BERMAN FINANCIAL PLAN

Transcription

1 BERMAN FINANCIAL PLAN Prepared by F.L.S Financial MAY 18, 2018 F.L.S. FINANCIAL

2 April 29, 2018 Carl and Naomi Berman Harrisonburg, VA Dear Carol and Naomi, It was a pleasure to meet you at our retirement seminar. Thank you for sending over some of your financial data for us to analyze, and for sharing with us some of your more personal goals that you wish to achieve. After reviewing your information, we have compiled a plan that will allow you to achieve your desired lifestyle. Attached is a summation of the plan we have set for you, including education savings for your children Matthew and Sarah, an insurance portion, and recommendations for all of your financials throughout. After reviewing the plan, we hope you are satisfied and confident about your financial future. FLS Financial is excited about what is to come of our relationship. We are enthusiastic about advising you and your family on how to ensure the security of your financial future. If you ever have any questions or concerns please contact us and we will be happy to talk it over. Sincerely, FLS Financial 1

3 Disclosures (hereinafter, the Financial Advisor ), working as a representative of F.L.S. Financial (hereinafter, the Firm ), has relied on the information provided by Carl and Naomi Berman (hereinafter, the Clients ) in preparing the enclosed financial plan. The information in this report is based on data supplied by the Clients and is intended to be used as a guide for their financial strategy. The information and data were obtained from sources deemed reliable. Their accuracy or completeness is not guaranteed and subject to change with current market conditions. Clients should review and verify the accuracy of these assumptions. If any of the assumptions are incorrect, Clients should notify their Financial Advisor immediately. The views expressed herein are those of the author and do not necessarily reflect the views of F.L.S. Financial. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The projections or other information generated in this report regarding the likelihood of various investment outcomes (including any assumed rates of return) are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. F.L.S. Financial and its representatives do not provide tax or legal advice. Individuals should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trusts, estate planning, charitable giving, philanthropic planning or other legal matters. Per the oral agreement made between the Clients and the Financial Advisor, the enclosed financial plan has been completed and delivered in a timely manner. The plan does not constitute a promise of any sort and further implementation of the plan will be covered under a separate engagement letter. If the Clients so choose to engage the Financial Advisor in the implementation of this plan, this document will be considered a working document that should be carefully reviewed and updated on a regular basis. I hereby acknowledge the terms of this Agreement and the disclosures made above. Carl Berman Date Naomi Berman Date Advisor Date 2

4 Table of Contents Personal Information Overview 4 Client Goals 5 Key Assumptions 6 Cash and Debt Management 7 Education Savings 10 Risk Management 13 Retirement 16 Investment Portfolio 19 Estate Planning 25 Action Plan 27 Appendix 31 3

5 Personal Information Overview Client 1 Client 2 Name Carl Berman Naomi Berman Gender Male Female Age Marital Status Married Married State of Residence VA VA Employment Status Law school professor Private junior high school principal Employment Income $140,000 $100,000 Other Income $386 Interest $518 Dividend $1,744 Long-Term Capital Gain $386 Interest $518 Dividend $1,744 Long-Term Capital Gain Approximate Net Worth $1,033,430 (Joint) $1,033,430 (Joint) Child 1 Child 2 Name Matthew Sarah Gender Male Female Age Employment Status Student Student State of Residence VA VA 4

6 Client Goals Owning a home in the Historic District of Harrisonburg, Virginia. Owning a small cabin in the Blue Ridge Mountains of Virginia during retirement. Pay for Matthew and Sarah s college education. Adequate Life Insurance coverage for both Carl and Naomi. o If Carl were to pass away, he wants Naomi to still be able to fund all their goals: Home in the Historic District of Harrisonburg Cabin in Blue Ridge Mountains Pay for Matthew and Sarah s education o If Naomi were to pass away, Carl would not purchase the cabin, but would: Fund Matthew and Sarah s education Move to the Historic District of Harrisonburg Adequate Disability Insurance for both Carl and Naomi. Proper estate planning. 5

7 Key Assumptions Assuming Carl will retire at age 70 (average retirement age for college professor 73). Naomi will retire from education administration before 60, but transition to second career until age 67. Both reflecting norms for their profession. Rate of income growth until retirement Life expectancy 95. Conservative approach To calculate retirement expenses Current Cash Outflow FICA tax, Savings, Mortgage. Risk tolerance Inflation rate Rate of return Net Worth Details are accurate, but only includes cash held in Savings account, not checking account Bank Savings represents cash held in a savings account as an emergency fund Cash flow details are accurate Funds intended for children s college, historic district home and cabin have been invested in Brokerage/Investment All funds invested in 401(k), IRA and Roth accounts are intended as retirement savings. Account Summary page totals are estimates, and exact numbers should be calculated using details for each account type from the Net Worth Details page. Account Summary Cost Basis is correct, as investments are often made using round numbers Account Summary Market Value is an estimation, and descriptive in the proportion of the portfolio s overall value represented by each asset on 12/31/2017, but not the exact market value of the asset. As the $37,597 cashflow surplus is not reflected on the Net Worth details, we operated under the assumption it is in a checking account not included in the Bank Savings account. Home was purchased at $453,750 with 20% down payment. Home loan is payment $30,000, for 15 years at 3.26% interest. SS COLA keeps pace with inflation Need $24, saved per year Virginia 529 Plan (Invest529) o $4,000 deduction cap o Expense ratio:.10% -.76% Putting fund into low-risk Carl and Naomi may have Group benefits through their employers, but because this was not specified, we assume they do not, or it is inadequate. o Life Insurance Assuming Carl and Naomi are super preferred non-smokers. o Disability Insurance 6

