FINANCIAL PLAN 2018 Prepared for Carl & Naomi Berman. Patrick Yaghoobians Cecilia Mata Taylor Downhour

Transcription

1 FINANCIAL PLAN 2018 Prepared for Carl & Naomi Berman Patrick Yaghoobians Cecilia Mata Taylor Downhour

2 Table of Contents Table of Contents 1 Executive Summary 3 Current Financial Situation 4 Cash Inflows 4 Cash Outflows 5 Cash Flow Recommendations 6 Balance Sheet and Net Worth Statement 6 Assets 6 Liabilities 7 Net Worth 7 Ratio analysis 7 Assumptions 9 SWOT Analysis 9 Education Funding 10 Funding Amount Needed 10 Matthew s Education Funding 11 Sarah s Education Funding 12 Real Estate 12 Historic District Home 13 Blue Ridge Cabin 14 Estate Planning 15 Required documents 16 Recommendations 17 Life Insurance 17 Whole Life Insurance 17 Term Life insurance 18 Recommendations 18 Disability Insurance 19 Recommendations 20 Investments 20 1

3 Asset Allocation 20 Brokerage Account 22 Roth & Traditional IRA (k) and 403(b) 24 Contacting Professionals 25 Implementation 25 Appendix 27 2

4 Executive Summary This financial plan is intended to help you, Carl and Naomi Berman, achieve your financial goals and dreams. Your financial plan addresses the following: - Purchasing a new home in the historic district of Harrisonburg, Virginia - Purchasing a cabin in the Blue Ridge Mountains to enjoy the outdoors during your retirement - Funding college for Sarah and Matthew - Assessing your current life and disability insurance coverage - Initiating essential estate planning documents - Reviewing current investments - Refining your retirement planning. We begin the plan with an analysis of your current financial situation including your current cash inflows and outflows, a balance sheet showing your assets and liabilities along with your total net worth, ratio analysis, and a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). We then discuss education funding, real estate goals, and estate planning. The closing sections of your Financial Plan discuss life and disability insurance, current investments, and retirement planning. The educational funding section of your plan discusses total costs of tuition for Matthew and Sarah, different types of universities and their associated costs, and methods of funding. The estate planning section covers how to protect, organize, and distribute your assets. Both the life insurance and the disability insurance sections of the plan discuss types of policies you should consider. The investment section includes a set of recommendation on reallocating funds to ensure your long-term goals are met. Finally, the retirement section will considers increasing your retirement contributions and the benefits from contributing to different retirement vehicles. Overall, this plan will give you a clear picture of your current financial status and leave you with a clear sense of direction of how to integrate these steps to achieve your financial goals and dreams. 3

5 Current Financial Situation You are on the right path to achieve your personal and financial goals. During this time in your life, you are in the asset accumulation and risk management phase. We would like to reassure you that with the resources you already have and with some help, you will be in a good position to achieve most of your goals. To summarize your current financial standing: Your current gross income of $240,000 places you in the 33% federal tax bracket. Based on your cash flows you have a surplus of $37,597 per year. Your net worth is currently $1,033,430. Cash Inflows Your annual cash inflow is $245,297, with salaries representing 98% of your total cash inflows. We discuss methods of protecting your later in this report. EARNED INCOME CARL NAOMI FAMILY SALARY $140,000 $100,000 $240,000 SUBTOTAL $140,000 $100,000 $240,000 INVESTMENT INCOME INTEREST $386 $386 $771 DIVIDENDS $518 $518 $1,037 LONG-TERM CAPITAL GAINS $1,744 $1,744 $3,489 SUBTOTAL $2,649 $2,649 $5,297 TOTAL CASH INFLOWS $142,649 $102,649 $245,297 The following figure emphasizes your dependence on salaries for income: 4

6 Cash Outflows Your total cash outflows are $207,700. Taxes (32%), discretionary expenses (24%) and nondiscretionary expenses (38%) comprise most of your cash outflows. Methods of reducing taxable income, and thus tax liability, are discussed in the retirement section of this report. Non-discretionary expenses are those that are required, such as your mortgage, car loan, and credit card payments. Discretionary expenses are those that are not essential. Decreasing your discretionary expenses will allow you more flexibility regarding your debt and long-term financial goals. The figures below provide a representation of where your money is spent annually, both in dollar amounts and percentages. 5

7 Cash Flow Recommendations Your cash inflows and outflows show that you have a surplus of about $37,500 annually. This annual surplus will allow you to fund your current and future goals. Although cash flow analysis and adjustments should be made regularly, our suggested allocation for this year follows: New Cash Flows - Increase 401(k) contribution from $7,500 to $18,500 $11,000 - Purchase term life insurance at a cost of $5,200 annually for both policies $5,200 - Purchase disability insurance; we recommend a budget of $2,000 a year for the policies $2,000 - Contribute $19,000 to $22,000 to Sarah s 529 Plan (we assume $19,000 for this cash flow breakdown) $19,000 - The remainder should be invested in a high yielding savings account. $397 $37,597 Balance Sheet and Net Worth Statement Your balance sheet represents your net worth by subtracting your total liabilities from your total assets. You have $1,384,851 in assets and $351,421 in liabilities, resulting in a total net worth of $1,033,430. Here is a breakdown of your current assets and liabilities. We will discuss how to increase your assets and decrease your liabilities further in the Real Estate and Retirement section of this report. As of May 2018: ASSETS BANK SAVINGS: JOINT $30,281 TRADING ACCOUNT: JOINT $107,338 TOTAL CASH & CASH EQUIVALENT $137, 619 ROTH IRA CARL $61,431 ROTH IRA NAOMI $66,550 TRADITIONAL IRA CARL $153, (K) NAOMI $204, (K) CARL $307,155 TOTAL QUALIFIED ASSETS $793,483 RESIDENCE: JOINT $453,750 TOTAL LIFESTYLE ASSETS $453,750 TOTAL ASSETS $1,384,851 6

