annually. 

He is currently receiving $19,000 per year (50% of his wife’s benefit), but at age 70, he could switch to benefits on his earning record and increase the amount of his Social Security retirement benefits because he delayed starting his benefits after full retirement. This couple was eligible to take advantage of Social Security claiming strategies that are no longer available.

“For this couple, financial planning and financial advice made all the difference. Sure, they could stop helping their daughter with health insurance premiums, but the couple or cut expenses elsewhere, but I found from speaking with them that providing for education and healthcare are core values for their family,” Cheng said.

In addition to the wife’s 403(b), the husband had a Thrift Savings Plan, which is 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 received $42,000 a year in Social Security benefits.

For 2021 the couple had expenses of $208,000 including the extra $48,000 tax bill. Included in those expenses is financial help they give to their to pay for health insurance for their adult daughter who lost her job during the pandemic and is now a member of the gig economy with limited income.

“When the couple brought me in they were experiencing a deficit of $1,900 per month. The recast helped reduce that deficit significantly. When the husband turned 70, their cash flow improved significantly with his Social Security benefits,” Cheng said. “I did not want to dictate to them what they should do, so we talked through their options.

“Understanding their values was critical because I realized a new loan was not an option. This couple has traditional Midwestern values and feels uncomfortable having debt,” Cheng said. “Being able to reduce their expenses so that they could pay all of their expenses each month was a great relief to them. 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.”

The pandemic effected many advisors’ clients negatively. Cheng said she advised this couple, as well as her other clients that, if they didn’t need some funds they had available they should deposit it 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 (I think a word was missing) clients tremendous peace of mind,” she said.