Retirement Paycheck – Money Movements

Check out my previous video: Shell Retirement Payment Timeline, and stay tuned for my next two videos!

Full Transcript:

Where will all of the lump sum payments from Shell go, and where do they need to be so I can recreate a paycheck in retirement?

In my last video, we walked through a hypothetical case study, John, and his Shell retirement payment timeline. Today, let’s talk about where those payments go and how we can then recreate a paycheck in retirement. Stay tuned for my next video, where we’ll cover the math behind that retirement paycheck. Now for this example, we’re going to assume that John is married and that he and his spouse have combined finances.

First, let’s talk about John’s group employee stock purchase program. With John’s group employee stock purchase program, when this vests, it will continue to go to his individual Fidelity account. Now once there, of course, John and I have chatted about whether he wants to keep or sell these shares, and if he chooses to sell these shares, then we’ll use that money where it’s needed most.

One potential use of that money is for John to fund his backdoor Roth IRA. Now, this will primarily depend on whether or not John is in a tax efficient manner because of the pro rata rule. Otherwise, we’ll transfer the shares or the proceeds to him and his spouse’s joint Fidelity account.

Now, of course, John will continue to get his base pay for a few more paychecks and then in February he’ll also get his bonuses on unification, etc. These will continue to be processed through Shell’s payroll. Then in March, when he gets his severance payment or his first severance payment. Now with these payments, as well as his upcoming BRP payments, he’s getting a lot of lump sum payments in one tax year, which means he’s going to be in a very high tax bracket.

So, we’re going to look at two things. First, we want to make sure that John has enough withheld so that he will have no underpayment penalties when he files his 2027 tax return. Second, we’re going to want to ensure that there’s no surprises when he sees the tax bill and that that money is already been set aside.

So, first and foremost, we’ll do a tax projection and set aside a part of his severance for taxes. Now when doing so, John will likely keep this in a high yield savings account or a money market fund so that the money is not going to be subject to the market, but we’ll get some higher interest. This way when taxes are due, he has that payment.

Next, we’re going to make sure that any of John’s short-term spending or savings goals are fully funded. Maybe he and his spouse have a large purchase they want to make or a big retirement trip. Once those are accounted for, any leftover money will then deposit into his joint account.

Now next, let’s talk about John’s performance shares. When John’s performance shares vest, they will continue to go into his individual account at Fidelity. Now, if John was a letter category or SEG job grade, John was also subject to shareholding guidelines.

Now the shareholding guidelines no longer apply now that John’s no longer employed by Shell. But John may have a lot of Shell stock in his individual account, and some of that stock may have been acquired at a very low price. So, there’s a lot of taxable gains in there when he sells these shares. So instead of selling them all and taking an immediate tax hit what we’ll do is we’ll move everything in-kind to this joint account so that we can integrate it with the rest of his investments and have an integrated tax strategy for those shares.

Next, let’s talk about his BRP payments. First let’s start with his PF-BRP. Now with the Provident Fund BRP, this one you have no control over the withholding. So, it will be withheld at a flat 22%. Again, one of the many places where Fidelity will under withhold the year that John retires. Now with his pension BRP’s, he does have some say in the pension BRP payment withholding. So, of course, we’ll look at his APF-BRP and his 80 Point-BRP, and we’ll submit an updated W-4 for withholding.

Now, with all three of these accounts, it’s imperative that you have a checking account or joint Fidelity account linked to it so that when these payments are made Fidelity knows where to send the money. If there’s no linked account, Fidelity will mail you a check. And that’s potentially a really big check to get surprised by in the mail. So, what we’ll do is we’ll link their joint Fidelity account that way the money is electronically deposited from these BRP accounts, after tax withheld, to their joint account.

Now that everything’s been in the joint account and integrated, we can then set up and start John’s retirement paycheck. So, with this regular paycheck, it’ll feel just like when he was working so they can continue to have the money available for their lifestyle and spending goals.

Now, one last thing we’ll look at what this joint account in 2027, since his income is so high and his tax rate is so high, we’ll also look at what is the best use for some of these shares and is John and his spouse, are they very charitably inclined?

If they are charitably inclined, we may look at funding a donor advised fund so that he can get a much higher tax deduction in 2027. Now, in addition to being able to get a high tax deduction, we can fund this with highly appreciated stock. Now in John’s case this could be some of those old Shell shares. Now once this is funded, John and his spouse they get to then pick when they want that money to go from this account to the charities of their choice. And they can spread that out over many, many years.

Now encourage you to stay tuned for my next video where I’ll talk about the math behind this retirement paycheck.

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