John and Mary BurkeCase

Establishing the Client Relationshipo Initial Contact

• Acknowledging Referral (why is this important?)• Documentation of all aspects of client engagement

• Dates and meeting schedules• Correspondence• Notes

o Outline and Communicate General Expectations• Information from clients• Services from your firm• Costs

Engagement Letter (required in your case)o What services you will provide

• Reviews and Recommendations• Will be based in part on information client supplies

o General Outline of activities• Data analysis and review• Adjustments, alternatives, future meetings

o Clients are responsible for all decisionso Fees and Payment Dateso Termination option(s) and final billing

Appendix One – Fundamentals o Professional Standards of Conduct with Client

• Confidentiality• Fiduciary• Prudent Judgment

o To Employer (or your organization)• Loyalty• No improper conduct

o Financial Planning Process• Diagram of Steps (page 354)• Use in your presentation to show each phase• Can use in your conversation with clients to show overview

of process

Clients Datao Family Information

• John Burke – age 30• Previously married (divorced from first wife)• Father of Patrick age four from previous marriage• Monthly support of Patrick $350 (until 18 years of age)• Patrick lives with mother (out of state)• Owns term life insurance policy with former wife (Kathy) as

beneficiary required by divorce agreement (contingent beneficiary Patrick)

• Patrick’s education fully funded by 529 plan from Kathy’s father

• Mary Burke – age 30• Couple married for three years• John works as assistant manager for Atlanta Gas -- $36,000

salary• Mary works as administrative assistant -- $26,000

Client’s Datao Stated Goals of Clients – Short Term

• Adopt two children in next few years• Increase Savings• Retire Debt• Save for down payment on a home (target 20%)

• House at today’s price -- $180,000• Three years away• Inflated price, at 3% inflation is $196,691• Down payment at 20% is $39,338• Closing Costs? Not addressed (add about $4,000)

o No specifics on amount of increased savings or reduced debt

o No priority listing of the three short term goals

Increase Savingso Current Budget has annual savings ($5,702)

• Home purchase $2,500• 401 (k) $1,080 (plus additional employer match of $540)• Discretionary Cash Flow $1,042

o Investment Income is $1,300 • All discretionary income comes from investment income

o With Discretionary Cash Flow, savings 9.0% of gross incomeo Current Savings $27,000 (excluding 401(k))o All applied to emergency fund – over 6 months

Major Problem is that couple spends too much of its income and increased savings not possible under current spending

Decrease Debt – Current Debt $78,345o Credit Cards -- $14,000 (high interest rate at 18%)o Student Loans -- $54,298 (interest rate 6.9%)o Auto Loans - $10,047 (interest rate 4.75%)o Current annual debt payment $14,295 (student loans,

auto loans and credit cards)• Payments represents 22.6% of gross income

o Assets available to pay off debt $27,000 (excludes 401(k))• Cash $3,000, Stock holdings $12,000, Mutual Fund $12,000• Could add personal assets (Scooter at $2,000)

o If Emergency Fund lowered to 3 months (two stable jobs) – need $10,000 so $14,000 (before taxes) could be used for debt reduction

Basic Costs of Proposed Home Purchase ($4,000 closing costs added to price of the home)o Bank Lending Rate for 30 year fixed is 5.5%o Twenty Percent Down – Required savings $43,339

• P&I payment ($196,691 cost minus down payment) $893.43• Homeowner’s Insurance and Property Tax (1% each) $327.82• Total Monthly Cost $1,221.24 or 23.6% of monthly gross• Increase over current housing cost of $471.24 per month

o Ten Percent Down – Required savings $23,669• P&I increases to $1,005.11 and adds Private Mortgage

Insurance of $85.00 per month – total monthly payment $1,417.93 (27.4% monthly gross)

• Increase over current housing cost of $667.93 per month

Medium Term Goalso Education Expenses (future children)

• Support education of children (adopted)• No support for education of Patrick• Want to contribute $20,000 per year to college expenses for

each child• Want to contribute for 4 years (undergraduate)• Anticipate college costs rising at 5% per year

o Cost of college• Assume adoption in next two years• Future costs are, Year 1 -- $106,132, Year 2 -- $111,439,