8 LIABILITIES MORTGAGE CAR LOAN CREDIT CARD ($314,118) ($29,787) ($7,515) TOTAL LIABILITIES ($351,421) NET WORTH TOTAL ASSETS $1,384,851 TOTAL LIABILITIES ($351,421) TOTAL NET WORTH $1,033,430 As you can see, roughly 80% of your balance sheet is taken by assets and 20% by liabilities. This is great, especially given that you are still accumulating assets. Ratio analysis In this section we discuss your current financial health using financial ratios (please see Appendix A for detailed calculations). The emergency fund ratio is used to determine how many months you can cover nondiscretionary cash-flows based on your current liquidity. The purpose of an emergency fund is to cover those risks that are unexpected, such as an injury or accident. Ideally you should have the equivalent of three-to-six months of income to cover non-discretionary cash-flows. Your current emergency fund ratio is about 4 ½ months. Based on this number, you have four and half months of funds to cover your non-discretionary expenses in case of an emergency. You have a good emergency fund, especially given the stability of your income. 7

9 The purpose of the 1 st Housing ratio is to reflect the proportion of gross pay that is used for housing, which includes your mortgage payment, property taxes, homeowner s insurance, and any association dues. The ideal benchmark for housing ratio 1 is less than or equal 28 percent. Your current housing ratio 1 is 12.5%, which means that you spend 12.5% of your gross pay on housing. You are in excellent standing. The purpose of the 2 nd Housing ratio is to reflect the proportion of gross pay that used for housing and other monthly debt payments. The ideal benchmark for this ratio is less than or equal to 36 percent. Your current housing ratio 2 is: 16.63%, which indicates that your housing debt plus other monthly debt is covered by 16.63% of your gross pay, well below the benchmark. You are in excellent standing. 100% Salary 33% Tax (Married Filing Jointly) 17% Housing ratio and other debt 50% Net Percentage after taxes and housing/debt expense Based on these housing ratios, we calculate that 33% of your salary goes to taxes and roughly 17% (16.63%) goes to housing and debt payments. This allows for 50% of your salary to contribute to your utility payments, food and clothing expenses, living expenses, and education and retirement goals. Your debt to total assets ratio is based on leverage. This reflects the portion of your assets that have been financed by creditors. This ratio should decrease with age. Your current debt-to-total asset ratio is: 25.38% The net worth to total assets ratio is based on the percentage of your total assets you own outright. This ratio should increase with age. Your current net worth to total asset ratio is: 74.62% The sum of the total asset ratios is 100%. You are currently in excellent standing. The savings rate is essential to achieving your long-term goals concerning retirement, education funding, and large expenditures. If your only goal is to obtain financial security, then your savings rate benchmark should be 10-13%. Based on your current goals, your saving rate benchmark should be higher than 10-13%. Your current saving rate is: 4.62%, which means that you are only saving 4.62% of your gross pay. This number is very low given your income and the goals we are looking to accomplish. We will discuss how we can increase this ratio in the Investment section of this report. 8

10 Assumptions In this plan we make assumptions to provide realistic recommendations given external variables. Below are the general assumptions we have made: Surplus in your cash flow will be used to fund your immediate and long-term goals Retirement accounts will grow at 7% Brokerage accounts will grow at 8% Inflation rate is 3% annually Education inflation rate is 6% annually Your current home will be sold immediately. SWOT Analysis SWOT analysis examines both internal factors (strengths and weaknesses) and external factors (opportunities and threats) that may positively or negatively affect your goals. Strengths - Positive net worth - Low debt - Good emergency fund - Strong housing ratios - Current home has a high market value - Surplus of cash flow Opportunities - Selling current home to decrease mortgage, increase cash flow - Maxing out 401(k) and 403(b) contributions Weaknesses - High discretionary expenses - High taxes - Poor savings rate - No estate planning documents - Inadequate life insurance coverage - No disability insurance - Lack of college funds for children Threats - Catastrophic illness or death - Loss of jobs - Rising inflation rate in education - Change in housing market - Market growth has been volatile Your strengths include: Few liabilities and a high net worth; in the event of a loss of income or emergencies you have sufficient funds to cover yourself Low housing ratios, which allow for the remaining percentage of salary to be allocated to other obligations and goals. Some of your weaknesses include: High discretionary expenses Poor saving rate High taxes. Your opportunities include: Selling your current and using the proceeds to purchase a new home at a lower cost in your desired location; selling your current home will also increase your cash flow and reduce your liabilities 9

