Allen & Betty Abbett. Cash Flow Analysis. Sample Plan - TOTAL Cash-Flow-Based Planning

Transcription

1 Mar 29, 2018 Cash Flow Analysis Allen & Betty Abbett John Smith Asset Advisors Example, LLC A Registered Investment Advisor 2430 NW Professional Drive Corvallis, OR IMPORTANT: The illustrations or other information generated by this report regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.

2 Table of Contents Cash Flow/Debts Cover 1 Cash Flow Planning (text) - A1 2 Cash Flow Management (text) - B1 3 Cash Flow Needed vs Available Graph - B2 4 Sources of Funds Graph - B3 5 Annual Expenses Graph - B4 6 Cash Flow Chart (text) - B5 7 Current Year Cash Flow - B6 8 Future Year Cash Flow - B6a 9 1 to 5 Year Cash Flow - B6b 10 6 to 10 Year Cash Flow - B6c 11 Cash Flow Illustration - B7 12 Annual Expense Illustration - B8 13 Earned Income - B9 14 Pension and SS - B10 15 Social Security Comparison - B11 16 Social Security Income Comparison - B12 17 Social Security Breakeven Point - B13 18 Social Security Retirement Income - B14 19 Social Security Terminology - B15 20 Social Security Optimization - B16 21 Other Income/Expense Detail - B17 22 Other Income/Expense - B18 23 Miscellaneous Cash Flow Items - B18a 24 Financial Goals - B19 25 Education Funding - B20 26 Education Funding Sources - B20a 27 Saving For College (text) - B20b 28 Residence Sale - B21 29 Life Insurance Summary - B22 30 Other Ins Premiums - B23 31 Loans 1 - B24 32 Loans 3 - B24b 33 Loans By Owner - B24c 34 Allocation of Cash Flow - B25 35 Page 1

3 Cash Flow Planning A1 This financial analysis has been prepared with the objective of illustrating your present and future cash flows, integrated with your assets and income taxes. Cash Flow Planning Cash flow planning is designed to account for all sources of income and expense, and to illustrate the impact that any surpluses or shortages might have on the ability of your assets to last through your life expectancy. This method of planning is sometimes referred to as an "optimized" approach. What do we mean by "Optimized" planning? Cash Flow Each year your income sources are compared to your annual expenses. Any surplus of spendable income is automatically added to your savings and investments starting in the first year. If there is a shortage of spendable income, the amount needed to make up the shortage is withdrawn from your asset accounts. This approach is intended to reflect what would happen if you are managing your funds in an optimal manner. Assets Every year your savings and investment accounts will have potential interest, dividends, capital gains or appreciation. The cash flow analysis makes the assumption that, unless otherwise indicated, the entire rate of return is reinvested into the account. This approach optimizes the potential growth of each asset account. Taxes are not charged to the earnings on the account, but instead are added to your personal expenses. Taxes Since income and FICA (Social Security) taxes can represent a substantial part of your annual expenses, the "optimized" planning approach carefully computes your tax burden every year. The analysis uses the actual IRS tax rate tables including annual adjustments for "indexing" the rate breakpoints and standard deductions. For high income taxpayers, itemized deductions and exemptions are phased out. Separate tax treatment is provided for dividends, capital gains, alternate minimum tax, the taxable portion of social security income and other areas where special treatment is required. The result is that, instead of showing a "guesstimate" of your annual taxes, the analysis provides a more accurate yearly indication of future potential taxes. Page 2

4 Cash Flow Management B1 The management of your annual cash inflows and outflows is based on the following details. The various report pages will provide more specifics about the annual amounts and results. Cash Flow Surplus In any year when there is a cash flow surplus, this surplus will be reinvested into your savings and investment accounts divided as shown below: Before After age 65 age 65 Taxable accounts (savings, CD, money market) 20% 40% Equity and other (stocks, mutual funds, real estate, etc.) 80% 60% Tax-Free accounts (municipal bonds and funds) 0% 0% Tax-Deferred accounts (annuities, non deductible IRAs, etc.) 0% 0% Cash Flow Shortage If in any year the amount of expenses exceeds the spendable income available, the analysis will draw funds from your savings and investment accounts to make up the shortfall. These funds may result in a taxable event if money is taken from your equity and other accounts which have a cost basis less than the current market value, or if it is necessary to take money from your retirement accounts because all other accounts have been depleted. In case of a shortage, funds are drawn from accounts in the following order - taxable, equity and other, tax free, tax deferred, tax deductible retirement accounts, and finally Roth IRA accounts. In some cases assets may be periodically rebalanced between accounts. Interest and dividends Each year the interest and dividends earned is computed on the various accounts, and these amounts are automatically assumed to be reinvested into the account unless an option is elected to take the amounts in cash and added to your spendable cash flow. On the following reports, the cash option will be indicated by a cash distributions in the "Cash Withdrawal" column. Taxable accounts (savings, CD, money market) Equity and other (stocks, mutual funds, real estate, etc.) Tax-Free accounts (municipal bonds and funds) Tax-Deferred accounts (annuities, non deductible IRAs, etc.) Income Taxes The amount you are required to pay for income taxes can vary every year, depending on the sources and amount of your income, and the adjustments and deductions available. In the analysis we have estimated all the various income and deduction items to determine the taxable income each year, including consideration of ordinary taxable income, capital gains, AMT and other significant items. The taxes are computed using real IRS tax rate tables, including indexing of the tax breakpoints using an assumed index rate of 2.00% per year. The amount of federal and state income tax and FICA (Social Security) tax is added to your annual expenses each year. Page 3