Year 3 – 117,010, and Year 4 -- $122,861• Present Value of $79,112 (at 8.5% return on investments)• Required Annual Annuity $7,941 (for twenty three years)

Long Term Goalso Retirement only stated goal

• Retire at 65 to 67 (35 to 37 years away)• Only John currently has 401(k) account with $4,320 balance• Mary has option to join 401(k) plan with employer 25% match• Annual contribution to account is $1,080 and employer

contribute match of $0.50 per $1 up to 6% of salary• Combined Future Value of 401(k)s with 8.5% return rate and 4%

annual increase with full participation is $1,596,916 (at age 67)o Believe that Social Security will not be there for retirement

• Current OSADI projections have minimum 70% of current payment rate viable through 2090 (need to include in retirement planning)

o High Future Value, 100% replacement of $62,000 wages at retirement with 35 years to retirement and 3% inflation– $2,091,000

Financial Datao Income Statement (page 200)

• Revenue (with passive income) $63,300• Savings (not counting match) $3,580 – 5.7%• Taxes $17,403 – 27.5%• Non Discretionary $39,775 – 62.8%• Discretionary (vacation) $1,500 – 2.4%• Free Cash Flow (remainder) $1,042 – 1.6%

o Additional Information• John -- 401(k) plans is an employer match up to 6.0%,

currently only withholding 3% -- Mary – employer 25% match up to 3% not used

• Burke Salaries should increase 4% annually for the next five to ten years (good target for careers)

Financial Datao Total Assets $88,820

• Assets Cash and Cash Equivalents $3,000 – 3.4%• Investments $24,000 – 27%• Retirement account (deferred tax account) $4,320 – 4.9%• Personal Use assets $57,500 --- 64.7%

o Total Liabilities $78,345 (adjusted to $79,209) – 89.2%• Current Liabilities (Credit Cards) $14,000 – 15.7%• Deferred taxes (401(k) account) $864 – 1.0%• Long term Liabilities (student and car loans) $64,345 – 72.4%

o Net Worth $10,475 (adjusted to $9,611) – 10.8%o Additional information – Student loan 6.9% ten year loan

Financial Datao PASS Scores

• John’s total score is 25 (RT4 low end)• Mary’s total score is 22 (RT3 middle)• Combined total score is 23.5 (border RT4/RT3)

o Couple relatively young • Portfolio Investment Allocation

• Short –Term basic balance is 80% bonds and 20% stocks• Medium – Term basic balance is 30% bonds and 70% stocks• Long – Term basic balance is 15% bonds and 85% stocks

• Small Portfolio holdings• Mutual fund is balanced fund and $12,000 current value• Equity holdings, 1,000 shares of Crossroads value $8,000 and

100 shares of Gladwell value $4,000

Financial Datao Insurance Policies

• Life Insurance • John has two policies – one that is court ordered from divorce for

Kathy (Patrick) that has $500,000 face value and an employer plan of $50,000 with Kathy still listed as beneficiary

• Mary has employed sponsored plan of $26,000 with John as beneficiary

• Need to change beneficiary on John’s second policy to Mary

• Health • Policy via John’s work (policy out of line with ACA with lifetime limit

of $1,000,000 per person)

• Disability Insurance• John’s policy is “owned” and 90 day elimination period (3 month)

and 60% coverage• Mary has disability through employer (will need to check specifics)

Financial Datao Insurance Policies (continued)

• Renter’s Insurance – HO4 policy at $600 per year, with $25,000 property and $1,000,000 liability

• Automobile Insurance – • Policy on John’s car• Policy on Mary’s car• No policy on John’s scooter (need more information on this

vehicle)

• No Long-term care insurance• No Personal Liability Umbrella Policy (PLUP)

o Investments• Stock holdings – 1,000 shares of Crossroads and 100 shares

of Gladwell• Mutual Fund – balanced fund and employer sponsored 401(k)

Financial Datao Tax Returns

• Not provided but the average tax rate (federal) is 17% and the marginal tax rate is 25%.