8 Cash and Debt Management Cash and debt management are the first steps in financial planning. Understanding your current financial situation is the foundation of building a financial plan. How can we know where we are going if we don t know where we are starting from? With that in mind, please review Appendix A and B to confirm your information you provided in the initial client data forms are correct Cash Flow 15% 20% 27% 16% 12% 0% 3% 2% 1% 3% Discretionary expenses Fixed Expenses Mortgage Payment Car Loan Credit Card Payment Non-Qualified Reinvestments Retirement Savings Education Savings Taxes Surplus A household s cash flow represents a precise system. Money that enters the system is either used for expenses (outflow) or saved. If you look at your cash flow statement, you will see there is surplus of 15% of your total income ($37,596) for Congratulations, you are already following the most important rule in financial planning: Spend less than you make! Having a surplus is preferable to having a deficit (spending more than you earned), but our goal is to help you reduce that surplus to 0. This surplus simply represents inefficiency in how you have approached your cashflow. What a surplus really represents is money saved but have not put towards anything yet. This will be achieved by increasing your savings towards an emergency fund, paying off high interest loans, funding goals (retirement savings, education, etc.) and investing any remainder to support future goals. 7

9 Debt We recommend using a portion the surplus from 2017 to pay off your credit card debt immediately. This debt represents potential for unnecessary interest accrual at a high rate. By paying it off, you also remove an annual expense. Based on your current mortgage balance and payments we determined your mortgage carries a 3.26% annual interest rate on a 15 year loan with 13 years left. Once your mortgage is paid off, the cash flow previously used for mortgage payments can be allocated towards future goals. Managing a Cash Deficit In order to achieve your stated goals, you will need to drastically increase savings in the areas of education and retirement. You will also have increased expenses when it comes to insurance as you have mentioned the need for both life insurance and disability insurance. We will cover these areas in detail later, but for cash flow purposes, these increased expenses and savings result in an annual deficit for 2018 of approximately $7,000. The best solution to address this issue without sacrificing any goals is to reduce discretionary spending. By definition, discretionary spending is extra spending above and beyond your needs and goals. As such, this area provides flexibility to cut back in order to fund higher priorities. In order to best facilitate the reduction of discretionary spending, we recommend automating your non-discretionary spending and most important savings goals. This way you will have the advantage of knowing the important items are taken care of and that funds remaining in your checking account are not already intended for critical items. Cash Outflow Discretionary expenses $ 50, $ 44, Fixed Expenses $ 40, $ 41, Mortgage Payment $ 30, $ 30, Car Loan $ 7, $ 7, Credit Card Payment $ 2, $ - Non-Qualified Reinvestments $ 4, $ 4, Retirement Savings $ 7, $ 19, Education Savings $ - $ 25, Life and Disability Insurance $ - $ 18,060 Taxes $ 65, $ 67, Surplus $ 37, $ - This reduction in discretionary spending does need to be viewed as permanent. Once Matthew and Sarah have completed college, the portion of your income stream currently dedicated towards college 8

10 savings will be freed up to supply other goals. At that point however, you may find you can comfortably live on the reduced discretionary spending as you will be accustomed to it. If so, we recommend utilizing the freed income for saving and investing towards future goals. Perhaps some of it could allow you to enjoy travelling as you did before having kids. Emergency Fund An emergency fund is necessary incase unexpected expenses and/or events arise. One of these unexpected events could be losing a job. It can take many months to find a new job, and there are expenses that are required to be met regardless of loss of income. Having an emergency fun will make it much easier and less stressful if and when unexpected things happen in an individual s life. After reviewing your cash flow statement, we recommend you put $40,000 toward an emergency fund. This number is based off your cash and cash equivalences which equals $67,878. To calculate your emergency fund needs, we decided to remove your credit card debt from the equation making your cash and cash equivalences $60,383. We did this because we believe it would be best for you to go ahead and completely pay off your credit card debt as soon as possible with a portion of the money in your surplus of $37,597. It is best to pay off any outstanding credit card debt so that you can avoid accruing monthly interest. Your annual non-discretionary expenses came out to be $77,800. Because we do not know how much you owe for your mortgage, car payment, insurance payments and other fixed liabilities on a monthly basis, we divided your annual expenses of $77,800 by 12 to assume you spend roughly $6, on non-discretionary expenses per month. An emergency fund should allow for you to make fixed payments for about 6 months if anything unexpected were to happen. 9

11 Education Analysis You have said that you wish to pay for Matthew and Sarah s entire college experience. This is a common goal among many parents. The wage disparity for workers with a high school diploma versus workers with a college degree is enough to warrant the ever-rising cost of higher education. Although scholarships, financial aid, and grants are sometimes available, we are going to analyze the amount you should be saving for Matthew and Sarah s education disregarding these variables, just in case extra aid is not available. Recommendations We recommend a 529 Plan for each of your children to fund education savings. While each state has their own 529 Plans that anybody, including non-residents can choose from, we recommend Virginia s CollegeAmerica 529 Plan for each child because of its annual deduction benefit. CollegeAmerica 529 Savings Plan Benefits Tax-deferred growth State tax breaks State income taxes can be deducted up to the lesser of $4,000, or the amount contributed to the 529, per year. Control/ flexibility Funds can be rolled over from one 529 to another. Beneficiaries (Matthew and Sarah) do not have the right to make withdrawals, only account owner does (you). Account funds can be used at any public or private university, for all qualified education expenses, including tuition, room and board, school supplies, and books. Multiple investment options 10

