comprehensive financial plan

Comprehensive Financial Plan

Table of Contents

Introduction- 2

Engagement Letter- 3

Client Goals- 5

Executive Summary- 6

Net Worth- 8

Cash Flow- 10

Budget Analysis- 12

Investment Recommendations- 14

Retirement Recommendations- 16

Insurance Recommendations- 25

Education Planning- 34

Tax Planning- 39

Estate Planning- 42

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Introduction

It has been a pleasure building a relationship with you and learning about the aspects of life that are most important to you. Enclosed here is your personal comprehensive financial plan prepared exclusively for you based on the information you have provided through our

conversations and data gathering sessions. As I have become familiar with your current financial situation, risk tolerance, and future financial aspirations, I truly believe we have set attainable financial goals together. It’s going to take dedication to turn these changes into

reality and make them habitual, but the benefits will be truly worth your while.

Implementation is the key to realizing the value of this plan. The plan is designed to work best when all of its units are functioning together, as many of the finances are

interrelated. It will be imperative to use this synergy to your advantage by treating each change as important as the next.

You have the choice to be in ultimate control of your assets and execute this plan if you feel comfortable doing so. I will always be available to guide you and manage your assets if necessary, and I hope to be in regular contact with you as time passes to track your progress

and analyze how your finances are aligning with the goals you set forth for yourself. By regularly reviewing and updating the plan, the likelihood of achieving the desired results is

greatly enhanced. I see a successful financial future for you and am happy to be such an integral part of the process.

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Engagement Letter & Contract Terms

The purpose of this section is to formally reveal the details of our engagement and walk you through the steps of the process. To be as specific as possible, the following will break down our ensuing relationship step by step. These steps can be time consuming, but I will do everything I can to help you avoid feeling overwhelmed by the process:

Reviewing and prioritizing your goals and objectives Developing a summary of your current financial situation, including a net worth

statement, cash flow summary, budget and income tax analysis Reviewing current investment portfolio and developing an asset management strategy Developing a financial management strategy, including financial projections and analysis Assessing exposure to financial risk and developing a risk management plan Completing a retirement planning assessment, including financial projections of assets

required at estimated retirement date Assessing estate net worth and liquidity and the development of an estate plan to

ensure estate planning objectives are met Identifying tax planning strategies to optimize financial position Integrating and prioritizing all strategies outlined above into a comprehensive financial

plan Managing the implementation and monitoring the performance of the financial plan On-going review and assessment of assumptions incorporated into financial plan given

changes in economic, political and regulatory environment

The following will review further fees and disclaimers that I would like you to review before signing into this contract:

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My engagement fee is $3,000 for a comprehensive financial plan. Payment terms include $1,500 payable upon acceptance of this engagement and with

the balance due upon presentation of the comprehensive financial plan. The results presented in this financial plan are not predictions of actual results. Actual

results may vary to a material degree due to external factors beyond the scope and control of this financial plan. Historical data is used to produce future assumptions used in the financial plan, such as rates of return. Past performance is not a guarantee or predictor of future performance.

Recommended portfolio construction and the subsequent market transactions are based on your personal/investor profile, your goals, and market conditions at the date of plan publication

This plan is not to be construed as offering legal or tax advice. You are encouraged to discuss this plan and its findings with your attorney, accountant and insurance broker.

The evaluation and hiring of these practitioners is your responsibility, and I make no representations or warranties of the quality or appropriateness of anyone’s work but my own

If you wish to terminate this engagement at any time, please notify me in writing and I will take care of your request immediately.

I look forward to working with you and helping you reach your financial planning goals. By signing below, you are agreeing to the terms and conditions of the contract and officially beginning your journey to financial well-being:

____________________________________________

Signature

__________________________

Date

Clients Goals4 | P a g e


Here is a list of some of the aspects that you expressed as being the most important in your life. These goals, along with a plethora of other objectives are going to be addressed throughout

this plan

Short-Term goals:

Establish cash saving habits to accumulate a larger amount in savings account, including refinancing your mortgage

Create an estate focusing on allocating assets to beneficiaries and tax savings

Start an education fund that will have enough accumulated money to fund your son’s education without the burden of taking out a loan

Long-Term goals:

Retire at age 65 and maintain a level of income to support your financial needs and lifestyle

Optimize the performance and allocations of investments in your 401(k)

Continue to have enough income to make contributions to charity yearly

Increase your death benefit in order to leave a larger family legacy

Executive Summary

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• Personal Profile: using our Personal Profile questionnaire, which was designed to determine your risk tolerance and investing knowledge, your results show:

Risk tolerance: Moderately Aggressive

Knowledge of investing: Average

• Budget: Your current financial statement shows annual gross income of $117,000 and annual expenses of $87,801. Right now, your current income exceeds your expenses. There have been many adjustments made within your budget, with the goal of keeping your savings at a healthy surplus. The most significant change made to your expenses was in refinancing your mortgage, which is going to save you an impressive $1,182. You are currently saving 25% of your current cash inflow, which we would like to increase to at least 30% if possible.

• Children’s education: You do not currently have any educations savings for your son, so it is going to be vital to get this savings started since your son will be beginning community college in 2 years. By my estimates, it is going to cost you a total of over $52,000 to send him to community college for 2 years and a 2 year state school for 2 years. This can be achieved by funding this account with a yearly sum of $5,756.