5 Cash Flow B2 The bars in the above graph represent the amounts available from... Earned income (wages & self employment) Pension plans and Social Security Misc (inheritances, sale of residence, investment account systematic withdrawal plans or interest/dividends taken in cash, scheduled retirement account distributions or required minimum distribution amounts.) The black outline illustrates the annual expenses including... Personal living expenses Life insurance and other premiums Mortgage and debt repayment Planned deposits to investments and retirement accounts Miscellaneous expense items Taxes If income from various sources exceeds expenses, the excess is reinvested in savings and investment accounts. If expenses are greater than income, it is assumed that funds required to meet such excess expenses will be drawn from savings and investment accounts to make up the shortage. Page 4

6 Sources of Funds B3 Each year your spendable money will come from several different sources, as shown above. When your expenses exceed the income available from earnings, pensions and Social Security, then withdrawals are made from your investment accounts or retirement plans. Earned Salaries and self employment income. Pen/SS Defined benefit pension plans and the total income from Social Security benefits. Invest Retire Other Interest or dividends paid in cash or withdrawals from your investment accounts to meet spending requirements. Distributions from your retirement accounts either to meet your spending needs, scheduled distributions, or distributions made to meet the IRS minimum distribution requirements. Other single year or multiple year sources of funds, excess proceeds from sale of your residence, or life insurance death benefits. Page 5

7 Annual Expenses B4 Your annual expenses represent a number of different items, including personal needs, life insurance premiums, debt repayment, additions to savings and investments, other miscellaneous expenditures and taxes of various types. The graph should help you visualize the proportionate amount of your total outlay for each of these types of expenditures, and the changing mix over the future years. Page 6

8 Cash Flow Chart B5 The following flow chart illustrates the logic used in your cash flow report, indicating the methods used to allocate annual surplus and shortages. SURPLUS - If there is a surplus of income after deducting expenses, then the surplus is divided between the Taxable, Equity/Other, Tax-Deferred, and Tax-Free accounts in the percentages shown. SHORTAGE - if there is a cash flow shortage, funds are drawn from the accounts in order starting from the top down. As each account is depleted, then the next account is used. Income >>>>> Earned Income Interest and Dividends Pensions & Social Security Miscellaneous Income Less Expenses Shortage is drawn from accounts in the order shown below Personal Insurance Debt Payments Savings and investment additions Income Taxes >>>>> Surplus is divided as shown below <<<<< Taxable (Until age 65) (After age 65) <<<<< 20% 40% <<<<< Equity & Other <<<<< 80% 60% <<<<< Tax-Free <<<<< <<<<< Tax-Deferred <<<<< <<<<< Qualified Plans * * Mandatory distributions start at age Page 7

9 Current Year Cash Flow INCOME Monthly Annual Percent of Income Salaries & Wages $13,167 $158, B9 Self Employment Income (Sch C) 667 8, B9 Rental Real Estate 552 6, C 24 Total income available $14,386 $172, EXPENDITURES Monthly Annual Percent of Income Federal and State Income Tax $2,914 $34, D3 FICA Taxes 1,101 13, D6 Residence Mortgage 1,600 19, B 24 Credit Cards 100 1, B 24 Life Insurance Premiums 244 2, A7 Homeowners & Other Insurance A8 Auto Insurance A8 Disability Insurance A8 Saving and Investment Additions 750 9, B8 Retirement Account Additions (IRA, 401(k), TSA, etc.) 1,690 20, B8 Education Fund Deposits B 20a Charitable Contributions 333 4, D 10 Property Taxes 617 7, D 10 Medical Expenses 333 4, D 10 Discretionary Spending 1,000 12, A9 Food and Household Expenses 500 6, A9 Utilities and Bills 445 5, A9 Auto Operating and Maintenance 367 4, A9 Child Related Expenses 500 6, A9 Holidays 167 2, A9 Household Help 220 2, A9 Clothing 250 3, A9 Property Improvements/Upkeep 500 6, A9 Vacations 333 4, A9 Total spending and savings $14,341 $172, Cash flow surplus (Income less Spending) $45 $533 B6 Page 8

10 Future Year Cash Flow at Allen's Age 65 INCOME Monthly Annual Percent of Income Salaries & Wages $7,609 $91, B9 Self Employment Income (Sch C) , B9 Rental Real Estate 1,026 12, C 24 Total income available $9,481 $113, EXPENDITURES Monthly Annual Percent of Income Federal and State Income Tax $1,994 $23, D6 FICA Taxes 702 8, D6 Residence Mortgage 1,600 19, B 24 Life Insurance Premiums 213 2, B 22 Homeowners & Other Insurance 109 1, B 23 Auto Insurance B 23 Retirement Account Additions (IRA, 401(k), TSA, etc.) 1,027 12, B8 Charitable Contributions 423 5, D 10 Property Taxes 1,657 19, D 10 Medical Expenses 1,272 15, D 10 Other Expense (Stock Options, Educations Costs, etc.) 11, , B 18 Discretionary Spending 1,459 17, Food and Household Expenses 426 5, Utilities and Bills 649 7, Auto Operating and Maintenance 462 5, Holidays 243 2, Household Help 321 3, Clothing 292 3, Property Improvements/Upkeep , Vacations 608 7, Total spending and savings $25,552 $306, Cash flow surplus (Income less Spending) ($16,071) ($192,869) B6a Page 9