12 We recommend taking advantage of the American Funds College Target Date Series, using American Funds College 2024 Fund (CFTAX) for Matthew and American Funds College 2027 Fund (CSTAX) for Sarah s education savings. The asset allocation within these fund adjust over time. As we get closer to her enrolling in college, the fund becomes more conservative to protect against volatility, while allowing the opportunity for more growth until then. 11

13 We recommend funding $25,000 per year toward your children s education. From now until the beginning of Matthew s senior year in college, save $15,000 into Matthew s fund and $10,000 into Sarah s. After that, save the full $25,000 into Sarah s fund until her senior year in college. This would fund around ⅔ of Sarah and Matthew s college education, and result in an equal amount of support for both. This would allow for discretionary spending to remain at reasonable rate for your family. Keep in mind that this number is provided without regards to additional scholarship, financial aid, or grant opportunities. 12

14 Risk Management Life Insurance In the event of an untimely death, families may be left without sufficient funds to sustain their existing lifestyle. Life Insurance coverage is recommended in order to provide the funds needed for a secure, ongoing income, pay off any outstanding debts, cover immediate needs (such as a funeral, burial, etc.), and any other goals that may be important to a family. While reviewing your current situation and future goals, we wanted to ensure your spouse would have enough income from your death benefit to maintain your family s lifestyle and reach the goals you have set if you were to pass away. Because we do not know what your current Life Insurance coverage is, we decided to use the Multiples of Salary approach. This approach is great for your situation. Because you are young, your spouse would need more income replacement than if he/she were closer to retirement age. Carl Because it was not specified, we are unsure about your current Life Insurance coverage. We did some research on law schools in Virginia and found that most offer Group Life Insurance benefits to their employees. We recommend meeting with the Human Resources coordinator at your school to find out information on coverage offered and when the group enrollment opportunity is. However, it is common for employers to provide Group Life Insurance based on unisex and uni-smoker rates. If you are healthy, you will probably be able to get a better rate individually than through your employer. Not only did we find there are benefits available to professors at many Virginia law schools, we found members of the Virginia Bar Association also have the ability to purchase Group Life Insurance. If you are a member of this organization, we recommend visiting their website and contacting a representative for further details. We went ahead and ran an Individual 30 Year Term Life Insurance quote based on your stated goals because we do not have details about your current coverage. If you were to pass away, you want Naomi to be able to pay for Matthew and Sarah s education, move to the Historic District of Harrisonburg, Virginia, and purchase the cabin in Blue Ridge Mountains, Virginia. To reach these goals and for your family to maintain their current lifestyle, you need a 30 Year Term policy with $4,051,606 of coverage. Your Premium per month will range between $670 - $885 depending on the insurance provider you choose as well as the underwrting class you are offered, which is dependent on your personal medical history. We recommend this amount of coverage because the goals you have decided you want Naomi to be able to fund will be quite expensive and she will also still need to pay any fixed expenses your family already has as well. In the event of an untimely death, there are other costs she will have to pay as well, which were stated previously in the introduction to your Life Insurance Needs section. We do know you have a relationship with your neighbor who is a State Farm representative, but you will need to look elsewhere for your Life Insurance coverage, as State Farm only sells 30 Year Term policies to participants of ages

15 At our next meeting, please provide any details about your current coverage, details you get from your Human Resources coordinator on Group Life Insurance coverage available to you through your employer, and if you qualify for any Group Life Insurance coverage through the Virginia Bar Association. With these details, we will better be able to assist you in recalculating your needs and coordinating an individual policy into your current coverage if you so desire. Naomi Because it was not specified, we are unsure about your current Life Insurance. We recommend meeting with your Human Resource benefits coordinator at your school to find out what (if any) Group Life Insurance coverage is available to you through your employer and get a date for when the next open enrollment availability is. Usually Group Life Insurance is based on unisex, uni-smoker rates, which means you will most likely be able to get a better rate by purchasing an individual policy if you are healthy. Based on the goals stated before and because we are not sure what coverage you already have or have available to you, we ran a quote for a 30 Year Term policy. If you were to pass away, Carl has stated he want to be able to pay for Matthew and Sarah s education, move to the Historic District of Harrisonburg, Virginia, but would not purchase the cabin in Blue Ridge Mountains, Virginia. To reach these goals and for your family to maintain their current lifestyle, you need a 30 Year Term policy with $2,371,269 coverage. Your premium per month will range between $235 - $300 depending on the insurance provider you choose as well as the underwrting class you are offered, which is dependent on your personal medical history. This may seem like a high amount of coverage, but with the goals stated and other expenses which have been stated previously, if you were to pass away it is necessary for Carl to have this income replacement available. We know you have a connection to State Farm through your neighbor, but because Carl does not fit their age range for 30 Year Term policies, we advise you to purchase a plan through the same insurance provider so you can have the same advisor. Additionally, while your neighbor may seem to have your best interest at heart, they will only have the products from State Farm available to them, and there may be other products better suited to your needs they do not have access to. At our next meeting, please provide us with details on your current Life Insurance coverage and any Group Life Insurance available to you through your employer. This will help us to coordinate and recalculate coverage recommendations accordingly. Disability Insurance Disability Insurance protects you in the event you are unable to fund your financial obligations due to illness or injury. Disability coverage replaces a percentage of your income in the event you are unable to continue working. Based on your current lifestyle and future goals, we recommend a Long-Term Disability policy for each of you. Long-Term Disability coverage may continue until normal retirement age or death. It is better from a risk perspective to have Long-Term coverage in the event of an accident or illness. Carl 14