• Insurance: You have told us that you are worried about risk and risk management. We are recommending that Dan increase his term life insurance coverage to $850,000, and Katrina obtain term life insurance in the amount of $450,000. For tax reasons, we recommend both policies be owned by irrevocable life insurance trusts with “crummy” clauses. We also recommend changes to your auto, and homeowners policies to minimize premium costs while maximizing coverage. In addition, we recommend that you obtain an umbrella policy in the amount of $2,000,000 for better liability coverage. We are recommending that Dan obtain long-term disability insurance which will pay $3,000 per month in the event he is disabled.

• Investments: You currently don’t have any outstanding investments in the securities market and the money in your savings account is not adequate enough to start worrying about creating

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an investment portfolio. I have made suggestions, however, to efficiently allocate the funds in your 401(k) plan to increase the return on those funds for your future. My suggested allocations to your 401(k) plan will increase your expected retirement income from $61,000 to $75,000. A satisfactory level of retirement income based on your current income would be $81,900. The difference can be made up by contributing an extra $2,982 annually to your 401(k).

• Taxes: You have suggested that your taxes are currently being handled by a tax professional and that you are content with your current tax liability. Suggestions that I have made for you in other section are going to reduce your taxable income, including making larger yearly contributions to your 401(k) plan and making gift contributions to fund your son’s college education. It might also be of value to consider moving your life insurance death benefit into a beneficiaries name so it is not accounted for in your gross estate.

• Estate Planning: Establishment of your estate documentation is critical. I recommend establishing a living trust so that you can pass your assets to your choice of beneficiaries immediately following your death, while avoiding probate. In addition, establishing a will is vital to protect the remaining assets that are left outside of the living trust. It is a huge benefit to ensure your current and future assets are distributed in the manner that you desire. Lastly, I recommend that you grant your son as the power of attorney and as the beneficiary of your 401(k) plan and lie insurance death benefit. This will save money in form of future asset transferring costs and it will decrease your gross estate, which could save tax liabilities down the road

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Net WorthA statement of net worth provides an overview of an individual's current financial situation. In

this report, the Assets section represents what you currently own, stated at market values. The Liabilities section illustrates your current debt balances. The net worth section shows the approximate

amount that would be left if you sold all your assets and paid off your debts, representing a good estimate of your current wealth. One of the main objectives of financial planning is to increase your net worth through a variety of strategies. The following is a list of the assets and liabilities that are included

in determining your net worth:

Assets Liabilities

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I. Liquid Assets

I. Short-Term

Cash & Checking Accounts $15,000 Current Bills $0

Savings Accounts $5,000 Credit Cards $1,000Money Market

Funds $0.00Installment Loans $0

TOTAL $20,000.00 TOTAL $1,000II. Investment

AssetsII. Long-

TermA. Short Term CD's $0 Mortgage $375,000

Treasury Bills $0 Loans $4,956.54

B. Long Term401(k) Taxes (28%) $81,989.32

Life Insurance Death Benefit $425,000 TOTAL $379,957

Retirement401(k) Contribution

Plan $292,819

EquityCommon/Preferred

Stock $0

Mutual Funds/ Stock $0TOTAL

LIABILITIES ($380,957)IRA Stock $0

Profit Sharing Stock $0Debt Muni Bonds $0

IRA-Bonds $0

NET WORTH

$1,046,862.46

Profit Sharing Bonds $0CD's Long-Term $0

TOTAL $717,819III. Personal

AssetsResidence/Vacation

Home $500,000Automobiles $175,000

Personal Property $10,000Other $5,000

TOTAL $690,000

TOTAL ASSETS$1,427,819.0

0

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Cash FlowsA cash flow statement, summarizes an individual's financial activity over a given period of time.

The cash flow statement in this report tracks your income (cash inflows) and uses of cash (cash outflows) during the current year. The difference between the income you receive and the cash you use is your net cash flow. If there is a positive value for your net yearly cash flow, it means that you are able to

accumulate savings each year, while alternatively if you are spending more than you’re earning, you will not be able to save and invest towards benefitting your future as efficiently and you will have less of a

safety net should crisis ever rear its nasty face. The following is a breakdown of your current cash flows:

Inflow Outflow

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Income Sources Fixed ExpensesSalary $117,000Self-employment $0 A. Family NeedsDividend/Interest $0 Foods $8,400Capital Gains $0 Clothing $500Rents/annuities/Pensions $0 Transportation $5,760Bonus $0 Other $0Alimony Child Support $0 TOTAL $14,660

TOTAL $117,000 B. HomeMortgage $33,600Insurance $750Utilities $4,500

INFLOW TOTAL $117,000 Other $3,780OUTFLOW TOTAL $87,801 TOTAL $42,630

SAVINGS $29,199 C. InsuranceLife $720Disability $0Health $0Auto $2,160Liability $0

TOTAL $2,880D. OtherLoans $1,576

TOTAL $1,576

Flexible Expenses

Taxes $7,414Vacation $500Entertainment $3,000Gifts $9,385Tuition $5,756

TOTAL $26,055

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BudgetYour budget is based on realistic estimations of your earnings coupled with your past

spending and saving habits. Your budget is a dynamic document designed to be flexible. Deviations may occur due to need changes, accidents, and other unexpected events. The goal is

to provide you with guidelines to incorporate into your financial behavior.