• No state income taxeso Legal Documents

• John’s Last Will and Testament for John – beneficiary is Patrick• Need to change beneficiary to Mary

• Mary no Will• Common Law Property State• No Durable Power of Attorneys• No Advanced Health Directives

Overview of Goals, Initial Assessmento Down payment at 20% for home in three years -- $13,000/yr

• Need $4,000 from current assets for closingo Education for adopted children to start in two years -- $8,000/yr

• Needs to wait until after down payment on house completedo Retirement by maximizing 401(k) employer match - $1,860

• Fund from next salary increases (anticipated 4%)• Match from employers grows from $540 to $1,275

o Debt reduction credit cards with highest interest rate - $14,000• Equity portfolio $12,000 (before tax) plus scooter or mutual fund

Goals not attainable under current income and spending habits – funds not available for down payment on house

Checklist of Items that need immediate attentiono Legal Documents

• Draw up Will for Mary• Draw up Power of Attorney’s for John and Mary• Draw up Advance Health Directives

o Retirement Plans• Change beneficiary on John’s 401(k)

o Review Insurance Needs (Risk Assessment)• Catastrophic Risk needs to be mitigated (Life Insurance

Policies updated and level of coverage)• Change beneficiary on Life Insurance policy owned by John

from Patrick to Mary• Get information on Mary’s disability insurance coverage

Checklist of Issues for Reviewo Budget and Savings – current spending rate and savingso Emergency Fund – sources of funds and coverage

(number of months)o Impact of 401(k) potential changes on budget and

savingso Priorities on Goals

• Increase Savings• For Down Payment for House• For College for children (no children yet)• For Retirement (35 to 37 years away)

• Debt Reduction (major issue)• Home Purchase

• Size and Timing

Data Analysiso Insurance Review – Risk Analysis

• Current Coverage• Benchmark Coverage

o Present Situation – Spending and Savings• Budget – Pie Charts and Benchmarks (Age Appropriate)• Cash Flow Analysis• Net Worth – Pie Charts and Benchmarks (Age Appropriate)

o Financial Ratio Analysis• Key ratios on changing budget and building net worth• Change in Cash Flow (projected)• Projected budgets

Risk Assessment – What are the objectiveso What risk does the client(s) have with respect to

• Loss of Life or Income Stream?• Loss of Property due to “acts of nature” or others?• Loss of Good Health due to accident or medical issues?

o What losses can the client(s) afford to own?o What losses can the client(s) not afford to own?

• What are the ways to mitigate or avoid the losses they cannot afford to own?

• What are the costs of these products that can mitigate or avoid loss?

• What are the options to reduce some of the costs of these products that can mitigate or avoid loss?

o What events will alter or change the risk exposure of the client(s)?

Risk Assessment (Insurance Needs)o Life Insurance Needs -- Minimum

• Current coverage for John and Mary is too low…• John has $50,000 (change beneficiary to Mary, no cost)• Mary has $26,000 • Kathy (ex-wife) owns $500,000 policy on John’s life (no change)

• What should the Life Insurance cover today?• Replace spouse’s income• Funeral Costs

• Replace John’s income for Mary and Mary’s income for John• Ten times salary (low end)

• Increase term-life insurance (ten year policy) to $360,000 for John and $260,000 for Mary (ways to estimate the amount needed?)

o Anticipated costs $275 for John and $130 for Mary

Risk Assessment (Insurance Needs)o Health Care

• Policy through John’s work sufficiento Disability

• John’s coverage through company sufficient• Mary is not covered – check with company benefits to see if

disability insurance is available and match John’s (90 day, 60% replacement)

• Note – emergency fund should be three months (90 days) to cover the waiting period on disability insurance

o Long-term Care – not needed at this timeo Anticipated additional annual costs for Mary’s disability

insurance via company should be around $300 per year if company sponsored or $600 if purchased directly

Risk Assessment (Insurance Needs)o Property and Casualty

• Home owner’s (Rental Insurance)• Coverage Sufficient (Net worth $88,000 and liability coverage is

$100,000)• Contents is $25,000 and equal to property and furniture

• Automobile and Scooter• Upgrade to more realistic coverage of 100/300/50 for each vehicle• Either insure or sell scooter • Additional costs of upgrading personal auto policy is $400 per year