16 Based on our research of law schools in Virginia, we have come to the conclusion that you most likely have Long-Term Disability Group Insurance available to you. We recommend taking advantage of any policies your employer offers, as they are typically less expensive than individual policies. The Virginia Bar Association also has Group Disability Insurance available to members. Details can be found on their website at Because we do not have information on your current Disability Insurance, we calculated the amount of coverage and the premium for an individual policy. We recommend you purchase an Individual Long-Term Disability policy that covers 60% of your income. This comes out to be $84,000 per year, which is $7,000 per month of coverage. Premiums typically cost 3% of your income, which would make your premium $4,200 per year. This number may seem high, but we believe it is important to have this amount of coverage in the event a situation occurs that results in loss of income. Premiums may also change depending on the insurance company you choose to purchase from. We recommend meeting with the human resources benefits coordinator to get information of the Group Disability Insurance your employer offers and when open enrollment begins as soon as possible, as well as contacting a representative at the Virginia Bar Association about your eligibility for the coverage they offer. For our next meeting, please bring information on any Group Disability Insurance available to you. With this information, we will be able to recalculate your insurance needs and coordinate additional individual coverage if you so desire. Naomi Because we are not sure what your Disability Insurance Coverage is currently, we calculated your coverage needs are for an individual policy. We recommend purchasing a Long-Term Individual Disability Insurance policy that covers 60% of your income. Purchasing an individual policy for 60% of your income will cover $60,000 annually with a monthly benefit of $5,000. Premiums are typically calculated to cost 3% of your annual income, making your annual premium $3,000. This number may seem high, but we encourage you to have this amount of your income covered in the event you are unable to work. Premiums may also change depending on the insurance company you choose to purchase from. We recommend meeting with your human resource coordinator to find out if your employer offers any Group Disability Insurance as soon as possible. If any coverage is available to you, we suggest taking advantage of this as group coverage is typically less expensive that individual coverage. Once we have this information, we will be able to better assist you in recalculating your Long-Term Disability Insurance needs, and will be able to coordinate additional individual coverage if you so desire. 15

17 Retirement When gauging retirement savings, the general rule of thumb is to have three times your household income by the age of 45. With a household income of $240,000 and $775,000 in retirement savings, you are right on track by this measure. As with any broad generalization, this does not take into account individual situations and goals such as target retirement ages, risk tolerance, asset allocations, family health history or planned changes to lifestyle during retirement. Still, given the extreme lack of retirement savings across the US population, you should feel encouraged to know you are on the right track. At FLS Financial, we will help you shift from general retirement savings, to a more targeted approach focused on your specific goals and situation. Retirement Needs Factors The first step in developing an effective retirement plan is determining your goals, and what you need to achieve them financially. Key factors are the age at which you wish to retire, anticipated retirement expenses proportionate to pre-retirement expenses (known as the Wage Replacement Ratio), anticipated Social Security benefits, life expectancy, expected rates of return for investments, inflation projections, and additional goals during retirement that will affect spending. Research indicates the average retirement age for university professors is 73. By contrast, primary and secondary school administrators tend to retire early (between 55 and 60), and then take on a second career before winding down their working years in their mid to late 60s. Since you did not indicate your target retirement ages, we conservatively set Carl s retirement age at 67, and Naomi s at 64. Retirement age is the single most powerful factor in determining retirement savings requirements. By choosing to work longer you improve chances of a successful retirement in 3 main ways. 1) Every year longer you work is one less year you are in the draw-down phase. Once you reach the age of 70 ½, the government requires you to make minimum distributions from tax deferred accounts, but if you are still bringing in income from employment, your minimum distributions can simply be reinvested in a brokerage account and allowed to continue growing. 2) By delaying retirement, you allow yourself more years in which to save. 3) The longer you work, the longer you allow your money to work. Compound interest is amazingly powerful. As long as your money is invested properly, it has the ability to continue providing returns, which grows your nest egg by itself. To determine your wage replacement ratio (WRR), we analyzed the cashflow data you provided us from your annual spending. In our calculation we included expenses that are likely to continue through retirement (discretionary spending, fixed expenses, car expense and reinvestment expenses), while leaving out expenses we project to fall off at or before retirement (Social Security and Medicare income taxes, primary home mortgage and savings). We then divided this sum by your current income, resulting in a WRR of 61.4%. Social Security benefits are similar to retirement age, in that, it is advantageous to delay benefits until you need them. For our calculations, we assumed you will start taking Social Security benefits the same year you retire. However, this is not our recommendation. Given adequate cashflows, we recommend delaying claiming Social Security benefits until age 70 ½. This strategy maximizes monthly benefits. Based on our 16