11 Five Year Cash Flow at Allen's Age 65 B6b Allen's Age Betty's Age INCOME Salaries & Wages $91,313 B9 Self Employment Income 10,146 B9 Rental Real Estate 12,306 12,843 13,391 13,949 14,519 C 24 Other Income Items B 18 Pension Income 2,448 2,497 B 10 Retirement Account Dist. C 13 Social Security 34,803 35,499 67,047 B 10 Total income available $113,765 $12,843 $50,594 $51,896 $84,063 EXPENDITURES Federal and State Income Tax $23,924 $6,423 $27,038 $47,590 $45,041 D6 FICA Taxes 8,419 D6 Residence Mortgage 19,200 52,898 52,898 52,898 52,898 B 24 Life Insurance Premiums 2,550 2,550 2,550 2,550 2,550 B 22 Homeowners & Other Ins. 1,313 1,355 1,399 1,444 1,490 B 23 Auto Insurance ,002 1,035 B 23 Retirement Additions 12,328 B8 Charitable Contributions 5,073 5,174 5,278 5,383 5,491 D 10 Property Taxes 19,889 20,486 21,101 21,734 22,386 D 10 Medical Expenses 15,265 16,181 17,151 18,181 19,271 D 10 Other Expenses 132,557 15,060 69,940 16,040 16,553 B 18 Discretionary Spending 17,512 18,072 18,651 19,248 19,864 Food and Household Expenses 5,108 5,271 5,440 5,614 5,794 Utilities and Bills 7,793 8,042 8,300 8,565 8,839 Auto Operating and Maintenanc 5,545 5,723 5,906 6,095 6,290 Holidays 2,919 3,012 3,108 3,208 3,311 Household Help 3,853 3,976 4,103 4,234 4,370 Clothing 3,502 3,614 3,730 3,850 3,973 Property Improvements/Upkee 11,675 12,048 12,434 12,832 13,242 Vacations 7,297 7,530 7,771 8,020 8,276 Total spending and savings $306,634 $188,356 $267,769 $238,488 $240, Cash flow surplus ($192,869) ($175,513) ($217,175) ($186,592) ($156,611) Page 10

12 Five Year Cash Flow at Allen's Age 70 B6c Allen's Age Betty's Age INCOME Salaries & Wages B9 Self Employment Income B9 Rental Real Estate 238,244 C 24 Other Income Items 200,000 B 18 Pension Income 2,547 2,598 2,650 2,703 2,757 B 10 Retirement Account Dist. 4,490 24,315 51,365 54,546 57,917 C 13 Social Security 68,388 69,756 71,151 72,574 74,025 B 10 Total income available $513,669 $96,669 $125,166 $129,823 $134,699 EXPENDITURES Federal and State Income Tax $63,250 $2,277 $8,462 $9,741 $22,352 D6 FICA Taxes 2,428 D6 Residence Mortgage 37,799 33,698 33,698 33,698 33,698 B 24 Life Insurance Premiums 2,550 2,550 2,550 2,550 2,550 B 22 Homeowners & Other Ins. 1,537 1,587 1,637 1,690 1,744 B 23 Auto Insurance 1,068 1,102 1,137 1,173 1,211 B 23 Retirement Additions B8 Charitable Contributions 5,601 5,713 5,827 5,944 6,063 D 10 Property Taxes 23,057 23,749 24,461 25,195 25,951 D 10 Medical Expenses 20,428 21,653 22,953 24,330 25,790 D 10 Other Expenses 17,083 17,629 18,193 18,776 19,376 B 18 Discretionary Spending 20,499 21,155 21,832 22,531 23,252 Food and Household Expenses 5,979 6,170 6,368 6,571 6,782 Utilities and Bills 9,122 9,414 9,715 10,026 10,347 Auto Operating and Maintenanc 6,491 6,699 6,913 7,135 7,363 Holidays 3,417 3,526 3,639 3,755 3,875 Household Help 4,510 4,654 4,803 4,957 5,115 Clothing 4,100 4,231 4,366 4,506 4,650 Property Improvements/Upkee 13,666 14,103 14,555 15,020 15,501 Vacations 8,541 8,815 9,097 9,388 9,688 Total spending and savings $251,126 $188,725 $200,206 $206,986 $225, Cash flow surplus $262,543 ($92,056) ($75,040) ($77,163) ($90,609) Page 11

