A Summary Report Mr. & Mrs. Client Prepared by: Mary T. Tacka, CRPC 8062 High Castle Road, Suite 202 Ellicott City, MD 21043 Securities & Investment Advisory Services offered thru H. Beck, Inc. Registered Investment Advisor, member FINRA/SIPC. is not an affiliate of H. Beck, Inc.
SYNOPSIS Jane has worked for her company since 1980. Recently, her company offered some of their senior employees an enhanced benefits package. Jane would like to know if she could retire early at age 54 with the benefits offered. She is accustomed to receiving $510/week after tax and wants to continue receiving this amount per week. Also, the Client s plan on purchasing a car in 2015. Her enhanced package from her company is lucrative and a decision needs to be made by June 16 th, 2010 (on whether or not she should accept the offer). Throughout the years, the Client s have done a great job keeping their expenses low and living within their means. Also, Jane has taken advantage of her 401k plan throughout the years and has also saved in other taxable accounts. PROFILE Jane and John are married and have 2 older children, Mary (age 28), and Michael (age 25). Jane John Current Ages: 54 2010 56 2010 Retirement Age: 54 2020 62 2016 Plan End Date: 95 2051 90 2044 OTHER ASSUMPTIONS Inflation = 3% Social Security increases at 2%/year John s salary does not increase Jane s last day at her company is around 7/1/2010. 1
GOAL ASSUMPTIONS 1) Retirement Expenses: Jane would like to retire now at age 54. John would like to work another 6 years and retire at age 62. Total living expenses are $3,500/month or $42,000/year. The Client s anticipate the same level of spending throughout retirement. In 2018, the home equity line of credit will be paid off, reducing their expenses by about $2,160/year. In 2019, the mortgage will be paid off, which will reduce Jane and John s expenses further by ~$11,530/year. If either Jane or John should pass, expenses are estimated at ~$25,200/year and assumes all liabilities are paid off. Retirement expenses are projected to increase at the rate of inflation, which is 3%. 2) Jane s additional income: The additional income amount was calculated to be $14,700/year. (The calculation is in the Cash Flow section of this report). The income will occur now through 2019, when she is age 63. No inflation was assumed on this amount. 3) Car purchase: Purchase a new car in 2015 for $20,000. (We pushed this to 2016, given that Jane will be over 59.5 and can tap her qualified accounts) No inflation was assumed. 4) Payoff principal of home equity line of credit: The principal of the equity line is due in 2018. The amount outstanding, which is ~$12,000, can be paid over 3 years to save in taxes - (years 2016, 2017, and 2018 at $4,000/year). Additional goals (to be discussed later): 5) Purchase a long term care policy for Jane 6) Purchase a long term care policy for John 7) Purchase a term policy for John for the next 10 years 2
Her company Enhanced Package Jane would receive the following payouts (pre-tax) if she accepts the package. o Vacation buy out: $4,600 o Bonus: $50,000 o EISP: $66,000 (she can receive either $66,000 over 4 years or 50% upfront and the other 50% over 4 years). o Pension: $438,126 Since her income is taxed at 33% at Her company, the values listed in the Net Worth statement below reflect after tax numbers. NET WORTH STATEMENT TAXABLE INVESTMENTS (Values are after tax) Current Investments Vacation Buy out Jane 3,082 Cash Value-Life insur Jane 3,920 Bonus Jane 33,500 401k AT Jane 39,128 Cash Value-Life insur John 3,065 Various Savings Joint 2,095 Various Checking Joint 2,610 87,400 Various Savings* Joint 11,900 QUALIFIED INVESTMENTS Current Investments 401k BT Jane 124,332 Pension Jane 438,126 IRA Var. Annuity John 52,175 Retirement Account John 4,550 619,183 OTHER ASSETS Home Joint 300,000 300,000 LIABILITIES Mortgage Joint (79,300) HEL Joint (11,865) (91,165) NET WORTH 915,418 Not used in calculation - used towards bathroom, fence, escrow 3