18 Annual Retirement Spending $700, $600, $575, $500, $400, $300, $200, $162, $100, $ desire to provide a more conservative plan that maximizes your chance of successful retirement and minimizes the chance of our assumptions leading to a retirement savings deficit, we set Social Security benefits for Carl at age 67, and 64 for Naomi using the Social Security Agency s Quick Calculator. Life expectancy in the United States has continued to increase. For males born in the early 1970s, the average life expectancy is around 84 years old, and about 87 for females. That being said, those are averages, meaning 50% of the population will live longer than those estimates indicate. For that reason, the standard life expectancy used in financial planning is currently between 90 and 95 years old. For our calculations we utilized a life expectancy of 95 years old for Naomi, with no change in household spending based on Carl s life expectancy. This assumption provides a higher retirement needs total because it essentially assumes Carl s life expectancy is 98; we felt a more conservative approach was prudent until we take a more thorough look at your family health histories. Once we have gone over your family health history and retirement goals in more detail, we can use more specific numbers to provide a more detailed projection at our next meeting. For your projected rate of returns on investments, we used a two-stage approach. We assumed a balanced portfolio (50% stocks, 50% bonds) during your pre-retirement accumulation phase, and a defensive/income focused portfolio (20% stocks, 80% bonds) during retirement. This is, again, a more generalized approach to estimating portfolio returns, and a more personalized projection can be provided once we have analyzed your risk tolerance and discuss the portfolio management philosophy, and strategy with you. For now, we used the average returns for for diversified balanced and income focused portfolios (8.6% and 6.6% respectively according to Vanguard). When estimating inflation, we used the long-term US average of 3.22%. This is much higher than recent levels, but we chose to use a long-term approach to avoid recency bias. 17

19 Retirement Savings $5,000, $4,500, $4,000, $3,500, $3,000, $2,500, $2,000, $1,500, $1,000, $500, $- In addition to the above factors, we included the purchase of a cabin in the Blue Ridge mountains at retirement (current value of $300,000). Our research indicates $300,000 would be sufficient for a cabin similar to what you described at current market values, and we allowed for inflation during our calculation. As this was the only major goal associated with your retirement, we felt it was important to build it directly into our retirement planning projections. Needs Analysis Based on the previously mentioned factors, we project your financial need for the first year of retirement to be $187,215 for annual expenses, with an additional $583,663 for the purchase of the cabin. In order for support an expected 31 years in retirement, you will need a retirement savings of approximately $4,900,000 the year you retire. While this may seem daunting, given your current retirement savings of $793,483 and the projected rate of return on your retirement portfolio, you can achieve your goal by saving $14,640 annually. With your current cashflow, this is extremely feasible. Implementation Savings during Year Investment Growth Annual Withdrawal Year End Total Your household income is above the Roth IRA phaseout limits ($199,000 for 2018), so you can not directly contribute to your Roth accounts. Instead we recommend your annual retirement savings of $14,640 be split evenly between Carl s 401(k) and Naomi s 403(b). By including all of these savings in your qualified retirement accounts, we will be able to deduct the entire amount from your taxes. The specific asset allocation for all of your accounts will be discussed in more detail during the Investments. When you begin withdrawing funds from these accounts, you will need to pay income tax on the withdrawals but deferring the taxes until retirement results in significant savings in the current year, and based on current tax brackets, your retirement withdrawals will result in a lower tax bracket than your current one. 18

20 Investment Portfolio Before diving into the numbers and details, we would like to commend you on your efforts to secure your financial future by saving and investing. Your portfolio consists of a mix of mutual funds, bonds and individual stocks across a range of sectors. You have a mix of large and small cap stocks of both value and growth valuations encompassing US companies as well as foreign markets. Looking at your portfolio, it is clear you understand the need for diversification and have taken steps to do so. While analyzing your client data sheet, we noticed your Net Worth and Account Summary sheets did not match. As the account balances provided on your Net Worth sheet appeared more precise, while the Account Summary sheet appears to be rounded numbers, we used the Net Worth numbers as the actual account values on 12/31/2017. We used the Account Summary market values to represent the ratio of each asset held within each account. We then multiplied this ratio by the overall account value from the Net Worth sheet to determine the actual market value of each asset held on 12/31/2017. Using asset values from the close of trading on 12/31/2017, we then calculated the number of shares for each asset held. Overview At DLS Financial, our Investment Policy focuses on a long term buy and hold strategy utilizing index funds and ETFs to achieve a well-diversified portfolio while minimizing associated expenses. We understand that every client situation is different, and we custom tailor our portfolio management solutions to match your personal risk tolerance and time horizon for your savings and investment goals. Current Portfolio Analysis As of December 2017, your defined contribution accounts combine for $511,925, and your IRA and Roth accounts combine for an additional $281,558. This brings your total retirement savings to $793,483. Your Brokerage account is worth an additional $107,338. Your overall investment portfolio, as of December 31, 2017, was $900,821. Within the portfolio details you provided, we found several potential errors we identified: Three ticker symbols, FRC1Z, MDBSZ, COASZ were not recognized symbols. Using the mutual fund names provided, we replaced them with FRSGX, MDIXQ and COAVX respectively. The reported basis and current values for Thrivent Small Cap Class S, BlackRock International Investor A and Tesla need to be reviewed. We analyzed each based on the highest price they ever recorded and their value as of 12/31/2017 and found the reported losses to be mathematically impossible. For your Tesla stock, we calculated a reported loss of approximately 27%, but the worst-case scenario could only be a loss of 13.9% on 12/31/2017. The worst loss your Thrivent Small Cap Class S could have suffered would be 6.58%, compared to a reported loss of 8.99%. BlackRock International Investor A could only have lost 5.77%, compared to a reported 14.68%. Current Portfolio 19