13 Cash Flow Illustration B7 Ages Scheduled Cash flow sources and Required Minimum Distributions Earned Income Retire/Roth Accounts * Investment Accounts * Pension/ SocSec Other Income Total Sources Less Living Expense & Taxes Surplus (Shortage) $166,000 $6,628 $172,628 ($172,096) $ ,750 7, ,801 (176,205) ,041 7, ,524 (198,631) (8,107) ,202 7, ,126 (246,333) (51,207) ,456 8, ,870 (254,046) (54,176) ,811 8, ,642 (222,250) (17,608) ,264 11, ,895 (228,594) (16,699) , ,763 (288,808) (78,045) ,572 10, ,834 (205,851) 19, ,494 10, ,252 (211,227) 20, ,528 15, ,840 (217,740) 23, ,679 11, ,459 (220,956) 21, R ,459 12, ,765 (306,633) (192,868) R 12,843 12,843 (188,359) (175,516) ,203 13,391 50,593 (267,769) (217,176) ,947 13,949 51,896 (238,487) (186,591) ,544 14,519 84,063 (240,673) (156,610) ,490 70, , ,668 (251,126) 262, ,315 72,354 96,669 (188,725) (92,056) ,365 73, ,166 (200,207) (75,041) ,546 75, ,823 (206,986) (77,163) ,917 76, ,699 (225,308) (90,609) ,454 78, ,772 (213,606) (75,834) ,543 79, ,427 (220,463) (81,036) ,104 81, ,586 (227,608) (87,022) ,112 83, ,223 (235,093) (93,870) ,559 84, ,333 (242,857) (101,524) ,071 86, ,540 (250,950) (110,410) ,658 88, ,857 (210,834) (71,977) ,066 89, ,028 (218,763) (79,735) ,607 91, ,369 (227,001) (88,632) ,478 93, ,075 (235,579) (98,504) ,205 95, ,674 (244,515) (109,841) ,295 97, ,673 (253,805) (123,132) ,727 99, ,052 (263,507) (138,455) , , ,452 (273,618) (156,166) , , ,418 (251,556) (144,138) 90 L , ,406 (256,615) (151,209) ,838 59,838 (235,847) (176,009) ,034 61,034 (245,132) (184,098) ,255 62,255 (254,826) (192,571) ,501 63,501 (264,949) (201,448) ,770 64,770 (275,522) (210,752) ,066 66,066 (286,568) (220,502) L 67,387 67,387 (298,109) (230,722) B9 C10..C11a C4..C8 B10 B18, B18a B8 * Scheduled distributions, interest or dividends taken in cash or amounts taken to meet the IRS minimum distribution requirements. R = Retirement Age, L = Life Expectancy Page 12

14 Annual Expense Illustration B8 Ages Personal Expenses * Life & Misc. Ins. Premiums Debt Payments Asset Account Deposits Retirement Account Deposits Other Expense & Stock Opt. Itemized Deductions** Income Tax Total Expenses $53,780 $5,050 $20,400 $9,000 $20,280 $15,400 $48,186 $172, ,424 5,099 20,400 9,000 20,711 15,902 49, , ,121 5,149 20,400 9,000 21,719 12,080 16,422 56, , ,872 5,201 20,400 9,000 22,185 55,481 16,962 58, , ,479 5,255 20,400 9,000 22,658 59,575 17,521 60, , ,321 5,310 20,400 9,000 23,143 30,707 18,100 61, , ,820 5,367 20,400 9,000 23,637 33,502 18,701 63, , ,575 5,426 20,400 9,000 24,500 81,766 19,324 71, , ,385 5,487 20,400 9,000 25,026 19,971 67, , ,253 5,550 20,400 9,000 25,564 20,641 69, , ,182 5,615 19,757 9,000 26,113 21,337 73, , ,171 5,306 19,200 9,000 26,672 22,058 74, , ,203 4,775 19,200 12, ,557 40,227 32, , ,290 4,847 52,898 15,060 41,841 6, , ,443 4,920 52,898 69,940 43,530 27, , ,665 4,996 52,898 16,040 45,298 47, , ,959 5,074 52,898 16,553 47,148 45, , ,325 5,155 37,799 17,083 49,086 65, , ,768 5,238 33,698 17,629 51,115 2, , ,288 5,324 33,698 18,193 53,241 8, , ,889 5,413 33,698 18,776 55,469 9, , ,574 5,505 33,698 19,376 57,803 22, , ,345 5,599 33,698 60,250 30, , ,012 5,697 33,698 62,816 32, , ,765 5,798 33,698 65,507 33, , ,605 5,902 33,698 68,329 35, , ,537 6,009 33,698 71,290 37, , ,562 6,120 33,698 74,397 39, , ,684 6,234 77,659 26, , ,906 6,352 81,082 27, , ,231 6,473 84,677 28, , ,662 6,599 88,452 29, , ,203 6,728 92,417 31, , ,858 6,862 96,583 32, , ,629 7, ,960 33, , ,521 7, ,561 35, , ,538 7, ,397 4, , ,683 7, , , ,369 4, , , ,901 4, , , ,545 4, , , ,307 4, , , ,189 5, , , ,195 5, , , ,329 5, , , B23 B24b C4..C8 C10..C11a B18 D10 * Personal expenses include education fund deposits. ** Itemized deductions do not include mortgage interest, state tax, and medical insurance premiums, which are accounted for in respective expense categories. D6 Page 13

15 Earned Income Schedule B9 Age Allen Annual Salary Self Employment Age Annual Salary Self Employment Total Earned Income $86, $72,000 $8,000 $166, , ,440 8, , , ,909 8, , , ,407 8, , , ,935 8, , , ,494 8, , , ,084 9, , , ,705 9, , , ,359 9, , , ,047 9, , , ,768 9, , , ,523 9, , ,313 10, , Betty Page 14

16 Pension and Social Security Age Allen Betty Client Pension 2 Client Pension 1 SocSec* Spouse Pension 1 Spouse Pension 2 SocSec * $26,376 Age $ $22,464 Total Pension & Social Security , , , ,448 37, , ,497 30,838 69, , ,547 31,455 70, , ,598 32,084 72, , ,650 32,726 73, , ,703 33,380 75, , ,757 34,048 76, , ,812 34,729 78, , ,868 35,423 79, , ,926 36,132 81, , ,984 36,855 83, , ,044 37,592 84, , ,105 38,343 86, , ,167 39,110 88, , ,230 39,893 89, , ,295 40,690 91, , ,361 41,504 93, , ,428 42,334 95, , ,496 43,181 97, , ,566 44,045 99, , ,638 44, , , ,710 45, , , ,785 46, , ,860 55,978 59, ,937 57,097 61, ,016 58,239 62, ,097 59,404 63, ,178 60,592 64, ,262 61,804 66, ,347 63,040 67, B10 * Less earned income reduction if applicable Page 15