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Current and Projected Budget

Expenses current per year projected per year current per month projected per month

mortgage $ 35,148.00 $ 20,964.00 $ 2,929.00 $ 1,747.00taxes $ 4,991.00 $ 4,991.00 $ 415.92 $ 415.92insurance $ 2,880.00 $ 5,370.00 $ 240.00 $ 447.50entertainment $ 3,000.00 $ 2,500.00 $ 250.00 $ 208.33contributions $ 8,487.00 $ 11,469.00 $ 707.25 $ 955.75gifts $ 9,385.00 $ 14,000.00 $ 782.08 $ 1,166.67education $ 5,756.00 $ - $ 479.67 $ -loans $ 1,576.00 $ 1,576.00 $ 131.33 $ 131.33

Totals: $ 71,223.00 $ 60,870.00 $ 5,935.25 $ 5,072.50

Overall, the new projected budget should save you an annual amount of $10,353. The majority of this savings is going to be the result of refinancing your mortgage, which it going to save you $1,182 a month on its own. Some of your expenses are going to increase, such as

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annual contributions to your 401(k) plan and insurance costs, but these increases in expenditures are going to benefit other aspects of your finances, as you will learn upon reviewing your plan.

The most important aspect of your new budget is that you are projected to be saving a considerable amount more each year. This will allow you to save up and create an emergency fund in case something of a dire nature should ever occur, and in addition you will be able to accumulate enough money to start investing in stocks and bonds to build a larger future income.

Below is a breakdown of exactly how refinancing your mortgage is going to save you a great deal of money:

MONTHLY SAVINGS $1,182 /mo

NEW PAYMENT $1,747

BREAK EVEN 6 months

COSTS $6,000

LIFETIME SAVINGS $67,913

Investment Recommendations

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Constructing an efficient portfolio by making sound investments in financial securities can be one of the most rewarding aspects of a financial plan. Investment is simply the commitment of a given sum of money today with expectations for receiving a larger sum in the future. There are a wide variety of investment products in which this can be done, including bonds, stocks, mutual funds, and REITS, each with varying levels of risk and return.

The questionnaire in the data gathering packet was used as a tool to gauge which investments would be best suited for your level of risk tolerance based on your responses. The survey suggests that you share the same investment philosophy as a moderately aggressive investor. Investors with this type of approach typically hold 60-70% stocks in their long-run portfolios, as reflected on the scale below:

Conservative > Moderately Conservative > Moderately Aggressive > Aggressive > Very Aggressive

40-50% stocks 50-60% stocks 60-70% stocks 70-80% stocks 80-90% stocks

You are currently reaping no benefits from such investing because you have yet to create a portfolio. Although you currently have a savings balance that is too low to start investing immediately, the new budget introduced earlier in the plan should allow you to accumulate enough savings over time to create a portfolio before retirement. I would suggest that you begin investing once you have at least $50,000 combined in your bank accounts. Assuring that you have enough excess money to make a yearly gift as a contribution to your son’s 529 account and to make larger contributions to your 401(k) plan should be a larger priority for you in the short run.

You do not have an adequate amount of money in your savings account for you to begin investing in stocks and bonds. The amount of money that you will be accumulating in your savings account is going to be allocated towards Dillon’s 529 education savings plan and towards other current expenditures. Assuring that you have enough money to make mortgage payments stress free and take care of any other life expenditures also needs to be a 100% guarantee before I advise you to start buying securities.

Down the road, once you have reached a financially comfortable situation in life, I suggest taking the same investing approach that was recommended to you for the allocation of the funds in your 401(k) employer contribution plan. As a recap, I suggested that the 401(k) funds be invested as so:

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Cash- 4%

Bonds- 27%

Stocks- 69% (large-cap stocks- 35%, mid-small cap stocks- 8%, international stocks- 26%)

Other- 0%

This follows your moderately aggressive investment philosophy as measured by percentage of allocations and boasts an expected rate of return on the portfolio of 8.17%. Although 69% in stocks seems like a steep percentage, the risk is slightly alleviated by the portion of large-cap stocks, because these are more established corporations that operate with less overall risk. This is also about as risky as you would want to make your portfolio given that most portfolios begin as risky when individuals are younger and decrease their level of risk as individuals near retirement. At this point in your life, you want to guarantee yourself a level of return rather than invest this money where it might lose value.

When considering which stocks to invest in, there are various other details that must be considered before making a decision. For example, you have the choice to buy several individual large-cap stocks, or you can buy a mutual fund comprised of a bundle of several large-cap stocks. The following displays some vague suggestions as to which investments I think would be beneficial for you:

Municipal bonds

Interest paid on municipal bonds is exempt from both federal and local income taxes within the state of issue

They tend to have a lower default rate than standard bonds

Mutual funds in stocks

Helps to diversify the portfolio by spreading out risk The fund’s manager, supported by a staff of investment analysts,

manages the investment portfolio

Retirement Analysis

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The purpose of retirement planning is to determine the level of funding needed to help meet your retirement goals and identify the actions you will need to take to achieve that level of funding. In this report, your retirement plan is analyzed before and after making adjustments to see how reallocating resources and changing certain saving/funding habits could boost your annual retirement income. Below is a table presenting several important details that go into the calculations for determining your retirement needs:

Retirement Details

Current Age 55Years to Retirement 10

Retirement Age 65Years of Retirement 30

Ending Retirement Age 95

A good retirement plan will address the following questions and objectives:

What would my spendable income during retirement be if I maintain my current patterns of income, spending, and saving?

How much would I have to save annually in order to achieve my annual retirement spending objective?

How will varying the assumed rates of return on my assets affect the results of the analysis?

What can I do to facilitate more rapid growth of wealth?

Help you set attainable spending goals for retirement

Illustrate the impact of changing your current spending and saving patterns

Help you utilize planning concepts that not only increase your retirement income but also do so by taking advantage of tax deferral and tax reduction.

Retirement Planning Process

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The suggestions I present to you regarding your retirement planning are based on calculations following these steps:

1. First, a more efficient portfolio was generated that would be better fitted for your 401(k) to be invested in

2. This produces a higher level of expected retirement income for you, however there is still a gap between expected and desired retirement income

3. This gap must be made up either by saving a specified amount of money or contributing more monthly funds to your retirement plan.