21 As of 12/31/2017, your accounts include two Carl s IRA ($153,577), Carl s Roth IRA ($61,431), Naomi s Roth IRA ($66,550), Naomi s 403(b) ($204,770) and Carl s 401(k) ($307,155) for a total of $793,483 in qualified assets across 5 accounts. You also have a brokerage account with Charles Schwab of $107,338, a savings account of $30,281. You did not indicate where your annual cashflow surplus of $37, 597 resides, and we assumed it was held in a previously unmentioned checking account, because the value does not match any other account balances. Other 0.32% 401(k)/403(b) Cash 0.89% Bonds 29.46% Foreign Stock 20.05% US Stock 49.28% Cash US Stock Foreign Stock Bonds Other Your 401(k) and 403(b) contains 13 mutual funds, and 4 different bonds. When breaking down your portfolio based on assets held within the mutual funds, your asset allocation is 49% US stocks, 20% foreign stocks, 29% bonds and 1% cash. 20

22 IRA & Roth Other 2% Cash 1% Foreign Stock 26% US Stock 71% Cash US Stock Foreign Stock Bonds Other Your IRA and Roth accounts contain four mutual funds, and two individual stocks, with an overall asset allocation of 71% US stock, 26% Foreign stock, 1% cash and 2% other investments. This is an extremely aggressive allocation which will exhibit high volatility. Brokerage Account Foreign Stock 1% US Stock 99% Cash US Stock Foreign Stock Bonds Other Your brokerage account contains two mutual funds and five individual stocks. Your brokerage account is 99% US stocks and 1% Foreign stocks. This results in a very unbalanced account with poor diversification, and high volatility 21

23 . Overall, your portfolio appears diversified with a variety of stocks and mutual funds, however a significant number of your assets overlap. For example, Apple stock is included in five mutual funds, in addition to being held separately, making up 5.3% of your overall holdings. Other large, overlapping holdings include Amazon (3.7%), Tesla (3.2%), Paypal (2.2%), and Visa (1.6%). These overlaps result in these holdings being over-represented within the portfolio. Recommended Adjustments Our recommendation for asset allocation is based on a combination of your personal risk tolerance, and your risk capacity. To estimate your risk tolerance, we used the current asset allocation of your overall investment portfolio and considered the timeframe over which you have made these investments. Your current portfolio can be categorized as an aggressive growth model, where most of your assets are in stocks with the potential for higher volatility than bonds. Given that you started your investments just before the Great Recession and stuck to your commitment to invest heavily in the stock market, we assess you have a high tolerance for risk, with an understanding that volatility and higher chances of short term losses, provides greater opportunity for long-term growth. We used your time horizon for investing, measured by the number of working years until retirement, and your forms of employment to determine your capacity for risk. Both Carl s position as a law school professor and Naomi s position as an assistant principal should be very stable positions, especially if/when Carl is granted tenure. As such, the biggest risk to your income streams are death and disability, which we can account for utilizing difference risk management strategies. With most of the risk to income stream accounted for, we can treat your employment income similar to a long-term corporate bond, where your income equates to dividends. A stable income stream, combined with over 20 years until retirement provides you with a high capacity for risk. If something goes wrong, such as another recession in the market, you have adequate time for your portfolio to recover, either through a recovery of the markets, or changes to your financial plan. Once you have completed a risk tolerance survey, we will use it to adjust our recommendations accordingly. We highly recommend a general shift from mutual funds to broad based index ETFs where available. ETFs are similar to mutual funds in that they represent a collection of underlying stocks, however they have several advantages over mutual funds. The primary advantage you will see within your portfolio is a lower internal cost. Currently, your mutual fund expense ratios range from 0.30% (SFLNX) to 1.45 % (COAVX). ETF alternatives will have expense ratios closer to 0.04% (VOO). We also highly recommend moving away from holding individual stocks. It is difficult to maintain a properly balanced and diversified portfolio that includes a large quantity of individual stocks. It becomes too easy for a hand full of stocks to represent a disproportionate percentage of your portfolio, and thereby increase exposure to diversifiable risks. 22

24 401(k)/403(b) 30.00% 50.00% 20.00% Cash Equivelant US Stock Foreign Stock Bonds Other With this in mind, we recommend maintaining an aggressive growth model within your retirement portfolio with an asset allocation of 50% US Stocks, 20% Foreign Stock and 30% bonds across Carl s 401(k), Naomi s 403(b), both IRAs and both Roth IRA accounts. Specific asset recommendations are not appropriate at this time, until we have a more accurate risk tolerance assessment and details about investment availability within your 401(k) and 403(b). Brokerage Account Bonds 50% US Stock 40% Foreign Stock 10% US Stock Foreign Stock Bonds Within your brokerage account, we recommend a balanced asset allocation of 40% US stock, 10% Foreign stock and 50% bonds. We suggest a focus on a mix of long and short term federal and state bonds, due to the tax benefits associated with these investments. Dividends from federal and state bonds are exempt from their respective income taxes. In regards to stocks, again we recommend index ETFs as an efficient method of diversification with lower expense ratios than mutual funds. You are not currently relying on 23