17 Social Security Comparison B11 Current Claiming Strategy Allen's benefit at age 67 $2,198 per month Betty's benefit at age 67 $1,872 per month Betty claims survivor benefits at 89 $2,198 per month Monthly Expenses Optimal Claiming Strategy Allen files for delayed retirement benefits at 70 $2,726 per month Betty files for delayed retirement benefits at 70 $2,321 per month Betty claims survivor benefits at 89 $2,726 per month Monthly Expenses *All amounts on this page are in today s dollars and show gross monthly benefits. Page 16

18 Social Security Income Comparison B12 *All amounts on this page are in today s dollars and show gross monthly benefits. Page 17

19 Social Security Breakeven Point B13 Age Year File at 62/62 Current Strategy Optimal Strategy , , ,839 26, ,027 52, , , , ,432 32, , ,272 65, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,712 1,034, ,787 1,029,552 1,094, ,975 1,078,392 1,155, ,163 1,127,232 1,216,083 *All amounts on this page are in today s dollars and show gross monthly benefits. Page 18

20 Social Security Income (Today's Dollars) B14 Ages Expenses 1 $172, , , , , , , , , , , , , , , , , , , , , , , , , , , ,238 83,675 83,806 83,929 84,054 84,180 84,300 84,428 84,558 74,199 72,808 72,839 72,839 72,840 72,840 72,841 72,841 72,841 Retirement Income Earned Income Pension 2 3 $166, , , , , , , , , , , ,000 80,000 Other Income 4 $6,628 6,833 7,026 7,209 7,418 7,544 9,628 7,976 8,102 11,174 8,330 8,433 8,528 8,616 8,697 8, ,094 13,792 28,233 29,052 29,890 29,732 28,853 27,753 26,441 24,936 23,100 20,971 19,682 18,116 16,376 14,308 11,775 8,816 5,359 1,313 Remaining Expenses Before SS 5 5,533 41,486 40,830 8,571 5,907 56, , , , , , ,602 93,521 93,240 98,748 89,730 90,872 92,240 93,841 95,622 97,738 60,304 61,724 63,414 65,278 67,471 70,125 73,212 76,799 70,486 70,408 70,439 70,439 70,440 70,440 70,441 70,441 70,441 Social Security Income Current 62/62 Strategy ,463 26,376 26,376 21,760 26,376 21,760 26,376 21,760 26,376 21,760 26,376 21,760 26,376 21,760 26,376 21,760 26,376 Optimal Strategy 8 32,706 32,706 32,706 32,706 32,706 32,706 32,706 32,706 32,706 Page 19

21 Social Security Terminology B15 Primary Insurance (PIA): This is the amount that all benefits are based on. A worker s PIA is determined by a formula that looks at the top 35 years of earning history, adjusted into today s dollars. Full Retirement Age: If a claimant files at Full Retirement Age, they receive a benefit equal to their full PIA every month. Full Retirement Age is determined by year of birth according to the table on the right. Note that individuals born on January 1 are deemed to have been born in the previous year for determin Filing Early: It is possible to claim Social Security retirement benefits as early as 62, however doing so permanently reduces the amount of benefit. The amount of reduction depends on the claimant's Full Retirement Age and whether they are claiming their own retirement benefit or spousal retirem Year of Birth Full Retirement Age and 2 months and 4 months and 6 months and 8 months and 10 months 1960 and later 67 Filing Late: It is also possible to claim Social Security retirement benefits after Full Retirement Age. There is no benefit to claiming spousal retirement benefits after Full Retirement Age. However, when claiming one s own retirement benefit there are Delayed Retirement Credits applied for each month delayed past Full Retirement Age that equal 8% annually. This increase stops at age 70, so that while it is possible to claim benefits after age 70, there are no further Breakeven Point: When comparing Social Security claiming strategies, one important detail to be aware of is that the optimal strategy depends, in part, on the life expectancy of the claimant(s). Delaying claiming past 62 increases monthly income but also means giving up income for a certain number of months. The breakeven point is when a certain strategy with higher income has caught up to, or provided the same or more lifetime income than, an earlier claiming strategy. The age that this occurs depends on the situation, as well as future Cost of Living Adjustments made by the Social Security Administration, and the opportunity cost of spending money from other sources in order to delay claiming benefits. Spousal Benefits: Spouses, and in certain cases ex-spouses, are entitled to a portion of a worker s retirement benefit after the worker has filed for retirement benefits. If taken at Full Retirement Age this equals 50% of the worker s PIA. This benefit is reduced when taken early, but can be claimed as early as 62. Spousal benefits are not eligible for Delayed Retirement Credits so while they can be claimed after Full Retirement Age there is no advantage to doing so. Restricted Filing: NOTE: ONLY AVAILABLE FOR THOSE BORN ON OR BEFORE JANUARY 1, When a worker is eligible for both spousal retirement benefits and their own retirement benefits, and has reached at least Full Retirement Age, they are able to restrict their filing application to one or the other. This is typically done to claim spousal benefits without also claiming their own retirement benefits since their own benefit will then continue to grow while spousal benefits do not increase after Full Retirement Age. Restricting the filing is necessary because the Social Security Administration deems filing for one benefit as filing for all eligible benefits without this election. Page 20