4. The type of retirement plan is the key indicator in deciding between methods of accumulating future money

Your current 401(k) contribution plan has an accumulated of over $292,000 invested in stocks, bonds, and the money market. The red flag that was the quickest to catch my attention was the large percentage of the 401(k) that is invested in the money market, a portion that is contributing very minimally toward your projected retirement income.

Here is a snapshot of your current allocation of contributed retirement funds, along with a tailored suggestion that I have formulated to help meet your financial goals. You will be able to get a visualization of how this new asset allocation will increase the yearly return on your retirement portfolio:

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$86,124.60

$155,024.28

$43,062.30 $2,870.82

Current

Cash Large-Cap Stocks Mid/Small Cap Stocks Individual Equities

Current Portfolio Distribution Expected Rate of ReturnWeighted Rate of

Return

Cash 30% 1.00% 0.30%

Bonds 0% 7.00% 0%

Large-Cap Stocks 54% 9.00% 4.86%

Mid/Small Cap Stocks 15% 11.00% 1.65%

International Stocks 0% 8.50% 0.00%

Individual Equities 1% 10.00% 0.10%

Portfolio Expected rate of return 6.91%

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$11,483.28

$77,512.14

$100,478.70

$22,966.56

$74,641.32

Suggested

Cash Bonds Large-Cap Stocks Mid/Small Cap Stocks International Stocks

Suggested Portfolio Distribution Expected Rate of Return

Weighted Rate of Return

Cash 4% 1.00% 0.04%

Bonds 27% 7.00% 1.89%

Large-Cap Stocks 35% 9.00% 3.15%

Mid/Small Cap Stocks 8% 11.00% 0.88%

International Stocks 26% 8.50% 2.21%

Individual Equities 0% 10.00% 0.00%Portfolio Expected rate of return 8.17%

The investments in the current portfolio are not well enough diversified and return could be improved by reallocating funds among different asset classes. The plan I have

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formulated will help to efficiently diversify your portfolio by spreading out your funds to a wider variety of asset classes that earn an attractive return relative to their level of risk.

You currently have 30% of your portfolio dedicated to cash and have nothing allocated to bonds. A smart consideration would be to allocate the cash you have in your portfolio more efficiently towards investment grade bonds, as you would be earning a yearly return of around 7.00% rather than a lousy 1.00% from keeping these funds in the money market. This strategy could be a key factor in helping to finance your future needs.

When combining large, medium, small, and international stocks, your portfolio consists of 69% stocks overall. Large cap stocks are those of big, often well-known corporations. Small caps lack the same kind of name recognition, but often offer greater potential for investment gains. Given that you would like to be positioned as a moderately aggressive investor, this is a satisfactory amount of equity for you to be holding, but it would be effective to allocate more of your overall stock funds towards small cap stocks that earn a higher return.

The current return of 6.91% is a decent return, but the new suggested allocation would earn a return of 8.17%, which will make a huge difference down the road. The allocation suggestion is slightly riskier than average of those with 9 years left until retirement, however in our first meeting you said you were comfortable with allocating a high percentage of investment funds in stock.

It is recommended that you earn 70% of your current income once you reach retirement, which is equal to $81,900. Given the mix of assets that your 401(k) plan is currently invested in, calculations suggest that there will be a considerable gap between the annual income you will be making in retirement and the amount you should be earning to retire comfortably.

Currently, your annual retirement income from your 401(k) plan would be $61,400 if it remains invested in the same securities. The portfolio that I have suggested for you will increase your retirement income to $75,000, and thus the remaining gap will have to be accounted for through other means.

As a general rule of thumb, it is recommended that you still accumulate about 80% of your annual income once you are retired. Your annual retirement spending goal has been established at $81,900 which is 80% of the $117,000 you are currently earning. This value will allow you to live comfortably without changing your lifestyle or giving up hobbies, because by nature your expenditures are likely to be reduced once you become a retiree.

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The chart below takes into consideration your desired retirement income, your expected social security income, your projected 401(k) income, years until retirement, and by using specified inflation and growth factors evaluates how much annual income you are going to need to accumulate for retirement through other sources. From this analysis, there shows to be a $9,903 shortfall in retirement income that will need to be accounted for using a mix of strategies.

Annual Retirement Income Surplus/Shortfall

Current Annual Income $117,000

% of Preretirement Income Needed for Retirement 70%

Ideal Retirement Income $81,900

Minus Social Security ($25,500)

Remaining Needed Income $56,400

Inflation Factor (assume 10 years until retirement) 1.48

Inflated Remaining Income $83,472.00

Minus Projected Income from 401(k) ($75,000)

Estimate of Retirement Income Needed $18,472.00

Savings Necessary to Produce Needed Income $277,080.00

Value of Current Assets $20,000

Growth Factor 1.97

Estimated Future Value of Current Assets $28,212.00

Total Amount Needed $248,868.00

Annual Shortfall $9,903.22

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Making the assumptions that you will live an additional 30 years once you have reached retirement and an inflation rate of 3.5%, calculations indicate the following: you are going to need an additional total retirement lump sum of $182,136 to meet the satisfactory level of retirement income, given that your current annual shortfall is $9,903, as shown below:

Lump Sum Retirement Need

PMT $9,903

FV $0

I 3.5%

N 30 years

PV $182,136

Next we take a look at the current savings in your bank accounts to see how much it will grow by the time you have reached your specified retirement age. Assuming that the $20,000 in your bank accounts will grow for 10 years at an interest rate of 3.5%, the future value of your current savings is projected to be $28,212.