11 Contributing the maximum amounts to your 401(k) and 403(b) each year. Threats that you are faced with include: Premature death and loss of jobs Insufficient coverage to cover risks The education inflation rate rises faster than the regular inflation rate which may mean that the cost of school for your children may substantially increase. Throughout this report we analyze how to change some weaknesses into strengths and how to avoid threats. Education Funding One of your goals is to fully fund college education for Matthew and Sarah. Matthew is currently 14 years old and will attend college in four years. Sarah is currently 11 years old and will attend college in seven years. We make the following assumptions for this section: The education inflation rate is 6% annually Both Matthew and Sarah will attend college Matthew and Sarah will attend either a public in-state college, private in-state college, or public out-of-state college You will be making contributions to their savings account at the beginning of each year The rate of return on the 529 plan is 7% annually. Funding Amount Needed We understand that funding for your children's education is an important goal. To start, we consider the three main types of colleges that you may be most interested in enrolling your children. The first type of institution is an in-state public 4-year university. The second is an instate 4-year private university. The last is an out-of-state public 4-year university. For 2018, the average cost of an in-state public university is approximately $23,000. For a private 4-year university in-state, the average cost is approximately $26,500. Lastly, for an outof-state public 4-year university, the cost of tuition is $25,600. The costs for all three of these types of universities are based on annual costs. Now that we know the present value of the cost of tuition, we need to find how much more tuition will cost in 4 years (2022), and in 7 years (2025. We know the present value cost of tuition in today s dollars and assume a 6% average college inflation rate. The following chart shows the future value of tuition cost in 4 years for Matthew s college education (Appendix B-1). 10

12 Type of University Annual Cost of Tuition (2022) Total Cost of Tuition for 4 Years Public 4-Year University in Virginia Private 4-Year University in Virginia Public Out-of-State 4- Year University $29,037 $33,456 $32,319 $116,148 $133,824 $129,276 The following chart shows the future value of tuition cost in 7 years for Sarah s college education (Appendix B-2). Type of University Annual Cost of Tuition (2025) Total Cost of Tuition for 4 Years Public 4-Year University in Virginia Private 4-Year University in Virginia Public Out-of-State 4- Year University $34,584 $39,846 $38,494 $138,336 $159,384 $153,972 Now that we have calculated the future value of the cost of tuition for Matthew s and Sarah s education, the following chart shows the total amount that will be needed to fund college education for both children. Type of University Public 4-Year College in Virginia Private 4-Year College in Virginia Out of State Public 4-Year College Total Amount Needed for Cost of Tuition $254,484 $293,208 $283,248 The total amount needed to fund for college will vary on which type of university Matthew and Sarah will end up attending. The total cost of college in the chart above assumes that both the children will go to the same type of university. However, if Matthew goes to a public 4-year institution in-state while Sarah goes to a private college in-state, then the total costs will be different. It is important to take this factor into consideration in determining how much will be needed to fund this goal. Matthew s Education Funding Since Matthew s education is currently 4 years away, we recommend you do not open any type of college savings account for him. There just isn t enough time for the money to grow. We recommend you use the money in your brokerage account to pay for Matthew s college tuition. You currently have $107,338 total combined in your brokerage account. If we assume a 5.82% rate of return (return is already adjusted for inflation) in four years the brokerage account will have a value of $134,593. This amount will be sufficient to cover Matthew s education. 11

13 As an alternative and in the event that the brokerage account is not sufficient to cover Matthews s education, we recommend using your joint savings account for the remainder. If using your savings account is not ideal, then we suggest Matthew take out a student loan for the amount needed. You are also able to take out a private loan for any balance needed to complete Matthew s education costs. Sarah s Education Funding Since Sarah will not be attending college for another seven years, we recommend that you open a College Savings Plan or 529 plan in the state of Virginia. A 529 savings plan is beneficial because it allows funds to grow tax deferred and there are no income phase outs. This means that no matter how your income changes, you will always be able to contribute to her 529 plan. At the time that Sarah needs the funds for a qualified education expenses such as tuition, books, school supplies and room and board, she will be able to take a distribution on the plan that is federal and state income tax free. For this plan, we assume a rate of return of 7%. Including the education inflation rate provides the inflation adjusted rate of return of.9% (Appendix C-1), which is then used to calculate the following annual payments required for Sarah s 529 plan dependent upon the type of college she attends. The following savings would be required for a total of 7 years: For an in-state public 4-year college, your annual savings for the plan would be approximately $19,235 (Appendix C-2) For an in-state private college, the annual savings would be approximately $22,162 (Appendix C-3) For an out-of-state public college, the annual savings would be approximately $21,409 (Appendix C-4) Type of University Payment required to fund 529 plan Public 4-Year Private 4-Year College Out-of-State Public College in Virginia in Virginia 4-Year College $19,235 annually $22,162 annually $21,409 annually Real Estate As of right now, you currently own a home in Harrisonburg, VA valued at around $450,000, with a goal to eventually move into the historic part of the city, known as Old Town Harrisonburg. Fortunately, prices of homes in this area are similar to the current market value of your present-day house. Since Old Town Harrisonburg is not a large area of land, there are few houses available on the market, but we feel that the houses that could potentially become offered in this area would be to your liking. There are many single-family homes built in the neighborhood, which include four or more bedrooms as well as four or more bathrooms. This would be ideal in your current situation, as each child will have their own room, and there would be an extra room available for use as a guest bedroom or office space. 12