• Liability Insurance• With increase in personal auto policy and current renter’s coverage

of $100,000 and net worth $88,000 no need for umbrella policy

o Total additional cost for P&C insurance is $400 per year

Present Situation – Budget and Spending Analysiso Looking at the two financial statements for current position

• Income• Balance Sheet

o Where is the couple with regards to benchmarks at this time?• Key items include, savings rate and current net worth• Pie charts to illustrate spending and savings

o What is a reasonable change to spending and savings• Where will future “raises” go? • What “behavior” needs to change to meet goals?• What timelines should the clients be on for some of their goals?• What are some immediate changes that can be made to impact

financial position?

Income, Spending and Savingso Pie Chart for visual reference and comparison to

“standard” for strong financial strength.• Table and Pie Charts on page 206• Key difference between benchmark and clients is debt

payments• Debt benchmark is 12% but clients at 22%

o High Debt prevents meeting other needs and goals• Savings rate low and not close to benchmark• Coverage in insurance low and thus carrying too much risk• Inability to take advantage of employer’s 401(k) match

o Looking Forward• Anticipated salary raises (4%) over next five years• Desire to move into house and out of rental property

Balance Sheet (Net Worth)o With Pie Charts (page 205)

• Assets are heavy in personal use and very light in cash and cash equivalents• Investment accounts low • Emergency Fund low but with the mutual fund, the couple has

access to funds that cover this area ($12,000)

• Candidates for Immediate Change • Change pie chart to reflect mutual funds in cash and cash

equivalent for calculating emergency fund (add in $15,000)• Investments are available for debt reduction ($12,000

potential minus capital gains tax on sale of stock) and uninsured motor scooter ($2,000)

• Long-term liabilities are high• Major item is student loan ($54,300) with modest interest rate

Financial Ratioso Key ratios for clients to review and understando Liquidity Ratios – Short term financing issues

• How long can you cover an abrupt change in income?• What sources do you have to cover abrupt change in income?

o John and Mary’s numbers• Emergency Fund using just cash and cash equivalents ($3,000)• Estimated non discretionary monthly cash flows ($3,315)• Coverage is 0.91 months (very weak against 3 month

benchmark)• Include mutual fund of $12,000 as accessible funds for

emergency• Coverage is 4.52 months (strong against 3 month benchmark)• Current ratio without mutual fund 0.21% (weak) with mutual fund

1.07 and at low end of good benchmark range

Financial Ratioso Debt Ratios

• Long term solvency issues• Can current income meet debt servicing • Does ratio impact future borrowing capacity (potential for

mortgage)?o Housing Ratio 1 for John and Mary

• Current housing costs (renting costs of $9,000)• Current gross income ($63,300)• Housing Ratio 1 – 14.22% and well below maximum of 28%

o Housing Ratio 2 for John and Mary• Current Housing Costs and Debt Payments ($23,295)• Housing Ratio 2 – 36.80% above maximum of 36%• Will hurt credit scores and potential mortgage qualification

Financial Ratioso Debt Ratios Continued o Debt to Total Assets and Net Worth to Total Assets

• Debt to Total Assets = 1 – Net Worth to Total Assets• This ratio varies with age and Debt to Total Assets falls as

couple approaches retirement (less income to handle debt)• Total Liabilities is $78,345 (book), $79,209 with tax-

deferred account• Total Assets is $88,820• Debt to Assets 88.21% (book), $89.18% adjusted• Very Weak – benchmark is around 80% for young couples

o Net Worth builds over time• Net Worth to Total Assets is 10.82% and below target of

20% for young couple

Financial Ratioso Debt Ratios Continued o Examine the “quality of debt” for couple with high Debt to

Assets ratio• Debt is in three parts – auto loans, student loans, and credit

cards• Credit Card debt is $14,000 and at 18% interest – number one

priority to eliminate – should use some current assets• Trade-off of debt payment at 18% versus earnings of 8.5%

• Student loan is $54,298 with 6.9% interest • Ten year loan with annual payments of $7,695 per year• Stay on schedule with this loan

• Auto Loans are $10,047 with 4.75% interest rate• Only 36 months remaining• Stay on schedule with this loan