25 your investment portfolio to generate a revenue stream, and the absence of dividend payouts from ETFs shields you from unnecessary taxable events. Tax Consequences Rebalancing your 401(k), 403(b), Roth IRA and Traditional IRA will not result in any tax implications. Rebalancing your brokerage account will result in substantial tax consequences. We can harvest your losses from your McKesson Corporation shares to offset some of the long-term capital gains realized by selling your other stock, but this will still constitute a large taxable event. With this in mind, we recommend the rebalancing of your brokerage account be done slowly over several years and can be accomplished by investing new savings into bonds. This will shift the asset allocation gradually, without having to sell of all of your current holdings and thereby realizing a large long-term capital gain in one year. 24

26 Estate Planning Estate planning is important for every individual no matter their net worth. It is about planning for risks, and the financial consequences of each possible risk and its outcome. These risks include untimely death, ill health, artificially sustaining life, inability to manage property, immaturity of heirs, and the application of state intestacy rules that may not be consistent with one s wishes. Estate planning allows individuals to ensure their property and assets are transferred to their loved ones either in life or at death, and provide sufficient liquidity for family members to pay for costs that arrive upon or around one s death, including funeral expenses and final medical costs. There are also many taxes and costs when transferring property and assets. Estate planning helps to minimize these taxes and costs as well as ensure an individual s wishes are carried out when they pass away. To begin the estate planning process, we need to collect the following detailed documents: Your current financial statements o Balance Sheet and Income Sheet We do have these statements; however, we need much more detail to properly begin your estate plan. We need a detailed list of assets and liabilities. For each asset, we need the fair market value, adjusted basis, expected growth rate, how title is being held, and the date acquired. Family information o We need information about each member of your family s health. Copies of medical, disability, and long-term care insurance policies. Copies of all current life insurance policies identifying the owner of each policy, the named insured, and the designated beneficiaries. Copies of annuity contracts Copies of wills and trusts Identification of powers of attorney and general powers of appointment Copies of all previously filed income tax, gift tax, and estate tax returns Identification of assets previously transferred to loved ones After we have each of these detailed documents, you will need to determine your transfer objectives. Common transfer objectives include the following: 1. The transfer of property in the way you desire, minimize estate and transfer taxes to maximize assets that will be received by heirs 2. Avoid the probate process 3. Use lifetime transfers (gifts) 4. Meet liquidity needs at death 5. Plan for children 6. Plan for the incapacity of the transferor 7. Provide the needs of the transferor s surviving spouse 8. Fulfill the transferor s charitable intentions 25

27 An estate plan requires a team of different professionals. This team includes an attorney, a Certified Public Accountant (CPA), a life insurance consultant, a trust officer, and a financial planner. The financial planner s role is to help integrate the work of the estate planning team to develop an overall estate plan, as well as help collect data, identify goals and objectives, analysis, and investment decisions. An attorney is required because of the many legal documents that will be drafted. A CPA is usually involved in order to help identify assets, calculate the related adjusted tax basis, and other tax issues. A life insurance agent is part of this team because they help assure liquidity at death, provide asset protection, and provide guidance as to the use of insurance policies so that the client s transfer objectives are fulfilled. A trust officer is involved when there is a trust in the estate plan. A trust officer manages the assets of a trust, if a client chooses to set one up. If you already have relationships with an attorney, CPA, life insurance consultant, and trust officer great! If not, we are more than happy to help you in making these connections, as they are vital to a successful estate plan. 26

28 Section Task/ Objective Parties Involved Action Target Completion Date Status Education Funding Open a CollegeAmerica 529 Plan for each child. Carl & Naomi; Advisor(s) Contact us to set up both 529s. June 30, 2018 Education Funding Contribute $15,907 to Sarah s 529. Carl & Naomi; Advisor(s) Speak with us to confirm annual contributions. December 31, 2018 December 31, 2028 Education Funding Contribute $21,059 to Matthew s 529. Carl & Naomi; Advisor(s) Speak with us to confirm annual contributions. December 31, 2018 December 31, 2025 Life Insurance Speak to HR Benefits Coordinators about benefits available through your employers and provide us with these details as well as your current coverage (if any). Carl & Naomi; HR Benefits Coordinator, Advisor(s) Collect all details necessary to proceed to the next step of purchasing coverage. June 1,2018 Disability Insurance Speak to HR Benefits Coordinators about benefits available through your employers and provide us with these details as well as your current coverage (if any). Carl & Naomi; HR Benefits Coordinator, Advisor(s) Collect all details necessary to proceed to the next step of purchasing coverage June 1, 2018 Carl, contact a representative at the Virginia State Bar for information on Disability Insurance offered there. 27