14 Historic District Home If moving to the historic district is not a short-term goal, then waiting until the children move out of the house and purchasing a smaller, two-bedroom condominium would be less expensive but will still fulfill the dream of moving into the historic district. To find information regarding house prices and their trends in the area, we used listing data from Zillow. For each corresponding year, the median listing price is based on a snapshot of prices on January 30th. The median listing price for homes in the Harrisonburg area have been very volatile and have not shown a consistent trend since 2012, so predicting home prices in 5 or 10 years may be a difficult task now. With that said, four of the six years have shown increases in listing price, and in the long run, our assumption is that they will continue to rise, albeit at an unpredictable rate. We believe the trend in housing prices for this area will be similar and reflect the same trend as the United States, which has grown by an average of 1-2% since 2008 according to Zillow. As a hypothetical example, if you were to sell your current residence and purchase a home valued at about $280,000, you can use the equity from the sale as a down payment and have an outstanding balance of about $180,000. Based on today s loan rates of about 3.75% on a 15- year fixed mortgage, monthly payments would be close to $1,272 per month, or about $15,264 a year. Your current mortgage payments would be cut by almost half. This calculation does not include the cost of home insurance or property taxes, however. 13

15 Our recommendation regarding Old Town is to wait until you have secured a buyer for your current home and have found something comparable to purchase. Due to the low number of listings specifically in Old Town, we used information for the entire Harrisonburg area, but history has shown that prices are slightly higher in Old Town. We expect this relationship to continue. Blue Ridge Cabin We also noted that you would love to own a small cabin in the Blue Ridge Mountains of Virginia and have provided a graph that represents the median listing price in that area. Like Harrisonburg, Blue Ridge has seen a volatile market, and it is unpredictable as to where the market may be headed in 5, 10, or 20 years. We will use the same assumption for the Mountain cabin as we did regarding the Harrisonburg properties and predict a more stable 1-2% increase. In another hypothetical example, let s assume that a cabin is purchased for about $172,000, which is close to the median price of houses in this area, at the same 3.75% interest rate, and a 30-year fixed mortgage. You would be looking at monthly payments of about $1,200, which translates to about $14,400 a year. These numbers are similar to the previous example, and we did not include property tax or insurance payments as part of the calculation. With this information, we have come up with two possible scenarios as to how you may want to approach purchasing this cabin in the future. One alternative revolves around the idea that you will wait about 10 years until your children are either done with their schooling or close to finishing. Since the children will soon be heading 14

16 to college, it might be in your best interest to save as much as possible to help pay for their tuition, and once they are done, begin looking for houses in this area. A second alterative would be to purchase the property sometime in the near future, whether it be in a couple of months or within two years and rent it out if you do not plan on occupying it until retirement comes along. Taking a look at your financials, you have a combined $50,000 in discretionary expenses, which means there could be some extra money put aside to purchase a property now. Considering the fact that house prices are right around $170,000, your financial situation would allow you to put a significant amount of money towards a down payment, allowing for the monthly mortgage payments to be lower. There is already $30,000 in your combined savings and checking account, and some of that money could go towards the aforementioned down payment, but our recommendation if this option is chosen would be to create a separate fund or account that would go towards a down payment instead of taking a portion from your current savings, which could be used as an emergency fund. This method would allow you to make your money work for you, while also ensuring that a good portion of the cabin will be paid for by the time you would like to use it for personal use. With both options being presented, our personal choice would be the first one, which consists of focusing on paying for the children s education, and then worrying about buying the cabin at a later time. Assuming it takes approximately 10 years for the children to finish with their school, our assumption regarding house prices estimates that a house that costs $170,000 today will cost around $207,000 in 2028, or about a 21% increase. With your financial habits and situation, this increase in prices will not cause you to take a significant hit on your accounts. Estate Planning Below are the assumptions we have held when determining this section of your financial plan: No estate documents have been drafted, including a will You are still residing in your Harrisonburg residence You have yet to purchase a cabin in the Blue Ridge Mountains You will be the beneficiary of one another Your children are the next beneficiaries in line Estate planning is a very important part of everyone financial planning. This is something that is very hard for many people to think about and to plan but having an estate plan in place will give you peace of mind knowing that your assets and family members will be taken care of after you have passed away. In general, everything you own goes through probate. Probate is a lengthy court process, which establishes who has the right to your assets after you have passed away. We want to make sure to avoid anything going into probate in order to help your family mourn, instead of stress about your assets. To avoid assets going through probate: 15