NET WORTH STATEMENT (con t) The funds in qualified and tax deferred investments need to be withdrawn after age 59.5; otherwise, a 10% penalty is incurred. Funds from taxable investments can be withdrawn at any time without penalty. As shown below, the majority of assets are in qualified accounts (~60%). The house accounts for 30% of the total asset value, and the taxable accounts comprise ~10% of the total. Jane and John need to maintain and monitor their spending from now until Jane turns age 59.5. In addition to John s net salary and the EISP income, they have ~$87,400 to pull from over ~5.5 years, when needed. Once Jane turns 59.5, accessing funds needed for goals will be much easier. 9% 30% TAXABLE INVESTMENTS QUALIFIED INVESTMENTS 61% OTHER ASSETS The EISP is included in the cash flow statement and the total of $66,000 is paid out over 4 years. Taking the payment over 4 years will provided better tax benefits, since the Client s income will increase this year, due to additional income from the bonus and vacation buy out. 4
INCOME STATEMENT First, we will look at current income from now (2 nd half of 2010) until 2015, when Jane turns age 59. Then, we will look at retirement income from 2016 (John s retirement) until age 95 for Jane. CURRENT INCOME John s net income is ~$30,176/year and ends in 2016. No growth is assumed on this income. The after tax EISP payment is ~$11,055/year for 4 years. For 2010, only the second half of the year is taken into consideration (since Jane may leave the beginning of July 2010). The income statement below show current income flows, expenses, and the amounts withdrawn from investments (this is not included in the financial plan). GAME PLAN FOR THE NEXT 5.5 YEARS Cash flow for Jane before age 59.5 54/56 55/57 56/58 57/59 58/60 59/61 2nd half 2010 2011 2012 2013 2014 2015 John's Salary (NET) 15,088 30,176 30,176 30,176 30,176 30,176 EISP (NET) 5,528 11,055 11,055 11,055 5,528 - Total Income 20,616 41,231 41,231 41,231 35,704 30,176 Expenses (21,000) (43,260) (44,558) (45,895) (47,272) (48,690) 3% inflation Term Insur-John (1,563) (1,563) (1,563) (1,563) (1,563) (1,563) for 10 years Jane's addt'l Income (7,358) (14,695) (14,695) (14,695) (14,695) (14,695) (29,921) (59,519) (60,816) (62,153) (63,530) (64,948) Additional Need: (9,306) (18,288) (19,585) (20,922) (27,827) (34,772) Taxable Assets 87,400 78,094 59,807 40,221 19,299 0 Remaining Assets 78,094 59,807 40,221 19,299 (8,528) (34,772) 5
INCOME STATEMENT CURRENT INCOME Once the taxable funds are depleted, then funds will be withdrawn from John s retirement plan, followed by Jane s retirement plan. The funds in the taxable account last until August 2014. The cash flow below shows 2014 and 2015 monthly figures. For 2014, John will need to withdraw $8,530 from his retirement account to supplement income. In 2015, John s withdrawal will be ~$25,000 and Jane s will be ~$8,300. 2014 Monthly Withdrawals Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec John's Salary (NET) 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 EISP (NET) 461 461 461 461 461 461 461 461 461 461 461 461 Total Income 2,975 2,975 2,975 2,975 2,975 2,975 2,975 2,975 2,975 2,975 2,975 2,975 Expenses (3,939) (3,939) (3,939) (3,939) (3,939) (3,939) (3,939) (3,939) (3,939) (3,939) (3,939) (3,939) Term Insur-John (130) (130) (130) (130) (130) (130) (130) (130) (130) (130) (130) (130) Jane's addt'l Income (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (5,294) (5,294) (5,294) (5,294) (5,294) (5,294) (5,294) (5,294) (5,294) (5,294) (5,294) (5,294) Additional Need: (2,319) (2,319) (2,319) (2,319) (2,319) (2,319) (2,319) (2,319) (2,319) (2,319) (2,319) (2,319) Taxable Assets 19,299 16,980 14,661 12,342 10,023 7,704 5,386 3,067 748 Remaining Assets 16,980 14,661 12,342 10,023 7,704 5,386 3,067 748 (1,571) (2,319) (2,319) (2,319) Withdraw-John's retirement acct TOTAL = (8,528) 6
INCOME STATEMENT CURRENT INCOME 2015 Monthly Withdrawals Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec John's Salary (NET) 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 Total Income 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 2,515 Expenses (4,057) (4,057) (4,057) (4,057) (4,057) (4,057) (4,057) (4,057) (4,057) (4,057) (4,057) (4,057) Jane's addt'l Income (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (1,225) (5,282) (5,282) (5,282) (5,282) (5,282) (5,282) (5,282) (5,282) (5,282) (5,282) (5,282) (5,282) Additional Need: (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) (2,767) Withdrawn from John's retirement account Withdrawal-Jane TOTAL = (24,907) TOTAL =(8,302) EXPENSE ANALYSIS The expenses listed were given by Jane. (Some of these expenses have been rounded). They spend ~$3,500/month, or $42,000/year. Once the mortgage and home equity line are paid off (both by 2019), the expenses will drop to ~$2,360/month or ~$28,310/year. The difference is ~$13,700/year! To figure out the additional income for Jane, the difference between John s net salary and the total expenses was first determined ($42,000 - $30,176 = $11,825, which is $227/week). Then, the $227/week was deducted from the $510/week to fund the additional goal amount ($283/week or ~$14,700/year. 7