22 Social Security Optimization B16 When attempting to optimize Social Security, one needs to define which part of Social Security they are attempting to optimize as well as certain assumptions about life expectancy, Cost of Living Adjustments, and the opportunity cost of taking Social Security later rather than earlier. First, many think of Social Security as longevity insurance. This means that in case someone and/or their spouse lives longer than expected, there is some guaranteed income available. To optimize longevity insurance the goal should be to achieve the largest annual income stream. Another way to think of Social Security is a source of income to help pay medical bills for someone with major medical needs in their 60s and 70s. If the need begins in their early 60s likely optimization means getting income as soon as possible to help cover medical bills. If the need arises after full retirement age, those who have delayed retirement benefits can receive up to six months of retroactive benefits as a lump sum. Accepting retroactive benefits can lower retirement benefits and related survivor benefits. Perhaps the most popular way to think of Social Security is as one of the core sources of income for retirement spending. What to optimize in this situation is much more personal and depends heavily on each individual situation. First, does the person have enough assets to retire at 62 or earlier without Social Security benefits? If not, are they able to continue working to increase benefits later? In addition, what is the life expectancy of the person, and what is it for their spouse? Shorter life expectancies are usually optimized by having earlier benefits, and longer life expectancies by maximizing annual income. Since arriving at an optimal Social Security claiming strategy is extremely complex, this model shows multiple strategies and the impacts at different life expectancies. One key thing to keep in mind is that a little planning will go a long way, but the difference between the most optimal approach, and the second most is typically negligible and thus a person s comfort with the strategy should be taken into consideration in addition to the financial benefit of the strategy. Page 21

23 Other Income/Expense Detail B17 Single Year Description Start Age Stop Age (today's $)* Increase Rate (prior) Increase Rate (after) (future $)* Ordinary Taxable Percent Taxable Dollar Betty's Expected Inheritance (~200k) $200, % 0.00% $200, % $0 Bonnie's Wedding (35,000) 3.20% 3.20% (54,398) 0.00% 0 Kitchen and Bath Remodel (55,000) 3.20% 3.20% (68,568) 0.00% 0 Multiple Year Description Start Age Stop Age (today's $)* Increase Rate (prior) Increase Rate (after) (future $)* Ordinary Taxable Percent Taxable Dollar Extended travel - first 10 years of retire (10,000) 3.20% 3.20% (14,593) 0.00% 0 * Negative numbers indicate cash outflow, positive numbers represent income. Page 22

24 Other Income (Expense) B18 Other Income and Expense Totals Ages Life Insurance Income Taxable % Expense Taxable % Stock Options Residence sale Education Other goals Other Income Other Expenses Taxable s (12,080) (12,080) (55,481) (55,481) (59,575) 41 (59,575) 1, (30,707) (30,707) ,332 (33,502) 2,332 (33,502) (68,568) (68,568) ,048 4,048 4, R 63 (14,593) (88,777) (29,187) (132,557) R (15,060) (15,060) (69,940) (69,940) (16,040) (16,040) (16,553) (16,553) ,000 (17,083) 200,000 (17,083) (17,629) (17,629) (18,193) (18,193) (18,776) (18,776) (19,376) (19,376) L L B17 B17 B17 B17 C14 B21 B19, B20a 10 R = Retirement Age, L = Life Expectancy *Residence sale = Sale price less sale cost less down payment on new home. Page 23

25 Miscellaneous Cash Flow Items B18a Ages Sched D Capital G/L Sched E Passive G/L Increase (decrease) Fed/State Income AMT Preference Income Rental Real Estate Inc/ (Exp) Other Taxable Income Other Non Taxable Income Total Other CashFlow Items $6,628 $6, ,051 7, ,483 7, ,924 7, ,373 8, ,831 8, ,299 9, (13,198) (13,198) ,262 10, ,758 10, ,264 11, ,780 11, ,306 12, ,843 12, ,391 13, ,949 13, ,519 14, , , C26 Page 24

26 Financial Goals It is important to plan ahead for financial goals like purchasing a home, a business opportunity or other special needs. If you indicated any special goals, the following table shows the amount of money needed for those items. The costs shown below are included in your projection of Other Income and Expense. B19 Funding methods at 6.00% Inflated after tax Description: Age Needed Inflation Rate % Needed Needed Lump Sum Deposit Monthly Deposit Sail boat % $20,000 $29,187 $14,505 $138 In order to achieve a future financial goal, such as a major purchase or investment, you should plan to have funds available at the right time. Two methods are illustrated: pre-funding with a lump sum of money dedicated to the future goal, or pre-funded with an accumulation account where funds are deposited each month. Lump Sum Using this method, a calculation is done to determine what amount of money would need to be set aside now at an after-tax rate of return that would grow to the required amount at the time the funds are needed. The initial lump sum deposit would be held in a separate account and then used to pay for the expense. Monthly Deposits If a lump sum amount is not available to set aside for the future expense, you might consider using a separate account where monthly deposits are contributed to accumulate the funds required. The amount shown above as "Monthly Deposit" would be anticipated to grow at the after-tax rate shown, and when needed would be used to pay for the goal specified. The above funding amounts and rates are used for illustration only and do not represent any particular investment program. Results are not guaranteed. Note: The expenses for these goals are included in the projection of personal expenses. Page 25