Financial Ratioso Financial Security

• Savings rates and Investment Accounts• Careful not to overemphasize rates with long horizons – couple

has years to monitor and adjust – but need to have perspective on current habits that might be hard to change

o Savings Rate• Savings of Individual and Employer Match ($3,580 + $540) now

but with full 401(k) participation ($5,440 + $1,275)• As a percent of gross pay 6.5% now, raised to 10.6% with increase

in 401(k) and with benchmark of 10% - 13% for current ageo Investment Rate

• Cash and Investments total $31,320 and ratio to gross pay is 0.49 to 1

• Below benchmark of 1:1 and will fall if assets used to reduce debt

Financial Ratioso Performance Ratios

• For this case no history of performance but if clients will be long-term clients you will start accumulating data to measure annual performance

• Return on Investments (sensitive to portfolio make-up and market performance)• Some measures you can use, Sharp Measure or Treynor

Measure or Jensen’s Alpha (Appendix 3 pages 368 – 369) • Based on Risk and Return (Security Market Line and Capital

Asset Pricing Model) – review• Bond Performance – function of duration

• Return on Assets (balance sheet change in assets)• Return on Net Worth (balance sheet change in net worth)

Future Income Statementso Projections over the next five years with increase in salaries

• Illustrate spending and savings pattern change• Illustrate some alternatives with delaying

• Home purchase• Education Savings

• Illustrate some alternatives with using current funds to reduce debt

o Important to show what choices will mean going forward (Spreadsheet with Scenario 1)• Example with using raises to fund 401(k)• Example with selling some investments to lower debt• Example with selling scooter for debt reduction and risk

management• Example with new insurance products

Future Income Statementso Immediate Changes

• Sell Stock (Net $10,000 after tax)• Sell Scooter (Net $2,000)• Pay off Credit Card debt with cash and proceeds

• Keep monthly balance of credit cards at zero going forward• Use as an emergency fund if necessary

o Allocate most of raises to full invest in matching 401(K) accounts• John’s raise $1440 and use $1,166.40 for 401(K)• Mary’s raise $1,040 and use $811.20 for 401(k)• Will have a tax impact so that entire increase to 401(k) of

$1,977.60 will have a tax offset of $494.40 (at 25% marginal tax rate)

o Review Spreadsheet with Net Cash Flow increasing to over 6%

Future Balance Sheetso Five year projection matched to income statement

based on changes for income statement• Raises at 4%• Reduce Debt with Stock sell-off and scooter sell off• Down payment goal of 10% • Delayed start in education savings for five years• Change to insurance policies to cover risk exposure

o Projections assume no major changes in activities or household other than• Purchase home at end of three years• Adopt children in fourth year

Future Balance Sheetso In five years – Net Worth increases to $107,000 and is 33% of

your asset base, an eleven fold increase over five yearso ROA over five years is ($317,892/$88,820)(1/5) – 1 = 89% due

to financial leverage with purchase of a homeo ROI is projected to stay at 8.5%o Cash and Cash Equivalents and Mutual Fund holdings are

$41,651 and is 55% or 0.55:1 of gross income but an increase of $5,500 over current holdings with the sell-off of the stock.

o 401(k) accounts have grown to $33,679 by using the first 4% raise to fund these accounts

o Home Equity is $36,550 or 17.5% of the value of the house

Financial Recommendations and Alternativeso Goal Matching – Retirement

• Increase of 401(k) and reasonable estimate of social security benefits at age 67 will be sufficient to replace 100% of current income and live to 100

• However,• Investment rate is set at 8.5% for the entire period • Reduction in risk tolerance could reduce both funds available

and or the length of payments from fund• Need to review the performance annually to see if you are still

on target for $1,600,000 goal with 401(k) accounts

• Other future options• Start IRA or Roth accounts should savings be available• Add to mutual fund account

Financial Recommendations and Alternativeso Goal Matching – Education

• No need to begin today • Wait until adoption takes place and you are “settled” in your

home• Goal of 100% funding for children

• May elect to alter in future – depending on scholarship potential, work contributions of children or other unknown sources of income