EXPENSE ANALYSIS Monthly Expenses: LIABILITIES Mortgage 961 HEL 180 1,141 33% NON-DISCRETIONARY Utilities/BGE 285 Verizon 109 Cell Phone 61 Groceries 500 Gas (auto) 400 Water 50 Prop Taxes 140 Home Insur 41 Car Insur 80 Ground Rent 10 job keeping their expenses 1,676 under 48% control. DISCRETIONARY Church 170 Golf 115 Bowling 85 Restaurants 150 Other Misc. 163 683 20% Discretionary 20% Non Discretionary 48% Liabilities 32% TOTAL: 3,500 42,000 In analyzing Jane and John s expenses, the liability payments comprise about a third of their total spending. Non-discretionary expenses comprise ~50% of the total, and non-discretionary expenses are only 20% of the total. 8
INCOME STATEMENT FUTURE INCOME In 2016, John is age 62 and begins collecting Social Security benefits of $1,440/month or ~$17,300/year. When Jane collects her Social Security benefit in 2018, the amount is 1,465/month or $17,600/year. These benefits inflate by 2%/year. Jane s Jackson National variable annuity is anticipated to pay out $17,600/year, starting at her age 65 (and not growing at inflation). The cash flow for these years is located in the financial plan. The goals are considered to be the expenses. 9
ASSET ALLOCATION The Client s have a moderate risk tolerance and their investments will be invested in the following way: TAXABLE INVESTMENTS (Values are after tax) Current Investments Vacation Buy out Jane 3,082 Cash Value-Life insur Jane 3,920 Bonus Jane 33,500 401k AT Jane 39,128 All stay in cash equivalent investments Cash Value-Life insur John 3,065 Various Savings Joint 2,095 Various Checking Joint 2,610 87,400 QUALIFIED INVESTMENTS Current Investments Proposed Investments 401k BT Jane 124,332 Loring Ward SA Balanced Pension Jane 438,126 Jackson National Variable Annuity with 70/30-Freedom Rider 220,000 Manning/Napier conservative term mutual fund 109,000 Hanlon Balanced mutual fund 109,000 IRA Var. Annuity John 52,175 same Retirement Account John 4,550 same 619,183 Again, the Jackson National annuity will pay out $17,600 annually starting at Jane s age 65. The asset allocation is located in the report and the return used in the plan was 6.5%. After taking into account inflation, the real return is 3.5%. 10
PLAN RESULTS The plan results were analyzed using an average return scenario, bad timing scenario, and Monte Carlo analysis. o Average return assumes the same rate of return every year. o Bad timing assumes that their return on investment drops in 2010 (Jane s retirement year) and 2011. o The Monte Carlo analysis tests the plan with different returns, based upon the risk in the portfolio. GOAL REVIEW First, Jane wishes to retire early at 54 and John at 62. Jane would like to receive $510 after tax/week until 2019. The Client s would like to purchase a car in 2015. They need to pay off their Home Equity Line of Credit by 2018. It is recommended that both obtain long term care insurance. CURRENT SCENARIO The Client s should be able to reach all of their goals, even the goal of purchasing long term care policies. They should purchase the car a year later in 2016 and consider purchasing long term care insurance when Jane turns 60. Again, Jane can access the bulk of her funds after age 59.5. Before age 59.5, she and John need to monitor their spending since their taxable funds are limited. ADDITIONAL SCENARIOS ADDITIONAL EXPENSES Since the results were positive in the current scenario, Jane s additional weekly income was extended until age 95. Again, the Client s should have a successful outcome. 4% RETURN The plan was tested again keeping the additional weekly income to age 95 and assuming a rate of return of 4%. The real return after inflation is taken into account is 1%. The results still looked positive. NOTE: Your plan should be reviewed periodically, (at least annually), due to changes in the market, changes in your life, and income and expense changes. It s best to monitor your plan to ensure both of you are on track to continue to meet your goals. 11