27 Educational Funding Requirements Child Per Year Lump Sum* Monthly ** Bonnie $25,000 $100,000 $1,605 Andy $25,000 $100,000 $2,298 Totals $200,000 $3,903 B20 to be Paid by Parents % ,250 26,250 26, ,563 27,563 27, ,941 28,941 57,881 57, ,388 30,388 60,775 60, ,907 31,907 31, ,502 33,502 33, Funding education costs with a lump sum investment now: Lump sum needed today to fund future costs Funds now available for college expenses. Additional lump sum needed now Monthly funding with level payments through the last year of college: Total level monthly payments to fund costs Payments needed considering $32,300 available now Additional needed with $32,300 and $200 current deposits $200,000 32,300 $167,700 $3,211 2,693 $2,493 Note: If education funds do not earn at the rate illustrated, it would require either a larger amount of initial lump sum investment, larger monthly deposits to the education fund, or education loans to finance the costs. *Lump sum is the dollar amount needed today to fund the expenses assuming a 5.00% after tax or tax free return on education funds. **Monthly deposit needed to fund the expenses from now through the last year of school. Note: The parents' share of education costs is included in personal expenses. Note: Education expenses are assumed to inflate at 5%. Page 26

28 Education Funding Sources B20a Ages Year Education Fund Balance (begin year) Annual Additions Annual Annual Growth at Costs 5.00% From Educ Funds Sources of Funds From Assets $32,300 $ $1, ,371 (26,250) , ,083 (27,563) 15,483 12, (57,881) 55, ,200 (60,775) 1,200 59, ,200 (31,907) 1,200 30, (33,502) 33, Note: The parents' share of education costs is included in personal expenses. Note: Education expenses are assumed to inflate at 5.00%. Page 27

29 Saving For College B20b Recent changes in income tax regulations have provided a variety of opportunities that should make saving for your child's education expenses more palatable. In some cases current education expenses can result in current tax savings, and putting aside money for future costs can be much more tax-friendly than in the pas 529 Plans: Section 529 of the Revenue code has enabled states to establish special college savings funds where parents or grandparents can make deposits to an account to accumulate money for tuition and in some cases other expenses. The terms and benefits of each state vary, but generally include the following features: Tax savings -earnings on the accounts not only accumulate without federal income tax, but withdrawals are also tax free so long as they are used for qualified educational expenses. Some states also allow withdrawals free of state taxation, and many states permit a deduction for a portion of plan deposits, but the rules of each state vary. Also, withdrawals from 529 plans that are not used for qualified educational expenses are generally subject to both federal and state taxation plus a 10% penalty. Control - unlike other accounts sometimes used to accumulate money for the child, you, the donor, stay in control of the assets. You decide when withdrawals are taken and for what purpose. And in most cases you can even reclaim the funds, particularly if the child elects not to attend college. (There may be a penalty for "non-qualified" withdrawals.) Simple - once you select which state plan to use, a simple enrollment form is completed, and deposits may even be made by automatic checking account withdrawals. The account is managed by the state or an investment manager hired by the state. Everyone eligible - generally there are no special eligibility requirements, and the amounts you can contribute in many states are substantial (in some cases as much as $250,000 or more.) Other education plans: Deduction of higher education expenses up to $4,000 may be deductible (subject to income limitations.) This deduction continues to be renewed by Congress, but may not be available in future years. Coverdell Education Savings Accounts - the nondeductible contribution may be used for "qualified higher education" or "qualified elementary and secondary education expenses", including private institutions. The maximum allowable contribution is $2,000 subject to certain income limitations. The plan is integrated with the HOPE and Lifetime Learning Credit programs. Employer provided assistance - the $5,250 contribution level now extends the exclusion to graduate courses and makes the exclusion for undergraduate and graduate courses permanent. Student Loan Interest Deduction - the availability for this benefit has been broadened and the earnings limits raised. For more information about these plans or to compare your state 529 plan with other states, go on the internet to : Page 28

30 Residence Sale Worksheet B21 Combined amounts for residences schedule for sale. Ages Residence Values* Mortgage Payoff Cost of Sale New Home Down Net Proceeds $447, , , , , , , , , , , , ,904 88,777 (88,777) ,031, ,051, ,072, ,094, ,115, ,138, ,161, ,184, ,207, ,232, ,256, ,281, ,307, ,333, ,360, ,387, ,415, ,443, ,472, ,501, ,532, ,562, ,593, ,625, ,658, ,691, ,725, ,759, ,795, ,830, ,867, ,904, ,942, Description Current value Appreciation rate Sale age Value at sale Percent sale cost Total sales cost Mortgage payoff Vacation Home % 65 New Home $350,000 Appreciated cost $443,885 Percent financed 80.00% Mortgage rate 5.00% Number of years 15 Down payment $88,777 New mortgage $355,108 *Replacement residence value is shown at the end of the first year. Page 29