• Will be able to support some of expenses out of current income when children go to college (reduction in at home expenses can be used to fund college)

• Change in education costs in the future may impact your target

• When adoption is completed • Explore various plans (529s) for tax deferred savings• New estimates based on current salaries

Financial Recommendations and Alternativeso Goal Matching – Education – Continuedo If you want to start today

• Set up two 529 plans, one for each “anticipated” child• Set up yourself as beneficiary• Start with a modest annual contribution

o Will need to modify savings for other goals• Reduce funds for down payment on a home• Look at loans requiring 10% or 5% down

• Interest rate on loan will go up• Additional interest expense is tax deductible

• Could lower insurance coverage and take on more risk

Financial Recommendations and Alternativeso Debt reduction

• Sell stock and scooter and pay off credit cards• Use credit cards for means of payment• Pay off balance every month (free money)• Builds up credit score• Could reduce mortgage interest rate as credit score improves

• Keep scooter and purchase necessary insurance• Monthly expenses increase• Funds available for debt reduction decreased• Make up by using some funds from mutual fund for debt reduction• Mutual funds also “emergency funds”

• Eliminate high debt (18%) and start to rebuild stock portfolio• Example demonstrates future advantage of paying off debt now

Sell Stock Use $12,000 to reduce

debt and invest “payments needed to payoff debt”o Monthly cash flow

increases by $355.51o Invest monthly savings

at 8.5% for five yearso Future value of

investment is $26,465o Disadvantage – lose

access to $12,000 now

Keep Stock Keep $12,000

investment and determine monthly cost to eliminate debt in five yearso $14,000 balance at 18%

with 60 paymentso Monthly payment

$355.51o Let portfolio grow at 8.5%

for next five yearso Future value is $21,382

Financial Recommendations and Alternativeso Increase Savings

• Max out 401(k) with increased salaries (one-time 4% increase)

• Take the projected salary increase and pay yourself first• Forced savings plan• Tax benefit • Employer Match (free money)

o John’s increase is $36,000 x 0.04 x (1 – 0.25) = $1,080 • Plus small tax credit as increase in salary is only $360 after

tax so taxes increase on $90 and net cash flow is up $270• Company match is $540 additional dollars

o Mary’s increase is $26,000 x 0.04 x (1 - 0.25) = $780• Change in cash flow is $195 and now company match is $195

Keep Raise and Self Invest Take all after-tax dollars of

the raise and invest Raises equal $2,480 Taxes on raise $620 Could use IRA and get

“taxes” back with deferred account

Additional funds for investing each year is $2,480

Future Value with investing over five years at 8.5% is $15,384.77

Use Raise for 401(k) Maximize 401(K) with pay

increase John uses $1080 of before

tax raise and gets $540 match

Mary uses $780 of before tax raise and gets $195 match

Total invested $2,595 All extra cash flow in IRA and

get “taxes back” $620 Future Value in 5 years at

8.5% is $19,944.37

Financial Recommendations and Alternativeso Increase Savings Alternatives with raise

• Could use money after 401(k) for other goals and not start IRA• Funds relatively small $620 before tax, $465 after tax annually• Funds some of the new insurance costs with new life insurance

policies or auto policy upgrades or rental policy upgrade or adding insurance for the scooter or adding PLUP plan or adding personal disability plan for Mary

• Could start 529 plans• Could use for more vacation spending• Could use for emergency fund build up

o If no changes to 401(k) accounts• Lose employer match of $735 • Could use after tax dollars for debt reduction, insurance

changes, or savings and keep some of the stock currently owned

Financial Recommendations and Alternativeso Entertainment Spending

• Only $1,500 per year seems very low for entertainment (vacation)

• What types of activities do you envision over the next five years and will that change with the adoption of two children?