17 All assets should be titled under joint tenancy with rights of survivorships or, if applicable, community property with rights of survivorship Have assets be held in the name of a trust Have valid beneficiaries designated Please seek an estate planning attorney to establish your estate plan. Below are the four basic documents you will need to have an estate plan. Required documents The first document we recommend is a will. The purpose of a will is to direct assets to your heirs as you wish. It is important to update your will on a regular basis in order to ensure all assets have been accounted for. We recommend that your will include a pour-over provision. This provision allows for any assets that were not placed in the name of the trust or held in joint tenancy with right of survivorship to be poured over to the name of the trust at the first spouse s death. This is especially important for the time period before new assets have been placed into your will or a trust. The second document we recommend creating is an inter vivos revocable trust with an A with disclaimer trust structure. Inter vivos simply means that the trust is created during the lifetime of the creator. The assets within a revocable trust can be taken out of the trust or changed at any time prior to death or incapacity. We are recommending a revocable trust because your family intends on selling your current residence and moving elsewhere later on. Additionally, a general power of appointment is allowed with this type of trust and either of you would be able to take the marital deduction. In the unfortunate instance that you have made all final home purchases and one of you has passed away, you will have the option to create an irrevocable trust with a qualified disclaimer. This trust will eliminate any power of appointments, but it will not be subject to tax upon the survivor s death. This way your children will avoid taxation later on. The third document we recommend is a Power of Attorney (POA). The purpose of a durable power of attorney is that in the event that you become incapacitated, it will give a designated individual the legal right to act in your place for any financial decisions. If no POA is in place and you become incapacitated, your loved ones would have to go to court to get a conservatorship of the estate. The court would then appoint the person who is best suited to make financial decision on your behalf. The last document we recommend is an Advance Healthcare Directive (AHCD). The purpose of an Advance Healthcare Directive (AHCD) is that in the even that you become incapacitated, it will give a designated individual the legal rights to make medical decisions for you. If no AHCD is in place and you become incapacitated, your loved ones would have to go to court to get a conservatorship of the person. The court would then appoint the person who is best suited to make medical decisions on your behalf. 16

18 Recommendations Our recommendation is to schedule an appointment with an estate planning attorney at your earliest convenience. If you do not have time or available funds to meet with an estate planning attorney at this time you may create a will by using resources such as LegalZoom. You may get a durable power of attorney at any financial institution you hold accounts in. You may get an advance healthcare directive at your local hospital. We are not estate planning attorneys; this information is meant to be informational. Please contact an estate planning attorney to facilitate the creation of your estate plan. We would be happy to give you a few recommendations of estate attorneys we have worked with in the past. Life Insurance Life insurance is used to protect your loved one from a premature death. The life insurance proceeds will provide the income lost due to a loved one s passing. Given your ages and two young children, having substantial life insurance is necessary. We have provided you with a detailed explanation on the two main type insurance policies we recommend you consider. Whole Life Insurance The first insurance type we recommend is a whole life policy. A whole life policy allows you to have coverage for the rest of your life. The benefit of having this type of policy is that, even if your health decreases you would not be denied coverage from your insurance policy. Whole Life Insurance also gives you an investment feature, in which your policy builds cash value over time based on the premiums paid. They are invested in safe investment vehicles, in which you could borrow from if need be. The down side to this policy is that the premiums are expensive. The premiums are fixed from the time you buy it till the time you need to use the policy. This policy will cost much more than a term policy, but it provides security by ensuring that you will always be insurance and premiums will never increase regardless of your age or health status. Whole Life Insurance Pros Cons Guarantees coverage for the rest of Expensive Premiums your life Fixed premiums Low rate of return on investment Investment feature Not flexible if your needs or goals change Builds cash value you can borrow from later 17

19 Term Life insurance The second insurance type we recommend is a term life policy. A term life policy is beneficial because it allows you to purchase coverage for periods of time. This makes the annual policy premiums very affordable. A term policy also gives you the flexibility of adding or removing coverage at the end of the term. The ideal usage of this policy, is to take the difference of what you are saving from buying term instead of whole life and invest it. Investing the difference gives you the cash value that the whole life policy provides but at your own leisure. Another benefit to having term life is that once the term ends, you can re-evaluate your goals and needs. You may renew your policy as is or increase or decrease the coverage amount based on your new needs. The downside to this type of policy is the risk associated when you have to renew the policy. As you renew the policy your premiums will go up given that your age has changed as well as health conditions. If your health conditions decrease substantially, you may become uninsurable and will not be able to become insured or may be insured but at very high costs. Term Life Insurance Pros Cons Low premiums for a fixed period Covered only for the fixed term Allows for free cash that can be Once term is up, premiums made invested increase due to age and health Allows flexibility in case your goals Once term is up, individual may change become uninsurable Recommendations Based on your current goals and financial standing, we recommend that Carl be insured for $2,800,000 (See Appendix D). This number may seem large, but this is how we calculated the figure that would provide financial security for your family even after you are gone. We recommend that this entire amount is invested at a 5% rate of return per year which would give you $140,000 a year in returns (See Appendix D). This will provide you family with 100% of your current wages so they may continue to maintain their current lifestyle and fund all their goals. We recommend that Naomi be insured for $90,000. This figure is adjusted to replace only 90% of her current income, given that your goals would change if Naomi passed away (See Appendix D). The following is a detailed breakdown of the type of life insurance that should be purchased for each spouse. Assumptions used to calculate the annual premiums based on State Farm s insurance policies: Both Carl and Naomi are in excellent health Both Carl and Naomi are non-smokers Premium for Term Policy is based on a 20-year term. 18