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Value of Current Savings at Retirement

PV $20,000

PMT $0

i 3.5%

n 10 years

FV $28,212

The next step shows that subtracting the future value of your current savings from the total lump sum needed, as calculated above, you are left with your overall savings shortfall. After finding the total savings shortfall, it can be calculated how much you are going to need to save annually to make up for your retirement income shortfall, which comes out to $2,982. This is not such a daunting number when considering it this way: you only need to save $248.50 a month extra for the next 10 years to assure yourself a well-funded retirement.

Annual Savings Suggested for Retirement

Annual income needed from personal savings $9,903Lump sum requirement need (current $)

n=30 years, I=3.5, PV=?, PMT=$9,903, FV=0 $182,136Current Personal Savings $20,000

Value of Current Savings at Retirementn=10 years, I=3, PV=$20,000, PMT=0, FV=? $28,212

Savings Shortfall $153,924Annual Savings required for retirement

$2,982.00n=30 years, I=3.5, PV=0, PMT=?, FV=$153,924

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This extra $248.50 needed per month to satisfy your retirement income needs would be most efficiently accomplished by increased monthly contributions to your 401(k). This method of clearing the gap between expected retirement income and desired retirement income has some major advantages that should not be overlooked.

Firstly, your employer has either met or come close to meeting the annual contributions that you have made to this account, which portrays the dual benefit you would receive from the addition of the combined increased contributions.

Secondly, a 401(k) contribution is before taxes, so you don’t have to pay income tax when you contribute money, just when you withdraw it.

Let’s say for example, that hypothetically, you are able to contribute an extra $248.50 a month, equivalent to $62 a week, to your 401(k). Your employer matches this increase and your monthly contributions suddenly increase by about $497 a month, which is $5,964 a year.

The following is a chart representing the differences in the future value of the 401(k) under different circumstances. $2,956,192 is the future value of your 401(k)’s assets given no changes and $4,769,250 is after the recommendations that were explained take effect. This is a very significant increase and translates to an increase in retirement income from $61,400 to at least $81,900, dependent on the level that your employer increases contributions to your 401(k). The forecast in the chart below assumes that your employer will match you dollar for dollar for every dollar of increased contribution:

Accumulated Future Value of 401(k) Comparisons

Current 401(k) Reallocated 401(k) Reallocated 401(k) & Increased Contributions

N 30 30 30

PV 292,000 292,000 292,000

FV 2,956,192 4,072,197 4,769,250

I/Y 6.91% 8.17% 8.17%

PMT 8,487 8,487 $8,487 + increased contributions of $5,964= $14,451

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Insurance Recommendations

Improvement in your risk management plan is one of the primary methods were are going to use to reach your goals and protect your family’s financial future. More specifically, we want to protect your

family and assets in the event of a personal loss or potential liability claim, while being as thorough and cost-effective as possible. The main purpose of insurance is to prevent a disastrous financial loss and due

to the many uncertainties and random events in life, it is vital to make sure all aspects of your life are covered.

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Life Insurance Introduction

A life insurance policy should ensure that when a death occurs in your family, there is sufficient income and capital to cover the cash flow needs for the surviving family members. Without the continued benefit of your income, your family may not be able to afford ongoing expenses for housing, transportation, food, clothing, retirement needs, etc. This type of income replacement needs to be sufficient enough to ensure Melissa is provided cash flow to meet these needs, which would otherwise have to be covered by redeeming your existing assets.

Your current life insurance policy through the company RiverSource has the following characteristics:

20 Year Term Life Insurance Monthly Premium: $60.04 Death Benefit: $425,000

The company boasts a very solid credit rating by 3 of the top rating firms, indicating you have chosen a financially stable company for insurance. Because of this, I suggest that you receive all insurance policies that I recommend to you through the same company:

A.M. Best Credit Rating: A+ (superior) with a stable outlook Moody’s Investor Service Credit Rating: Aa3 (excellent) with a stable outlook Standard & Poor’s Credit Rating: AA- (very strong) with a stable outlook

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Life Insurance Needs Analysis:

In order to produce an accurate estimate of your family’s overall life insurance needs I use an advanced calculation that inputs your current financial situation and future family income needs. This value is compared to the death benefit of your current policy to see if it will pay a large enough benefit to support your family without the support of your income

Family Expenses

Final Expenses 15% of estate $180,000Outstanding Debts Other than mortgage $4,956Outstanding Mortgage $375,000

Children to be College FundedAge 14, 2 years at a state school 1

Needed Income if you died today

Total Annual Income 60% of total income $60,000Years of Income Provided Estimated 30Current Savings Bank accounts $14,000Current Retirement Savings Pension, 401(k), etc. $282,276Value of Current Death Benefit Life Insurance $425,000

Extras

Estimated Inflation Rate 4%After-Tax Investment Yield 6%

Total

Your Overall Life Insurance Need

If you were to die today, your family would need this amount $946,656.66

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Life Insurance recommendation:

Though the term life insurance policy you have is a great choice and well-suited for many of your needs, it may not suffice in providing a large enough death benefit to satisfy future expenditures. Your current death benefit is only $425,000 while this analysis indicates that your family would need nearly $947,000 to live comfortably for 30 years. I would suggest increasing your monthly premium from $60 to $90 to increase your death benefit to $1,000,000. It is a viable option to stick with your current life insurance company as well keeping the 20 year term insurance, as this coverage offers several advantages over a whole life policy:

They are easy to understand and you pay a low, fixed monthly premium. Whole life policies, on the other hand, have a cash value that builds, but the monthly premiums are considerably higher

You can invest your hard earned money yourself rather than having the insurance company invest for you very conservatively

Death benefits are generally excluded from income tax to the beneficiary

You can increase your death benefit from $425,000 to $1,000,000 for an extra $30 on the monthly premium

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Health Insurance:

As far as the health insurance itself, the most practical seems to be the comprehensive health insurance which combines hospital insurance, surgical insurance, medical expense insurance, and major medical expense insurance all into one package. This would be the ideal coverage plan for your family once you are no longer covered by your employer, which provides satisfactory coverage for the time being.