• If this will change need to account for this in spending patterno Current projected income statements for next five years

have discretionary spending increasing from $155 in year one to $5,113

o Increases are in Savings account in balance sheet and accumulate to over $10,000

o If you hold to your new budget these funds are available for discretionary spending

Summary of Minimum Recommendationso Reduce Debt with sell of stock and scooter – no cost

increase• Eliminate credit card outstanding balance• Stay on course with student loan and car payment

o Increase savings via 401(k) accounts with employers using 4% raise next year – no cost increase• This accomplishes two things (1) increases annual savings with

employer’s match above 10% of gross income and (2) projects to be sufficient to meet retirement funds of nearly $1,600,000 (with support from social security)

o Insurance changes for risk reduction – cost increase is $1,105• Add life insurance policies (ten years of current salaries

$360,000 for John and $260,000 for Mary)

Summary of Minimum Recommendationso Insurance continued

• Add disability insurance for Mary – hopefully through company group plan

• Change beneficiary on current life policy to Mary (or when you increase face value to $360,000)

• Increase auto coverage o Down Payment on House – change to 10% down payment

target, increase in cost (additional annual savings) is $6,300

o Legal Documents – one time cost of $1,000• Change beneficiary on John’s will (no cost)• Add Durable Power of Attorney’s for each other• Add Advance Health Directives

Summary of Minimum Recommendationso Following these minimum recommendations in five years with

steady markets, following current spending patterns, and receiving annual raises of 4% • Sufficient funds for house purchase at the end of three years and

debt structure should be sufficient to qualify for “good” mortgage and rate for House Ratio 1 at 22% below maximum of 28%

• Debt restructured and House Ratio 2 at 32% and under maximum of 36%

• Annual discretionary funds growing to $5,000• Savings rate in the 10% to 13% range – appropriate for age group• Risk owned appropriate for current age and wealth

o Left to do on your current goals• Start education savings

Actions for John and Mary Burkeo Next Three months

• Change beneficiaries on current Will and Life Insurance• Purchase new life insurance policies

• Shop for new policies – • Term life or whole life choice

• Set up Power of Attorney and Advance Health Directive• Sell stocks and scooter– pay off current balance of credit cards

o Three to Six months• Add disability insurance plan for Mary – will check with company for • Change auto insurance policies for more appropriate coverage

o Six months to Twelve months• When salaries increase – sign up and/or change 401(k) contributions• Set up “account” for down payment on future home

Progress Benchmarkso Three months

• Life Insurance policies purchased and proper beneficiaries• John’s Will changed • Completed Power of Attorney and Advanced Health Directives• Credit card balance at zero

o Six months• Disability Insurance for Mary (information from company received

and if available Mary enrolled or scheduled to enroll at next opportunity)

• Met with insurance agent and new auto coverage limits established for next insurance payment

o One Year• Raises used to increase and open 401(k) at maximum employer

match• Account set-up for savings for down payment on house

Future Engagementso First follow-up in three months – anticipated meeting time

approximately two hours • Will review insurance policies• Verify disability insurance potential (Mary’s company or private)• Legal documents in place and beneficiaries changed• Individuals named Advance Health Directive have signed

acceptance• Power of Durable Attorney’s properly filed with court• Sale of stocks and scooter sufficient to clear credit card balance (or

other assets needed to clear balance)• Any new developments or considerations that impact goals

o Second meeting three months later – anticipate time of two hours

o Third meeting one year from now – anticipate time of two hours

Future Engagementso Issues and Events that can require non routine meetings

• Births (adoptions) or changes to family• Deaths (where you are a beneficiary of an estate)• Health Issues• Wealth Issues

• Job loss• Gifts received of high monetary value• Income changes (change to part-time employment, job change,

etc.)• Lawsuits

• Other issues that can impact your financial plan in either a positive or negative way• Changes with guardianship with son Patrick for example

o Questions?

Follow – up and Check – list before clients leaveo My office will provide you with a copy of today’s information

• Recommendations• Contact information for any party outside the office that was

recommended to help with any action item

• Action Items (theirs and yours)• Answers to your questions

• List the questions that you will be answering and target date for getting them the answer, for example

• Mary’s company policy on disability insurance• Mary’s company policy on open enrollment dates for 401(k)

and insurance• Etc,

o Make sure all letters are signed and if necessary notarized, payments received or billing information on hand

The Clients John and Mary Burke

o Married for three yearso Both age 30o John has son by previous marriage Patrick, age 4