20 Life insurance Policy for Carl Coverage Amount $2,800,000 Beneficiary: Naomi Whole Life Policy Premiums: $57,394.00/annually Term Life Policy Premiums: $3,774.00/annually Life insurance Policy for Naomi Coverage amount $1,800,000 Beneficiary: Carl Whole Life Policy Premiums: $26,564.00/annually Term Life Policy Premiums: $1,472.00/annually We recommend that you start your coverage by each getting a term life insurance policy. This recommendation is based on the cost of the policy and the assumption that both Carl and Naomi will not become uninsurable in the next 20 to 30 years. We chose a 20-year term because at the end of the term both of you will be reaching retirement age and your needs may be changing at the end of the policy. It is important to re-visit the insurance policy and change the beneficiary of the policy at the time of a spouse s death. Disability Insurance Disability insurance will provide you with security if you get injured and are unable to work for a period of time. Disability insurance will provide with a portion of salary for the time you are not able to work. Wage replacement is very important in order to continue funding your goals. Disability insurance does not cover 100% of your current wages but covers from 60% to 70% of your wages. With disability insurance, if you are paying the premiums, the benefit will be tax free. If your employer is paying for the benefit, then you will have to pay taxes on the benefit. Due to only a portion of your income is being replaced you will need to make substantial lifestyle adjustments such as eliminating as many discretionary expenses as possible. We recommend that you first reach out to your employer and obtain a disability policy threw them because most employers use a group policy to avoid adverse selection which means the policy premiums are usually much cheaper than buying an individual policy. If your employer does not offer disability insurance, we recommend you look for policies with short elimination period and long benefit period. When choosing a disability insurance policy, you will want to consider the elimination period and the benefit period of the policy. The elimination period, or waiting period, refers to the period of time that you will be disabled until the policy begins to pay out. Insurance policies will have a range of elimination periods such as 30, 60, 90, 180, or 360 days. We recommend that 19

21 you select a period no more than 90 days. This recommendation is based off your current emergency fund that holds 4 ½ months of savings that could be used as income replacement until the elimination period is over. The benefit period refers to the length of time that the insurance policy will pay you while disabled. You may choose the duration of the policy to be 2 years, 5 years, 10 years or up to the age of 65. Due to the uncertainty of the duration of disability and your current age, we recommend that you select a policy that is longer. Recommendations We recommend you both get a policy with no more than a 90-day elimination period and benefit period of at least 10-years. We suggest pricing some options and see what best fits your needs. Investments Moving onto your investments, by looking at your portfolio, as well as your financial status, we can see that most of the investing choices you made have netted you a positive gain. Your retirement accounts, as well your brokerage account, are well diversified, with a mix of growth funds, income producing stocks and bonds. Your decisions have put you in a better situation than most people your age, and this is something you both should be very proud of. Both of you are coming close to the age of 50, and this is around the age that we believe you should start shifting your focus from maximizing profits and taking big risks to capital preservation and keeping up with inflation. Given your great financial situation, we want to ensure that the money is still available for you to use, even after you stop working. Our recommendation is to have approximately 70% of your current income in retirement to continue living the way you were while working, which in your case would be approximately $168,000 a year. Asset Allocation One of the most important rules of finance is to not have all your eggs in one basket. To translate this, it means that you don t want all your money invested into one asset class, such as only stocks or only bonds. As mentioned previously, your accounts are well diversified, but we believe that it would be in the best interest to shift some of the assets you currently have. Here is how your current asset allocation looks like: 20

22 As we can see, approximately 80 percent of your money is invested in equities, while 17 percent are in fixed income and 3 percent in cash. We believe this is a little too aggressive for the goals you want to reach, so we want to shift it to a safer allocation, while still keeping the potential for growth. Our vision for your asset allocation looks like this: As mentioned earlier in the financial plan, some of the money from your brokerage account will be coming out to help fund college related costs for both of your children. This recommended asset allocation allows you to still see growth by making the right investment choices, but also allows more stability and liquidity. It is a fact that as our age goes up, our health begins to deteriorate, and we want to make sure that in a situation where something could happen spontaneously, your family is prepared. 21

