PFP Advisors. Financial Planning For Everyone. 123 neat st. Anywhere, USA 12345

Transcription

1 PFP Advisors Financial Planning For Everyone. PFP Advisors 123 neat st. Anywhere, USA 12345

2 1 Table of Contents PFP Advisors 2 Planning Process: 2 Fees: 3 Client Information and Summary 4 Current Financial Condition 7 College Funding Goal 10 Retirement Funding Goal 11 Real Estate Goals 12 S.W.O.T. Analysis 13 Budgetary Recommendations 13 Investment Recommendations 17 Tax Planning 18 Professional Referrals 19

3 2 Why We Exist: PFP Advisors was founded in 2018 and currently manages over $300 million for individuals and families. We measure our success based on our clients well being and overall satisfaction with our services. We are here to work hard for our clients so that they can spend their valuable time and energy focusing on the other important aspects of life. We Aim to Provide: -Clarity: by simplifying the often complex aspects of financial planning and educating clients along the way. -Confidence: by creating a plan that is unique to each individual, you can rest easy knowing that we are being very thoughtful when creating plans to help our clients reach their goals both financially as well as life goals. -Comfort: by addressing all of our clients goals and risks. As well as by making sure all tax, estate, insurance, and retirement aspects are being planned for. Planning Process: Our job as financial advisors is to look out for our client s best interests. We do this by following detailed steps to create a custom tailored plan for each client. We start by identifying what you value and what your goals are We then start to develop a plan to achieve your goals Next we implement the plan by aligning your financial resources with your goals and making changes Finally, we monitor the plan that has been set in place and make changed when necessary to ensure that we remain on target

4 3 Fees: We aim to be as inclusive as possible. However, we focus on serving individuals and families with investment assets of $1,000,000 and greater. We charge 1.00% of the first $1,000,000 that we manage with a minimum of $2,500 fee per quarter.

5 4 Personal Information Name Carl Berman Naomi Berman Birthday 02/13/ /24/1975 Age Marital Status Married Married SSN # Employer James Madison University Thomas Harrison Middle School Occupation Professor of Law Principal Address 1234 Market St 1234 Market St City Harrisonburg Harrisonburg State Virginia Virginia Dependents Name Relationship Birthdate Age Matthew Berman Son 04/17/ Sarah Berman Daughter 03/12/

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8 7 Client Summary Carl and Naomi Berman are married and currently living in Harrisonburg, VA. Carl work as a Professor of Law at James Madison University and Naomi is a Principal at Thomas Harrison Middle School in Harrisonburg. They have two children, Matthew and Sarah (14 and 11, respectively). The Berman s have spent their past years traveling and enjoying their time in Virginia with their family. They own their family home in Harrisonburg but are hoping to someday purchase an additional home in the Historic District as well as a cabin in the Blue Ridge Mountains. One of the main goals for Naomi and Carl is to fully fund both Matthew and Sarah s college educations, as education is greatly important to the family. Another goal of the Berman s is to ensure they are both on track for their retirement. As well as to seek consultation regarding their insurance coverage and estate documentation. Financial Goals Funding Matthew and Sarah s Education Funding Carl and Naomi s Retirement Purchasing new home in Historic District Harrisonburg Purchasing cabin in Blue Ridge Mountains Current Financial Condition - Ratio Analysis The following analysis was created using the financial statements you have provided with us. Please note that this analysis is created using standardized benchmarks and is meant to provide a framework for our understanding of your financial condition. Emergency Fund Ratio: 4 ½ months Benchmark - 3 to 6 months This ratio tells us how many months of your non-discretionary, or obligatory expenses, you could cover given your current cash holdings. You could cover about 4 ½ months of these expenses, which is in the middle of the benchmark. However, we would like to see this increase to provide more of a safety net.