RISK MANAGEMENT LIFE INSURANCE Currently, Jane receives $70,000 in life insurance from Her company, which decreases by 10% from age 66 through age 70. Her company also provides an additional $39,000 if she passes from an illness. In addition, she has an individual policy with a $100,000 death benefit. It does not appear that Jane needs life insurance at this time. This is based on the following: o Her final expenses are $15,000 o John s annual expenses are $25,200/year o He pays off their mortgage and home equity line o He continues to work until his age 62. In this case, John will inherit Jane s assets and he can continue to work at his employer. We recommend John obtain a 10 year term policy with a $130,000 death benefit. Jane will be able to afford her expenses in the event John passes, especially before 2019. If this happens, she will not have his income to help with expenses and she will still have the liability payments. It is not necessary for him to keep his permanent policy, since the risk of running out of funds only exists for the next 10 years. In addition, the premium is lower at $1,563/year compared to ~$2,244/year. A separate analysis was completed with Jane living alone. Before age 59.5, she would have to eliminate her additional weekly spending amount. After age 59.5, she may be able to resume this goal; however, the amount she spends weekly will depend on market performance of her investments as well as the length of time she will take this withdrawal. This goal will need to be monitored at least yearly. The analysis assumes the following: o Paying final expenses of $15,000 (for John) o Her annual expenses are $25,200/year o She pays off all liabilities o She does not take additional weekly income until she s 59.5. 12
JANE ALONE FROM 2010-2015 Taxable Investments Current After Tax Value: 87,400 Death Benefit-John 40,000 after liabilities are paid off (~$90,000) TOTAL: 127,400 CASH FLOW: JANE ALONE 54 55 56 57 58 59 2nd half 2010 2011 2012 2013 2014 2015 John's Salary (NET) - - - - - - EFIP (NET) 5,528 11,055 11,055 11,055 5,528 - Total Income 5,528 11,055 11,055 11,055 5,528 - Expenses (12,602) (25,961) (26,740) (27,542) (28,368) (29,219) Term Insur-John 0 0 0 0 0 0 Jane's addt'l Income 0 0 0 0 0 0 (12,602) (25,961) (26,740) (27,542) (28,368) (29,219) Additional Need: (7,075) (14,906) (15,685) (16,487) (22,841) (29,219) Taxable Assets 127,400 120,325 105,419 89,734 73,247 50,407 Remaining Assets 120,325 105,419 89,734 73,247 50,407 21,187 13
Jane's Expenses Monthly Expenses: Original Now LIABILITIES Mortgage 961 - HEL 180-1,141 - NON-DISCRETIONARY Utilities/BGE 285 285 Verizon 109 109 Cell Phone 61 61 Groceries 500 400 Gas (auto) 400 300 Water 50 50 Prop Taxes 140 140 Home Insur 41 41 Car Insur 80 80 Ground Rent 10 10 1,676 1,476 DISCRETIONARY Church 170 170 Golf 115 115 Bowling 85 85 Restaurants 150 120 Other Misc. 163 134 683 624 TOTAL: 3,500 2,100 14
RISK MANAGEMENT DISABILITY INSURANCE John has short term disability insurance through his employer, which pays 60% of weekly earnings to a maximum benefit of $600/week for 24 weeks. The elimination period is short at 14 days. John does not have long term disability insurance. Even if he purchases a policy, the maximum a policy usually pays is 60% of his salary (~$24,000/year). The benefit would cover roughly half of their expenses. If John should become disabled, then Jane will need to take job to make up for John s income (until 2016). Also, her salary would have to reflect John s current salary; otherwise, a 72t distribution from Jane s accounts would have to supplement their income. LONG TERM CARE INSURANCE Both should seriously consider obtaining long term care coverage when Jane turns 60. Long term care costs increase by 5% - 6%/year and the likelihood of needing this insurance is very high. Long term care costs are expensive and they can quickly erode your assets. A quote was obtained for Jane (age 60) and John (age 62) in today s dollars. These amounts were inflated by 3% until 2016, so the premiums are different from the original quote. The quote for both assumes a $150/day benefit growing at 5% per year. The benefit is for 3 years and the elimination period is 90 days. The analysis in the report assumes Jane would need care, starting at age 92 and going to age 94 (3 years) and John needing care at age 87 and going to age 89. Also, the report assumes home health care at 8 hours/day and uses Maryland s current costs. Certain costs were eliminated, such as recreational activities, restaurants, etc. With the policy helping to pay for costs, Jane would have to take ~$70k from her assets as opposed to a total cost of ~$1.1MM. In John s case, he would have to take ~$50,000 from the portfolio to pay for additional costs over the 3 year time period. The total cost of care for his 3 years is ~$800,000. 15