23 It is important to remember that since sending your kids to college is something of importance to both of you, the fact that the stock market is so volatile could diminish some of the assets that could go towards paying for college. By moving the current money into safer assets, and investing new money in similar assets, there will be a better chance of paying tuition, as well as any other educational expenses such as housing and books. To achieve this asset allocation, we need to sell some of the stocks that you currently own and move those funds into fixed income assets and cash. Brokerage Account Since we want to see some income coming in, we have decided to keep a majority of the positions that pay out dividends. This way, even if the value of the stock goes up and down frequently, there will still be consistent payments made out to you. Our first decision is to sell the following positions: McKesson Corporation, PayPal, and Amazon. The decisions to sell these positions will result in the following net gain/loss in your brokerage account. Stock Cost Basis Market Value Net Gain/Loss McKesson (MCK) $18,000 $12,000 -$6,000 PayPal (PYPL) $12,000 $18,000 $6,000 Amazon (AMZN) $10,000 $18,000 $8,000 TOTAL $40,000 $48,000 + $8,000 With this decision, the capital loss from McKesson and the capital gain from PayPal cancel each other out, meaning only the $8,000 gain from Amazon will count towards your income for tax purposes. These positions were held for more than one year, which means that your capital gains will be taxed at only 15% as opposed to your ordinary tax bracket, which is 33%. The total amount received from the sale of these positions is equal to $48,000, and since the $8,000 gain will be taxed at 15%, the tac will be $1,200 ($8,000 X 15%). As mentioned previously, our recommendation is to take the money from the sale of these stocks and to invest it in a 529 account for your children. We believe that it would be best to put the money into a age-based fund that has a proper balance of aggressive and safe investments. We want the money to grow at a high enough rate so that the inflation of college tuition doesn t lower the value, but we also want to make sure that the money is put into assets that won t be heavily affected by the ups and downs of the market. 22

24 Roth & Traditional IRA Your IRA s have allowed for a little more diversity because most of the assets are invested in different funds. As seen on the document that was titled Net Worth Details, we are aware that $281,558 is invested between both of your Roth IRAs as well as Carl s Traditional IRA. You currently own three different types of growth funds, one small cap stock fund, and two individual stocks, Apple and Tesla. As we mentioned before, as your age starts to increase, we want to be putting our money into safer investments, and by owning four different types of funds which have above-average risk, we are prone to the volatility of the market. Here are our recommendations for what to do with your current positions. - Decrease your position in all your holdings except for GFAFX o GFAFX is the most diversified out of the four and has grown an average of 9.11% for the past ten years. - CHCLX has performed the best for you relative to how much it was purchased for, but it is composed of 95% US stocks. - NBQAX has also produced large, positive gains, but it heavily invests in international securities, so we want to move into safer and more diversified investments. - TSCSX is the fund that invests primarily in small-cap US stocks and has underperformed, so we will be selling most it. The benefit of having these funds in an Individual Retirement Account is that the gains are taxdeferred, so whatever money we get from selling shares can all go towards purchasing new funds or investments. In your situation, we believe it would be in the best interest to keep only 50% of your position in the pre-mentioned funds, except for the TSCSX, which we will only keep 25% of the value. Before we crunch the numbers, we will briefly touch upon the two individual stocks in your accounts. Tesla and Apple are both strong companies that are still growing, so they are a little riskier than some of the companies that have been established for decades, Tesla more so than Apple. Our belief is that keeping you should keep the Apple stock for now. We will reevaluate this decision as we meet every quarter. Tesla on the other hand is a newer company and has seen major volatility in its stock price throughout the past five years. Therefore, we recommend you sell this stock and move the money towards safer and more diversified investments. Here is what you will expect to see after selling these shares. Ticker % To Sell Market Value TSCSX 75 % $30,000 CHCLX 50 % $30,000 23

25 NBQAX 50 % $35,000 TSLA 100 % $30,000 TOTAL $125,000 The $125,000 you receive from the sale of all those assets will stay in the IRA and we advise you to turn around and put $25,000 of that in a Money Market Fund or another CD. The Money Market Fund is very similar to a CD in the sense that they are both low-risk investments that are similar to holding your money as cash and have interest rates between 1-2%. This recommendation takes care of the cash portion of your new asset allocation. The other $100,000 should be invested in well diversified funds that may offer lower returns than growth funds but will also provide less volatility. We have chosen 2 funds. The first fund we have chosen is the Vanguard Wellington Investor Fund (VWELX). This fund is balanced in that it has approximately 53% of its assets in US stocks, another 30% in bonds, and the other 17% is primarily split between international securities and cash. The stocks and bonds that it invests in include securities from every sector from financial services, to healthcare, technology, etc. The second fund we have chosen is the USAA Growth and Tax Strategy Fund (USBLX). Just like the Vanguard fund, this one is just as balanced, but places more emphasis on bonds, as the allocation is 51% bonds, 47% in US stock, and just a mere 2% in cash. Whereas in the Vanguard fund, which invests in a variety of bond maturities, the USAA fund primarily focuses on bonds which mature in 20 to 30 years, which means they have higher yields. Overall, the two funds and some of your existing assets will take you from your current allocation to the new allocation. 401(k) and 403(b) For your 401(k) and 403(b) accounts, it is a little more difficult to say what you should invest in as opposed to what you are currently invested in due to the fact that we don t have information regarding the different funds that are available to your disposal as part of your retirement account at work. Once you obtain the funds and bring the list to our next meeting, we will refine our recommendations. With that said, much like your IRA accounts, we can see that there is a large variety of small-cap and mid-cap growth funds in addition to a handful of funds that focus on international securities. 24