9 8 Current Ratio:.83 times Benchmark - 1 to 2 times The current ratio calculates how many times over, you could pay off your current debts if you had to use all of your current, most liquid assets. Right now, you re only able to cover about 83% of your current debts, which is below the benchmark. This is something we would like to work with you to increase as well. Housing Ratio One (Front-End Ratio): 12.5% Benchmark - 25% This ratio tells us what percentage of your income is going towards your housing costs (i.e. mortgage payments). The benchmark for this is to be spending less than 25% of your income on this, your family is spending just 12.5% on this - which is great! Housing Ratio Two (Back-End Ratio): 16.6% Benchmark - 36% This ratio analyzes the percentage of your income which is spent on paying off all debts, including your mortgage, car loan and credit card debt. You re currently spending about 16.6% of your income on these debts, which is far below the benchmark of 36% (or less). Debt to Assets Ratio: 25.4% This ratio analyzes what percentage of your assets are owned by your creditors. While we do not have a specific benchmark for this, ideally this ratio declines more and more with age. For your current ages, this is an appropriate place to be. Net Worth to Assets Ratio: 74.6% This ratio is the opposite of the previous ratio, it tells us what percentage of your assets are owned by you. Again, we do not have a specific benchmark, but we would like to see this continue to increase as you approach retirement.

10 9 Savings Rate: 3.1% Benchmark - Varies with age, approx. 10 to 13% The savings rate calculates the percentage of your annual income that you re saving each year. The benchmark for the savings rate is a minimum of 10-13%, but increases if savings is delayed. Your savings rate is below the benchmark, and is something we would really like to see increase. Investment Assets to Gross Pay: 3.9 times Benchmark - 16 to 20 times (at age 65) This ratio measures your progress towards saving for retirement by analyzing how much you have invested, compared to your income. The benchmark for this ratio is based at age 65, which would be times your gross pay, in invested assets. Since you re not 65 yet, it s okay that you aren t at this number; however, we would like to see this grow as you get closer to retirement. Summary of Ratio Analysis Where are you doing well? Housing Ratio One Housing Ratio Two Debt to Assets Ratio Net Worth to Assets Ratio Where should we focus on? Building up Emergency Fund Increasing Current Ratio Increasing Savings Rate Increasing Investment Assets to Gross Pay Ratio

11 10 College Funding One of your main goals was to fund Matthew and Sarah s college educations. We ve created several present value analysis to illustrate the different routes which we can take to help you fund this goal. The first scenario has assumed both Matthew and Sarah will live on campus for all four years of college. The second scenario funds them living on campus for two years, and then two years of just college tuition. Our final scenario funds two years of tuition at a community college, and two years at a university at full cost. We have used the following assumptions in our calculations. Please note that these are just that, assumptions and will vary depending on what specific university or college Matthew and Sarah attend. These are meant to provide an estimation of what savings are required to meet these goals. Full cost (per year) at an in-state university: $22,987 Tuition cost (per year) at an in-state university: $12,702 Community College tuition (per year): $4,508 Below we have included a table with the current levels of savings needed for both Matthew and Sarah s education fund. Matthew Berman (14) Sarah Berman (11) Total Savings Scenario One $81,445 $71,460 $152,905 Scenario Two $63,565 $61,235 $124,800 Scenario Three $48,100 $46,330 $94,430 We have also included the following graph to visually represent the costs for each child s education.

12 11 Currently, you do not have any savings or accounts dedicated for Matthew or Sarah s education funds - however, you do have the trading account with a balance of over $100,000 which would be a great start for their funds. We have included both investment and budgetary adjustments which will allow you to fully fund both of their educations, using our second analysis. Retirement Funding Another goal of yours was to be able to fund both of your retirements. As you enter retirement, your expenses start to change. For example, in retirement income taxes, commuting expenses and other work related expenses decline; whereas other expenses (such as health-care costs) tend to increase. While there are different methods used to calculate the amount of savings needed for ones retirement, we have opted to use the Wage Replacement method. This approach allows us to calculate a retirement income need, based on your current income. We feel that this is the most appropriate approach given that you are not close enough to retirement age, for us to fully calculate the specific expenses you will have. Similarly to our approach to College Funding, we have created three analyses for different wage replacement levels. Most people find that an 80% wage replacement is appropriate for them in retirement, however we have calculated what your savings needs will be for an 80%, 90% or 100% wage replacement (Scenarios One, Two and Three, respectively). We have used the following assumptions for our calculations:

13 12 Carl will retire at age 65 (19 years from 2018) Naomi will retire at age 65 (22 years from 2018) Carl and Naomi will both live to age 95 No Social Security * 7.5% return on investments *We have chosen to not calculate social security in our calculations. While we feel confident that you will receive some form of a social security benefit we would prefer a conservative estimate of your needed savings. The following table illustrates the current amount of savings needed for each scenario. Carl Berman (46) Naomi Berman (43) Total Savings Scenario One $822,205 $596,975 $1,419,180 Scenario Two $924,980 $624,475 $1,549,455 Scenario Three $1,027,760 $693,860 $1,721,620 Currently you have several investment accounts being utilized for your retirement savings, this includes both Carl and Naomi s 401(k) and IRA accounts. If you continue contributing just $7,500 annually you will not be able to fund your retirement, however we have some recommendations in both budgeting and investing that will allow you to fund your retirement at an 80% wage replacement (the most common). Real Estate Purchasing Aside from funding your retirement and your children s education, you had indicated you would like to make some upcoming real estate purchases. Firstly, you would like to purchase a home in the Historic District of Harrisonburg, VA as well as a small cabin in the nearby Blue Ridge Mountains. Through our research we have found the average price range for 2-4 bedroom homes in the Historic District. Currently, these cost between $250,000 and $450,000. We assumed that you would be interested in purchasing this home at the time of Carl s retirement (in 2037). Given that homes in this region have been appreciating (or rising in price) at about 3.0% per year, we have calculated the price of these homes in At that time, we these homes will most likely cost between $275,000 and $790,000. In regards to the cabin in the Blue Ridge Mountains we have found the price range for small (1-2 bedroom) cabins. Currently the price range is between $95,000 and $100,000 for smaller cabins, without additional acreage. Again we assumed that you would be likely

14 13 to purchase this in 2037, or around that time. Given the same 3.0% per year, price increase these cabins will cost between $104,000 and $175,000. Assuming that you would like to begin saving now for these goals, we are looking at a current savings amount between $345,000 - $550,000. With your current home value being $450,000, we could use this as the basis for funding these future purchases. However, we could also look at other options for funding such as rental income or a second mortgage if necessary. S.W.O.T Analysis Strengths 1. Stable income 2. Several great outcomes from the Ratio Analysis 3. Long timeline between now and retirement (19+ years) Weaknesses 1. Low emergency fund ratio, savings rate 2. Shorter timeline for education funding goal Opportunities 1. Alternative routes for education funding 2. Potential real estate income 3. Potential rental income 4. Potential phased retirement Threats 1. Insurance coverage 2. Job Loss or other major financial emergency Budgetary Recommendation In analyzing your goals, we have determined that currently you do not have enough savings to fully fund your goals without making some adjustments. However, by looking at your cash flow statement we see that there is an annual surplus of $37,497. By allocating this between funding Matthew and Sarah s education, and in conjunction with your current retirement contributions, you ll be able to reach both of your goals. We have separated these adjustments as they are related to each goal.

15 14 College Funding With Matthew heading off to school in just 4 years, we wanted to put a greater push to fund his education in these first few years. We ve divided the current trading account between the two kids, delegating $40,000 to Matthew and $30,000 to Sarah. We are able to place these into two, seperate trading accounts where we will be able to invest them. For the next four years, we will be contributing $6,250 annually to Matthew s account and $3,750 to Sarah s. By doing this, at the end of the four years Matthew will have enough to fund four years of tuition and two years of on-campus expenses at an in-state university. In the next two years, we will ramp up Sarah s savings to $9,500 per year. By the end of this she too will have enough in her account to fund four years of tuition and two years of on-campus expenses. Retirement Funding Since we have used the majority of the trading account to be put towards education funding, we are allocating the remaining account balance between your qualified assets. Utilizing the budgetary surplus again, we will allocate a graduating amount towards your retirement savings. This will be in addition to your annual contributions to Carl s 401(k). Your contributions would be scheduled to increase after the first year of working with us (once your emergency fund is at 6 months) and then again after Matthew and Sarah both have entered college. Once Carl retires there will be a major decrease in your household s spending on employment related taxes and these funds can then be contributed towards the retirement accounts. To further illustrate we have created the following diagrams that show how the annual budget surplus will be allocated in the next year, 4 years, 6 years and beyond. You will also note that in the first year we have allocated nearly $10,000 to your emergency fund. By doing this we can ensure that after this first year, you ll have 6 months in your emergency fund. We have also assumed a 7.5% return on investments in our calculations. This is a conservative estimate, and we will go into further detail in regards to your investment possibilities.