For your current coverage, I recommend that you take advantage of your employer’s Flexible Spending Account, which is an account you put money into to pay for certain out-of-pocket health care costs. You don’t have to pay taxes on this money implying that you will save an amount equal to the taxes you would have paid on the money you set aside. Since you indicated that your son may be due for braces in the near future, you would be able to save tax dollars from setting aside money for the procedure into an FSA.

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Disability Income insurance

What if you were to be disabled for an extended period and could not work at all? For most people, this means that monthly expenditures are going to outweigh monthly income, thus creating financial hardship. Many overlook disability insurance because no one thinks they will ever become disabled, however, statistically, more people are disabled each year than die.

Given that you are the primary income producer, if you are struck with a disability, it would be financially disastrous. Although you are provided Workman’s Compensation Insurance by your employer covering short-term (six months) disabilities, I recommend that long-term disability insurance be purchased with a monthly benefit of $7,000 to compensate for your income to the family.

This coverage also presents the option to add on certain riders for a predetermined extra premium, in which I would suggest the waiver of premium rider. This would allow you to stop making premium payments during the disability period, which can be very valuable if the disability lasts for a long period of time. In addition, this policy should include a cost-of-living adjustment (COLA) to compensate for inflation over the term of the disability. Given that there is a relatively low-risk of you becoming disabled between now and your retirement, I would suggest adding only the two mentioned riders to avoid paying a higher premium than necessary.

Disability Insurance usually ranges from 1-3% of yearly income, so to play it fair we are going to use the rule of averages and assume that this coverage will cost you 2% of your yearly income. This comes out to a yearly premium of $2,340, or $195 a month.

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Long Term Care insurance

When considering the potential cost of long-term care and the uncontrollable risk factors associated with it, it is advisable for everyone over 55 to consider buying a long-term care policy if the person has the ability to make the premium payments. At this time I would recommend waiting to buy long term care insurance coverage until you reach age 60. Given that you are still living a perfectly healthy life, waiting a few years to buy such a policy will save you money now. You don’t want to wait much longer after turning 60 to purchase this insurance because waiting too long could make the policy cost prohibitive. As time passes and we meet in the future to evaluate how your financial plan is coming along, we can reevaluate whether or not it is time to invest in a Long-Term Care policy.

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Automobile insurance Policy

There are two types of damages that can occur from an auto accident: property damage and bodily damage. The selection of a good auto policy involves considering cost effective means of covering against both of these damages.

Under your current auto insurance plan you pay $180 a month. I recommend increasing the coverage to the minimum required to purchase an umbrella insurance policy that covers up to $2,000,000 and becoming insured against uninsured drivers. The umbrella creates an attractive financial cushion because where the underlying automobile liability coverage stops, the umbrella policy kicks in. The umbrella policy will not only cover your liability needs beyond the underlying policy limits, but also your defense costs associated with a lawsuit. Again, the policy not only covers auto liabilities as well as home liabilities. The first $1 million of coverage generally costs $200 to $400 a year; the next $1 million runs an additional $75 to $100.

It would also be a wise consideration to increase your deductible to $1000 to save a few hundred dollars annually on the premium. The young age of your son alone will affect your premium once he begins driving, because teenagers are perceived to have the highest risk of being involved in financially devastating car accidents. The decreased deductibles will also offset the price change of switching over to the umbrella policy.

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Homeowners Policy

A homeowner is exposed to many types of risks. The main elements of a homeowner’s policy are coverage on the house, for personal property, against the homeowner’s liability, and medical payments for bodily injury or property damage caused to other people or property. The standard homeowner’s policy is a package deal containing all four types of coverage.

You currently have the broad form of standardized homeowner’s insurance, which excludes liability protection against earthquakes and flood. Your location in La Center, Washington, however, does not have a considerable enough risk of flooding or being part of an earthquake so you can slide by without taking on this added premium.

The rule of thumb is that homeowner’s insurance should cover 80% of the appraised value of the property, but insuring your home for the replacement value rather than a fixed dollar amount for an added premium is worth the peace of mind. This will be accomplished through the umbrella policy that I have suggested for you, which covers auto and home damage or replacement costs up to $2,000,000. Your home to be paid in full should disaster strike and covers the costs of expensive lawsuits should the occasion rise. The benefits and ease of mind these changes will allow you to enjoy will be well worth the added premium.

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Education Planning

Most Americans consider a college education extremely important, and in today’s society that comes at a very high cost. Expenses at four-year universities are nearly two and a

half higher than 15 years ago and the cost will keep rising. Many families don’t consider the financial burden of college tuition until the time comes to pay for it, causing unnecessary stress. Any family that has children with college in the horizon should take a college funding plan very

seriously.

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I have incorporated an education planning section to help you get the ball rolling on saving for your son’s education. Saving now for future college tuition is key, and it is crucial that we implement this as soon as possible because time is still on your side. In educational planning, as in every other segment of financial planning, it is time in, and not timing that makes all the difference because of the magic of compounding. Luckily for you, there is only one child to consider saving for, making this a much less daunting task than it could be.