26 Re-iterating what was said earlier, we believe that this is the perfect time to slowly shift away from the riskier funds, which a good amount of your portfolio is consisted of. Our strategy for these accounts revolve around moving your money from equity focused funds into bonds or bond focused funds. Assuming you retire at normal retirement age (67), we want to put a portion of the funds into inflation adjusted US Treasury bonds. These bonds are backed by the US Government, so they have virtually no risk, but it is important to keep in mind that any investment has risk, no matter how low the risk is advertised. The benefit of investing in US Treasury Bonds is that their interest payments are exempt from State and local taxes, but not from federal taxes. Depending on what options your defined contribution plans offer, we believe it would be best to invest in a mix of 10, 20 and 30-year bonds, with more emphasis on 20-year maturities. The reason for this is because twenty years from now, the bonds will mature, and you will be a couple of years away from retirement. At this time, Carl is contributing $7,500 a year to his 401(K). We strongly suggest that you increase this contribution to the maximum allowed of $18,500. Increasing your contribution will allow your retirement account to grow at a much faster rate and it will decrease your presentday tax liability. If you begin to contribute the maximum allowed into your retirement account, this will increase your savings rate up to 9.19%, which is almost double what your current rate is. Contacting Professionals Now that you have been given the information you need to complete your goals you will need to speak to a few other professionals. Please meet with a real estate agent in your community to begin the conversation of selling your current home and relocating to the historic district of the city. We would again like to restate that we are not estate planning attorneys and have only provided the information that is needed to begin the process of creating your estate. If at this time you are not able to meet with an attorney we highly recommend that you begin the process of obtaining a will, durable power of attorney, and advance health care directive to protect yourself and your wishes. In order to buy life insurance and disability insurance, please meet with a license broker. We have provided only the information to make a sound decision on what type of policy you should get based on your current needs. Implementation Before our next meeting we would like you to meet with professionals mentioned above. Implementation of this plan will take place in a period of one-year in which we will meet three times in the year to reevaluate budgets, goals, and implementations. 25

27 It is the most important aspect of our job to ensure that you are satisfied with how your goals will be met. If at any time in the future you have a concern about the implantation of any of the recommendation we have made please let us know. We will find other ways to satisfy your goals in a means that you find best fits your desires. 26

28 Appendix APPENDIX A Ratio Calculations Ratio Calculation Standing Benchmark Emergency Fund Ratio Cash and cash equivalents / Monthly non-discretionary cash flows [$30,281 / ($79,900/12)] 4 ½ months 3 to 6 months Housing Ratio 1 Housing Ratio 2 Debt to Total Asset Ratio Housing costs / Gross pay [$30,000 / $240,000] Housing cost plus other monthly cost / Gross pay [($30,000 + $7,800 + $2,100) / $240,000] Total liability / Total assets [$351,421 / $1,384,851] 12.5% Equal to or less than 28% 16.63% Equal to or less than 36% 25.38% Depends on age. Will decrease as you get older. Net Worth to Total Asset Ratio Net worth / Total assets [$1,033,430 / $1,384,851] 74.62% Depends on age. Will increase as your get older. Savings Rate Savings and employer contributions / Gross pay [($771 + $1,037 + $7,500 + $1,771) / $240,000] 4.62% 10-13% to obtain financial security 27

29 APPENDIX B-1 Matthew s Cost Public 4-Year University in Virginia Private 4-Year University in Virginia Public Out-of-State 4-Year University PV= $23,00 PV= $26,500 PV= $25,600 PMT= 0 PMT= 0 PMT= 0 I/Y= 6 I/Y= 6 I/Y= 6 N= 4 N= 4 N= 4 FV= $29, FV= $33, FV= $32, $29,037 x 4 = $116,148 $33,456 x 4 = $133,824 $32,319 x 4 = $129,276 APPENDIX B-2 Sarah s Cost Public 4-Year University in Virginia Private 4-Year University in Virginia Public Out-of-State 4-Year University PV= $23,00 PV= $26,500 PV= $25,600 PMT= 0 PMT= 0 PMT= 0 I/Y= 6 I/Y= 6 I/Y= 6 N= 7 N= 7 N= 7 FV= $34, FV= $39, FV= $38, $34,584 x 4 = $138,336 $39,846 x 4 = $159,384 $153,972 x 4 = $153,972 APPENDIX C-1 [(1 + rate of return)/(1 + inflation rate)] - 1 = Inflation-Adjusted Rate of Return [(1 +.07)/(1 +.06)] - 1 =.09 =.9% as the Inflation-Adjusted Rate of Return 28

30 APPENDIX C-2 FV= $138,336 PV= 0 I/Y=.9 N= 7 PMT= $19, APPENDIX C-3 FV= $159,384 PV= 0 I/Y=.9 N= 7 PMT= $22, APPENDIX C-4 FV= $153,972 PV= 0 I/Y=.9 N= 7 PMT= $21, APPENDIX D Insurance - Coverage Calculations. For Carl: We take your current income and multiply it by 20 (based on industry average) $140,000 x 20 = $2,800,000 Assuming entire death benefit is invested at a 5% rate of return per year, it will provide 100% wage replacement for beneficiary. $2,800,000 x 0.05 = $140,000 For Naomi: We take 90% of wage replacement, which is $90,000 and multiply it by 20 (based on industry average) $90,000 x 20 = $1,800,000 Assuming entire death benefit is invested at a 5% rate of return per year, it will provide 90% wage replacement for beneficiary. $1,800,000 x 0.05 = $90,000 29