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18 17 Investing for Goals By reviewing your financial statements, we re able to see that you have several accounts that you are currently utilizing to fund your goals. By having these accounts, you re already off to a good start. However, we would like to see these accounts do even more for you through investments. Investing can be great way to boost your annual savings as you work towards your goals. Before we delve into the details of investing and our suggestions for you, we d like to define several terms to help you best understand the world of investments. Asset: Property (Portfolios, savings, Home, Vehicles, etc.) Asset Allocation: Allocation of an investment portfolio across broad asset classes Rate of Return: Gain or loss over a specific period of time, expressed as a percent Inflation: Increasing of prices and decreasing of purchase power Risk: Potential fluctuation of asset worth Portfolio: range of investments Time Horizon: Amount of time an investor is expected to hold on to an investment before pulling from it. Next we d like to go over some of the different kind of assets we will be suggesting for you to invest in. Each different kind of asset has a different potential rate of return, but it also has a different risk. In general, the greater the potential rate of return, the greater the risk of the investment. Risk can seem like a bad thing however, we like to see it as part of the tool box we use for reaching your goals and something that we can mitigate to help protect your assets (or savings). Cash Investments: ex: Money market funds, bank accounts, certificates of deposit Fixed Income: ex: Bonds, ETFs (exchange- traded funds) Stocks: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings

19 18 Now that we have gone over the kinds of assets you may be invested in, we d like to show you three different allocation options - the different ways you d be invested in. The first option is what we call a Moderate portfolio. This option has the greatest percentage investment in stocks and the least invested in fixed income. We project this will have the greatest rate of return, meaning it has the potential to grow your investments the fastest, however it also has the greatest risk. This kind of allocation is best if you have a long time horizon and a high risk tolerance. Our next option is a conservative portfolio. This option has the lowest percentage invested in stocks, and the most invested in fixed income. This has a lower potential return than the moderate portfolio, but it also has the lowest risk. This allocation can be good for when you don t have a long time horizon and want a lower risk. Our final option is what we like to call the middle man. This is a moderately conservative portfolio. It has more stock than the conservative, but less than the moderate portfolio. This means that the riskiness of this portfolio is about in the middle of the two, but it also has a return that is in the middle. This can be a good allocation if you re comfortable with some risk, but not as much as you may encounter with the moderate portfolio. In order to determine how much risk you are comfortable with, we have attached a survey to help us see where you fall. During all of our calculations we have used an extremely conservative rate of return, assuming an allocation that is more conservative than what we have shown above. Tax Planning Another tool which we will use to help best utilize your assets in order to achieve your goals is taking advantage of the new tax laws that were passed in Some of the new tax laws that were passed are : Allowed to take the deductions for interest up to $1 million mortgage Standard deduction changed to $24,000 (Married Filing Jointly) Gains from sale of home: Up to $250,000 excludable from taxable income Professional Recommendations Professionals that we recommend you seek guidance from are the following. CPA/ Tax Professional- Take advantage of all tax credits that are available to maximize your after tax wealth. Realtor- Help navigate the housing market and find the home you are looking for.

20 19 College Planner- Make sure Matthew and Sarah are taking advantage of all available financial aid. Estate Attorney- Create the will and finalize estate documents. Such as powers of attorney, beneficiaries, and who is in charge of the estate. Insurance Broker- We believe it is important that you obtain coverage for disability, life, perils, as well as a PLUPS policy. You may also want to consider contacting your neighbor for more informations on the appropriate coverage, and what rates are appropriate. We have individuals that we could recommend for all of these areas. Throughout this report we have presented your family with a multitude of goals, ratios and recommendations. We hope that you will take the time to consider our recommendations presented in this plan. We re excited to work with your family and help pursue your financial goals.