The following pages include graphs, analysis, and explanations to give you a play-by-play run down of how I calculated the future costs of college and how I suggest you save for the expenses. The projections that went into formulating your funding plan are parallel with the information that you passed on to me regarding your family’s wishes:

Your family collectively agrees that it would be best to save on college education by having your son take general education classes at an inexpensive school for his first two years. Thus, I have indicated that he will be attending a community college for the first two years

He will then finish his education at a state college for his final two years, preferably in-state to save on out-of-state tuition costs

He will be starting high school this year, giving you a savings time horizon of 4 years before tuition payments begin

You would like to save enough money to send him to school without taking a loan out, also allowing him not to use any employment income to support his school expenses

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The charts below contain the primary framework for determining the amount of savings required to pay for the full projected costs of college education. For this calculation, I broke the costs of college into two component: community college tuition needs and state school tuition needs. The assumption that was made for both components is that the tuition inflation rate is 5.0%

Community College Tuition Calculation

Average yearly tuition $3,748

Tuition inflation rate 5.0%

PMT $0

Years until enrollment 4 years

1st Year Tuition Future Value $4,556

2nd year Tuition Future Value $4,784

The current average yearly tuition at a community college today is $3,748. Given that your son will be starting college in 4 years I have presented the future costs for his first and second year at community college. The first year is projected to cost about $4,556 while the second is going to cost about $4,784. The third and final chart presents the total future costs of your son’s education, along with a yearly savings plan to help you achieve your goals.

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State College Tuition Calculation

Average yearly tuition $15,566

Tuition inflation rate 5.0%

PMT $0

Years until enrollment 6 Years

1st Year Tuition Future Value $20,869

2nd year Tuition Future Value $21,903

The current average yearly tuition at an in-state state college is $15,566. Given that your son will be transferring to such a school in a projected 6 years, I have presented the future costs for his first and second year at a state school. The first year is projected to cost about $20,869 while the second is going to cost about $21,903.

Annual Education Contribution

PMT $5,756

FV $52,103

I/Y 3.5%

N 8 Years

PV $0

Given these projected future costs of college for all four years, the total cost of education comes to $52,103. This may seem like an intimidating amount considering you don’t currently have much in your savings account. The good news is that if you are able to save $5,756 annually, which is about $480 a month, towards this purpose, college will already virtually be paid for.

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Education Funding Recommendation

It is my opinion that a 529 education savings account is the best investment vehicle for college funding. This plan offers significant benefits that make it a very attractive choice:

A Section 529 college savings plan allows a person to contribute to a pool of money that is managed by the state treasurer or investment advisor. People of all income levels are eligible to contribute to a 529 plan.

The money that accumulates in this account grows with compounded interest. The roughly 2% interest rate that this account will accrue is a better rate than could be earned in the money market at this point in time

Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free as long as they are used for educational purposes.

Contributions to a 529 are considered a completed gift for estate and gift tax purposes. The contributor may elect to treat the gift as occurring ratably over a five-year period, so that the $14,000 exclusion can be leveraged to as much as $65,000 in one year.

Control of the account stays with the owner even though contributions generally aren’t considered part of your estate for federal tax purposes. The contributor of a 529 plan is allowed to replace the current designated beneficiary who is a member of the family.

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Tax PlanningTax planning is defined as a process which helps individuals to evaluate their

financial status and their tax liabilities, and allows the financial planner to help recommend solutions that will accomplish this with efficiency. This involves

conceiving of and implementing various strategies in order to minimize the amount of taxes paid for a given period. Many clients claim that they are already covered in this area because they are utilizing tax professionals, however, I am usually able to

generate a tip or two about taxes when going through a person’s financial information. Below is a breakdown of current taxable income percentages based on

your total taxable income:

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http://blogs-images.forbes.com/kellyphillipserb/files/2014/10/MFJ1.png


Current Income Tax Liability

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Incomewages & salaries $ 117,000.00yearly contribution to retirement plan $ (8,487.00)taxable dividends $ -taxable refunds $ -business income (loss) $ -capital gain (loss) $ -taxable notes, annuities $ -rental real estate, partnerships, etc. $ -social security benefits $ -other income $ -

Total Income: $ 108,513.00

Adjustmentsself-emplyment tax adjustment $ -pre-tax contributions $ 9,385.00other adjustments $ -

Adjusted Gross Income: $ 99,128.00

Reductionsstandard deduction $ 41,961.00personal exemptions $ 11,850.00total deductions $ 53,811.00

Taxable Income: $ (44,426.00)

Income TaxFederal income tax $ 5,741.14Alternate minimum tax $ -

Total Tax Before Credits: $ 5,741.00

Creditschild tax credit $ 750.00other credits $ -

Total Income Tax Liability: $ 4,991..40

Although it isn’t a major issue in your mind to reduce your current income tax liability, increasing your pre-tax contributions to the maximum allowable level of $14,000 a year will reduce your income tax liability. As stated earlier in the plan, you will be accomplishing this by setting aside an extra $5,756 a year towards your son’s 529 education account, thus creating a

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tax advantage while simultaneously fulfilling a more important financial need. The table below presents how much this contribution will decrease your tax liability from last year, making the assumption that everything else remains constant. The new tax liability would be $4,432.80 as compared to $4,991.40 last year, a $558.60 improvement:

Adjustmentsself-emplyment tax adjustment $ -pre-tax contributions $ 14,000.00other adjustments $ -

Adjusted Gross Income: $ 94,513.00

Reductionsstandard deduction $ 41,961.00personal exemptions $ 11,850.00total deductions $ 53,811.00

Taxable Income: $ (40,702.00)