ESTATE PLANNING Jane and John need to have wills drafted. A will allows you to determine who will receive your assets, should you pass. Otherwise, the state will determine distribution of assets. Jane and John should obtain an Advanced Health Care Directive (which consists of a Living Will and a Durable Power of Attorney for Health Care). o A living will (or directive to physicians) is a statement, written by you, determining your health care wishes should you become seriously ill and unable to communicate. A Durable Power of Attorney for Health Care (or Health Care Proxy) appoints someone to make health care decisions on your behalf if you are incapable. Both also need to obtain a Durable Power of Attorney o A Durable Power of Attorney determines who should be responsible for making decisions, regarding your estate, on your behalf. You will need to determine the decision making authority of this person (limited vs. general powers). As a result, the person you choose can manage your estate, should you become incapacitated and cannot manage things yourself. 16
NEXT STEPS 1) The enhanced package seems lucrative and the benefits should allow Jane to retire at 54 (and John at age 62). Again, Jane needs to be comfortable with the idea that she may have to go back to work until 2016 (or 2019), should John become disabled or should he pass unexpectedly. Also, Jane should take the EISP payment over 4 years because of tax savings. 2) Jane and John need to continually monitor their spending, (especially now until Jane turns 59.5), since taxable assets need to be stretched over 5.5 years. 3) In 2011, John should change his W-4 with his employer to reflect married instead of single. He can still claim the 0 deduction. This should save about $100/paycheck. Realize that you may not get a refund for 2011 and beyond. (In 2010, it s better to leave the withholding as is, since Jane will be receiving additional income). The income in 2011 should be significantly lower. 4) Jane needs to roll over her pre tax 401k into an IRA as well as her lump sum pension amount into a separate IRA. 5) Both should continue paying off their mortgage, based upon the amortization schedule. 6) The principal of the home equity line of credit should be paid off, starting in 2016 through 2018 (at a steady $4,000/year). 7) Both Jane and John should consider individual long term care policies in 2016 to avoid a depletion in assets for these costs. 8) Both need to see an estate planning attorney to draft wills. Also, both should have an Advanced Health Care Directive and a Durable Power of Attorney drafted. 9) Both should ensure that beneficiary and contingent beneficiary information is updated on investment accounts. 10) A Transfer on Death form should be filled out for bank accounts and on nonqualified brokerage accounts. 17
PLEASE NOTE The purpose of this plan is to help you make decisions as well as give you an outlook on your future, based upon your current situation and the information given to us at the present time. Please be advised that this is a model only. Results and recommendations are based upon the information you have provided as well as the assumptions listed in the report. Financial plans are hypothetical and do not predict actual results, since the future cannot be predicted with certainty. (It may be possible that these differences may be significant). Please remember that investment performance is not guaranteed. This plan does not indicate the future performance of investments, which will fluctuate over time and may lose value. Since this plan does not constitute legal, accounting, or tax advice, please consult with professionals in those areas for more specific advice. In addition, no recommendations have been made with regards to property and liability insurance policies (i.e. auto, homeowners). Please consult with your property and liability agent to ensure your current coverage meets your needs. Your financial plan and portfolio should be reviewed annually to make sure that decisions and conclusions made continue to be suitable to your needs, especially since life situations change and changes in your assets, income, and expenses can affect the scenario(s). 18