29 Estate Planning Provide us with each of the documents stated in the Estate Planning portion. Carl & Naomi; Advisor(s) Collect each document and send to us. June 15, 2018 Estate Planning Begin the Estate Planning process with us and the other advisors. Carl & Naomi; Advisor(s), CPA, Attorney, Life Insurance Agent If you already have relationships with each type of advisor listed great! If not, we are happy to help you in making these connections. June 30, 2018 Cash Flow & Debt Management Reduce unnecessary loan interest accrual Carl & Naomi Pay off credit card using 2017 surplus May 30, 2018 Retirement Plan Establish annual retirement savings Carl & Naomi Contact employer plan sponsor to establish annual withholdings for employer sponsored retirement plans at recommended level June 1, 2018 Retirement Plan Confirm plan assumptions Carl & Naomi; Advisor(s) Confirm or adjust plan assumptions to include target age of retirement, planned retirement expenses and goals Next meeting; Fall

30 Investment Portfolio Establish Advisor(s) access to investment accounts (IRAs, Roth, Brokerage). Carl & Naomi; Advisor(s) Complete documentation to provide Advisor(s) custodial access to investment portfolios (IRAs, Roth, Brokerage). Including Special Powers of Attorney to oversee investments. June 1, 2018 Investment Portfolio Establish Risk Tolerance Carl & Naomi Complete Risk Tolerance Questionnaire on June 1, 2018 Investment Portfolio Determine 401(k) and 403(b) asset allocation and specific holdings Advisor(s) Using information obtained from plan sponsors, determine specific holdings to rebalance employer sponsored retirement plans. Work with clients to implement reallocation. June 30, 2018 Investment Portfolio Provide details on 401(k) and 403(b) Carl & Naomi Contact employer plan sponsor. Provide Advisor(s) with specific break out of both 401(k) and 403(b) accounts, available June 1,

31 asset options within each account, employer matching. Investment Portfolio Rebalance Portfolios Advisor(s) Use Risk Tolerance scores to confirm appropriate asset allocation and implement investment strategy June 15,

32 Appendix A 31

33 Appendix B 32

34 Appendix C Property Residence $ 453, Portfolio Total $ 910, $ 1,384, $ 231, $ 275, % $ 281, IRA, SEPS, SIMPLE, ROTH GFAFX American Funds "The Growth Fund of America" $ 27, $ 30, % $ 30, $ $ 3, % CHCLX AB Discovery Growth Fund Class A $ 34, $ 60, % $ 61, $ $ 27, % TSCSX Thrivent Small Cap Stock Fund Class S $ 45, $ 40, % $ 40, $ $ (4,046.11) -8.99% NBQAX Nuveen International Growth Fund Class A $ 45, $ 70, % $ 71, $ $ 26, % AAPL Apple Inc. $ 38, $ 45, % $ 46, $ $ 8, % TSLA Tesla, Inc. $ 42, $ 30, % $ 30, $ $ (11,284.58) % $ 86, $ 105, % $ 107, Brokerage/Investment SFLNX Schwab Fundamental US Large Company Index $ 14, $ 18, % $ 18, $ $ 4, % TRBCX T. Rowe Price Blue Chip Growth Fund $ 14, $ 15, % $ 15, $ $ % PYPL PayPal Holdings, Inc. $ 12, $ 18, % $ 18, $ $ 6, % DAL Delta Airlines, Inc $ 10, $ 14, % $ 14, $ $ 4, % AMZN Amazon.com, Inc $ 10, $ 18, % $ 18, $ 1, $ 8, % MCK McKesson Corporation $ 18, $ 12, % $ 12, $ $ (5,732.80) % V Visa Inc. $ 8, $ 10, % $ 10, $ $ 2, % $ 500, % $ 511, (k) & 403(b) - Equity BIGRX American Century Income & Growth Fund $ 45, $ 55, % $ 56, $ $ 11, % PYEQX Pioneer Equity Income Fund Class Y $ 35, $ 40, % $ 40, $ $ 5, % LGILX Laudus US Large Cap Growth Fund $ 27, $ 30, % $ 30, $ $ 3, % PJFZX Prudential Jennison Growth Fund Class Z $ 23, $ 30, % $ 30, $ $ 7, % ARGFX Ariel Fund Investor Class $ 7, $ 10, % $ 10, $ $ 3, % SPVZX Prudential QMA Mid-Cap Value Fund Class Z $ 6, $ 10, % $ 10, $ $ 4, % TWHIX American Century Heritage Fund Investor Class $ 12, $ 10, % $ 10, $ $ (1,761.50) % FRC1Z (FRSGX?) Franklin Small-Mid Cap Growth Fund Class A $ 18, $ 20, % $ 20, $ $ 2, % FSCAX Nuveen Small Cap Value Fund Class A $ 10, $ 20, % $ 20, $ $ 10, % QUASX AB Small Cap Growth Portfolio Class A $ 27, $ 30, % $ 30, $ $ 3, % MDBSZ (MDIXQ?) BlackRock International Fund Investor A Shares $ 42, $ 35, % $ 35, $ $ (6,165.25) % COASZ (COAVX?) Columbia Overseas Value Fund Class A $ 34, $ 35, % $ 35, $ $ 1, % FNGAX Franklin International Growth Fund Class A $ 27, $ 25, % $ 25, $ $ (1,403.75) -5.20% US Gov Bonds $ 50, % $ 51, US Investment Grade Corp Bond $ 40, % $ 40, US High Yield Corp Bond $ 30, % $ 30, Emerging Foreign Bond $ 30, % $ 30, Savings/Checking Local Bank $ 30, $ 30, Account/Symbol Description Cost Basis Market Value % of Portfolio ActuaL 31 DEC 20Price per Share # of Shares Return Rate of Return 33