Income TaxFederal income tax $ 5,741.14Alternate minimum tax $ -

Total Tax Before Credits: $ 5,741.00

Creditschild tax credit $ 750.00other credits $ -

Total Income Tax Liability: $ 4,432.80

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Estate PlanningEstate planning is the process of developing and implementing documents and strategies to ensure the

distribution of your property during your life and after your death according to your goals and objectives. Without such a plan, you may lose control of the distribution of your assets and leave those

decisions to chance and outside forces. Estate taxes and probate are two other factors that are preferably avoided at all cost, so financial plans look to ease that burden as well. The following analysis

and suggestions that I have formulated for you will help you choose what will happen to your assets upon your death, allow you to choose who they will be distributed to, and includes strategies to title your assets in order to lower your taxable estate and avoid probate:. We will begin by analyzing your

current taxable estate, total settlement costs, and beneficiaries of your assets:

Current Estate Structure Brendan Melissa

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Will No NoBequests to non-skip persons (not including the surviving client)

Dollar amount $0 $0Percent 0% 0%

Bequests to skip persons (subject to Generation-skipping Transfer Tax)

Dollar amount $0 $0Credit shelter trust No No

Estate Planning Assumptions

Death age (for estate plan) 85 85Funeral and final expenses (in today's dollars) $15,000 $15,000

Percent of the probate estate 10% 10%Administration expenses (as a percent of gross estate) 5% 5%

Historical Gifting Information

Cumulative total gifts in excess of annual exclusion $0 $0Cumulative gift tax previously paid above total $0 $0

Cumulative gift tax credit previously used $0 $0

Generation-skipping transfer tax exemption previously used $0 $0

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Total Current Estate Values

Brendan Melissa Joint Assets (Split 50%) Community AssetsCash assets $7,500 $7,500 $15,000 $0Investment assets $0 $0 $0 $0Retirement assets $290,000 $0 N/A N/AStock options $0 $0 N/A $0Annuities $0 $0 $0 $0Deferred compensation $0 $0 N/A N/ANotes receivable $0 $0 $0 $0Business assets $0 $0 $0 $0Personal assets $190,000 $50,000 $0 $0Death Benefit $425,000 $0 $0 $0Primary Residence $250,000 $250,000 $500,000 $0Assets received at Brendan's death N/A $1,162,500 N/A N/A

Current Gross Estate Total Assets $1,162,500 $1,470,000 $515,000 $0

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Current Estate Tax & Settlement Costs

Brendan Melissa

Current Gross Estate $1,162,500 $1,470,000

Settlement costs: Funeral and final expenses $ 15,000.00 $ 15,000.00

Probate expenses (2% of estate) $ 23,350.00 $ 29,400.00 Administration expenses (5% of estate) $ 58,125.00 $ 73,500.00

Liabilities payable at death $ 379,957.00 $ -Adjusted gross estate $ 686,068.00 $ 1,352,100.00

Allowable tax-free transfers: Transfers to surviving spouse (marital deduction) $ 686,068.00 $ -

Transfers to charities (charitable dedcution) $0 $0 State estate tax deduction (over $2.012 million in

Washington) $0 $0Taxable estate $ - $ 1,352,100.00

Total settlement costs: $476,432.00 $117,900.00


The graph below shows a comparison of your total gross estate, settlement costs of your assets upon your death, estate taxes, and how much of your estate is going to be passed on to your wife’s gross estate upon your death with and without your current death benefit included in your estate. You can decrease future settlement costs by over $20,000 and pass over $400,000 of your estate into your wife’s estate when you die, so I would recommend that you assign your life insurance death benefit to your son as a beneficiary and release it from your current gross estate:

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Estate Tax & Settlement Costs With Death Benefit In Beneficiaries Name

Brendan Melissa

Current Gross Estate $737,500 $1,045,000

Settlement costs: Funeral and final expenses $ 15,000.00 $ 15,000.00

Probate expenses (2% of estate) $ 23,350.00 $ 20,900.00 Administration expenses (5% of estate) $ 36,875.00 $ 52,250.00

Liabilities payable at death $ 379,957.00 $ -Adjusted gross estate $ 282,318.00 $ 956,850.00

Allowable tax-free transfers: Transfers to surviving spouse (marital deduction) $ 282,318.00 $ -

Transfers to charities (charitable deduction) $0 $0 State estate tax deduction (over $2.012 million in

Washington) $0 $0Taxable estate $ - $ 956,850.00

Total settlement costs: $455,182.00 $88,150.00


Settlement Costs Survivor Estate Taxes Current gross estate $-

$200,000.00

$400,000.00

$600,000.00

$800,000.00

$1,000,000.00

$1,200,000.00

$1,400,000.00

$476,432.00

$686,068.00

$-

$1,162,500.00

$455,182.00

$282,318.00

$-

$737,500.00

Your Estate Calculations With/Without Death Benefit in Your Name At Death

With Death Benefit Without Death Benefit

Additional Estate Recommendations

Title your life insurance death benefit in your son’s name so that it is not included on your total gross estate

Establish a credit shelter trust also known as an AB Trust. This will allow you to avoid estate taxes when passing assets on to heirs. The trust is structured so that upon your death, the assets specified in the trust agreement, up to a specified maximum dollar

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value, are transferred to the beneficiaries named in the trust, which you specified would be your son. A key benefit to this type of trust is that the spouse maintains rights to the trust assets and the income they generate during the remainder of his or her lifetime

Establish a will to protect the remaining assets that are left outside the living trust.

Establish in writing that your wife’s brother will be the guardian for your son if the situation should arise

Grant your wife as power of attorney so he can act on your behalf in making medical care and finances

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comprehensive financial plan

Documents