31 Life Insurance Summary Age Group or Term Allen Permanent (Net of Loans) Premiums Cash Values Age Group or Term Betty Permanent (Net of Loans) Premiums $250,000 $97,500 $1,900 $12, $250,000 $60,000 $1, ,000 97,500 1,900 15, ,000 60,000 1, ,000 97,500 1,900 19, ,000 60,000 1, ,000 97,500 1,900 23, ,000 60,000 1, ,000 97,500 1,900 26, ,000 60,000 1, ,000 97,500 1,900 30, ,000 60,000 1, ,000 97,500 1,900 33, ,000 60,000 1, ,000 97,500 1,900 37, ,000 60,000 1, ,000 97,500 1,900 40, ,000 60,000 1, ,000 97,500 1,900 44, ,000 60,000 1, ,000 97,500 1,900 47, ,000 60,000 1, ,000 97,500 1,900 51, ,500 1,900 55, ,500 1,900 56, ,500 1,900 57, ,500 1,900 58, ,500 1,900 60, ,500 1,900 61, ,500 1,900 62, ,500 1,900 64, ,500 1,900 65, ,500 1,900 66, ,500 1,900 67, ,500 1,900 69, ,500 1,900 70, ,500 1,900 71, ,500 1,900 73, ,500 1,900 74, ,500 1,900 75, ,500 1,900 76, ,500 1,900 78, ,500 1,900 79, ,500 1,900 80, ,500 1,900 82, ,500 1,900 83, ,500 1,900 84, ,500 1,900 85, ,500 1,900 87, Cash Values $2,850 5,131 7,412 9,692 11,973 14,254 16,535 18,815 21,096 23,377 25,658 27,938 30,219 32,500 33,264 34,028 34,792 35,556 36,319 37,083 37,847 38,611 39,375 40,139 40,903 41,667 42,431 43,194 43,958 44,722 45,486 46,250 47,014 47,778 48,542 49,306 50,069 50,833 51,597 52,361 53,125 53,889 54,653 55,417 56,181 B22 Page 30

32 Misc. Insurance Premiums Ages Allen Auto Disability Medical LTC Betty Disability Medical LTC Homeowners Prop & Casualty $350 $600 $275 $ , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,000 3, ,032 3, ,066 3, ,100 3, Auto B23 Total Misc Premiums 10 $2,125 2,174 2,224 2,276 2,330 2,385 2,442 2,501 2,562 2,625 2,690 2,756 2,225 2,297 2,370 2,446 2,524 2,605 2,688 2,774 2,863 2,955 3,049 3,147 3,248 3,352 3,459 3,570 3,684 3,802 3,923 4,049 4,178 4,312 4,450 4,593 4,740 4,891 3,889 4,014 4,142 4,275 4,411 4,553 4,698 Page 31

33 Loans - Mortgage, Auto, Credit Card Ages Residence Mortgage Balance Interest Principal Balance Auto Interest Principal Balance Credit Card Interest B24 Principal $232,000 $9,955 $9,245 $6,640 $894 $ ,755 9,542 9,658 6, ,097 9,112 10,088 5, ,009 8,662 10,538 5, ,471 8,192 11,008 5, ,463 7,701 11,499 4, ,965 7,189 12,011 3, ,954 6,653 12,547 3, ,407 6,094 13,106 2, ,301 5,510 13,690 1, , ,610 4,899 14, ,309 4,261 14, ,371 3,595 15, ,874 20,285 32, ,261 18,723 34, ,086 17,087 35, ,274 15,372 37, ,748 13,809 23, ,758 12,762 20, ,822 11,691 22, ,816 10,565 23, ,683 9,382 24, ,367 8,138 25, ,807 6,830 26, ,939 5,456 28, ,696 4,011 29, ,009 2,492 31, , , Page 32

34 Loans - RE, Other, Totals Ages Investment Real Estate Balance Interest Principal Balance Other Liabilities Interest Principal Loan Balances Total of all liabilities Interest Principal B24b Annual payments $238,640 $10,849 $9,551 $20, ,089 10,392 10,008 20, ,081 9,910 10,490 20, ,591 9,401 10,999 20, ,592 8,864 11,536 20, ,056 8,296 12,104 20, ,952 7,694 12,706 20, ,246 7,057 13,343 20, ,903 6,381 14,019 20, ,884 5,663 14,737 20, ,147 4,920 14,837 19, ,309 4,261 14,939 19, ,371 3,595 15,605 19, ,874 20,285 32,613 52, ,261 18,723 34,175 52, ,086 17,087 35,811 52, ,274 15,372 37,527 52, ,748 13,809 23,990 37, ,758 12,762 20,936 33, ,822 11,691 22,007 33, ,816 10,565 23,133 33, ,683 9,382 24,316 33, ,367 8,138 25,560 33, ,807 6,830 26,868 33, ,939 5,456 28,243 33, ,696 4,011 29,687 33, ,009 2,492 31,206 33, , ,803 33, A6 Page 33

35 Loans By Owner Ages Loan Balances (by owner) Loan Payments (by owner) Total Trust & Total Balances Allen Betty Joint C. Prop. Other Payments Allen Betty Joint $238,640 $6,640 $232,000 $20,400 $1, ,089 6, ,755 20,400 1, ,081 5, ,097 20,400 1, ,591 5, ,009 20,400 1, ,592 5, ,471 20,400 1, ,056 4, ,463 20,400 1, ,952 3, ,965 20,400 1, ,246 3, ,954 20,400 1, ,903 2, ,407 20,400 1, ,884 1, ,301 20,400 1, , ,610 19, , ,309 19, ,371 89,371 19, , ,108 73,766 52,898 33, , ,795 57,466 52,898 33, , ,647 40,439 52,898 33, , ,622 22,653 52,898 33, , ,675 4,073 37,799 33, , ,758 33,698 33, , ,822 33,698 33, , ,816 33,698 33, , ,683 33,698 33, , ,367 33,698 33, , ,807 33,698 33, , ,939 33,698 33, ,696 93,696 33,698 33, ,009 64,009 33,698 33, ,803 32,803 33,698 33, C. Prop. $19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 19,200 4,101 B24c Trust & Other Page 34