• Patrick leaves with former spouse Kathy in another state• John pays alimony for Patrick of $350 per month until Patrick

reaches age of 18• John pays for life insurance contract of $500,000 with Kathy as

beneficiary (Patrick as second beneficiary) and is required by divorce decree

o John works as an assistant manager earning $36,000 annuallyo Mary works as administrative assistant earning $26,000

annually

Clients have indicated five major goalso Goal 1 – Increase annual savingso Goal 2 – Decrease current debto Goal 3 – Save for 20% down payment

• Time horizon 3 years• Home value in today’s dollars is $180,000

o Goal 4 – Adopt two children within next few yearso Goal 5 – Have a retirement savings plan that covers

100% of current income at 65 to 67• Current income is a combined $62,000• Social Security not part of retirement planning at this time

In addition to these goals – need risk assessment

Financial Datao Current Budget Provided by Clients

• Revenue (with investment income of $1,300) $63,300• Savings (not counting company match) $3,580 – 5.7%• Taxes $17,403 – 27.5%• Non Discretionary $39,775 – 62.8%

• Housing Costs $9,000 – 14.2%• Living Expenses $12,280 – 19.4%%• Debt Payments $14,295 – 22.6%• Insurance $4,200 – 6.6%

• Discretionary (vacation only listed item) $1,500 – 2.4%• Free Cash Flow (remainder) $1,042 – 1.6%• See Pie Charts, spending against benchmark for couple

(page 206)

Financial Data – Current Wealtho Total Assets $88,820

• Cash and Cash Equivalents $3,000 – 3.4%• Investments $24,000 – 27%• Retirement account (deferred tax account) $4,320 – 4.9%• Personal Use assets $57,500 --- 64.7%

o Total Liabilities $78,345 (adjusted to $79,209) – 89.2%• Current Liabilities (Credit Cards) $14,000 – 15.7%• Deferred taxes (401(k) account) $864 – 1.0%• Long term Liabilities (student and car loans) $64,345 – 72.4%

o Net Worth $10,475 (adjusted to $9,611) – 10.8%o See Pie Charts and benchmarks for couple (page 205)

Data Analysis and Key Ratioso Life Insurance Needs -- Minimum

• Current coverage for John and Mary is too low…• John has $50,000 (change beneficiary to Mary, no cost)• Mary has $26,000 • Kathy (ex-wife) owns $500,000 policy on John’s life (no change)

• Increase term-life insurance (ten year policy) to $360,000 for John and $260,000 for Mary (minimum coverage)

• Anticipated costs $275 for John and $130 for Maryo Health Care Coverage sufficient through John’s companyo Auto coverage needs to be increased – anticipated costs

$400o Disability Insurance for Mary – anticipated cost is $300o No current need for PLUP on Long-term Care

Data Analysis and Key Ratioso Debt Position of Couple very poor

• Housing Ratio 1 at 14.22% (good)• Housing Ratio 2 at 36.80% (poor)• Debt Payments as percent of Income 22% (very poor)• Credit Card Debt is $14,000 over 15% of assets with high interest

rateo Savings Rate of Couple is low

• Savings as a percent of income (with employer match) is 9.0% below range of 10% to 13%

• Investments to Gross Pay is 0.49:1 and should be about 1:1• Current Ratio (Cash to Current Liabilities) is 0.21% and very weak

o Emergency Fund• Counting Mutual Fund ($12,000) as part of cash is 4.6 months

(good)

Data Analysis – Cost of Goalso Increase Savings – reach strong position of 13% of gross income

need to increase by $2,727 per year o Decrease Debt – cost to eliminate credit card balance in five

years is $4,266 per yearo Down payment of 20% for house in three years -- $13,000 per

yearo Cost to fund education (20 years away) -- $7,900 per yearo Total Cost to meet all goals approximately $28,000 or 44% of

current incomeo Goals are not attainable with current spending and income

Modification of Goals necessary for sound financial plano Postpone or reduce some of the goals so that they are attainable

Concerns and Issueso First Concern is Legal Documents

• Need to change beneficiary on John’s will from Patrick to Mary• Need to create Power of Attorney’s and Advanced Health

Directives• Need to change beneficiary on John’s 401(k) plan

o Second Concern is Risk Management• Need to remove risk exposure to untimely death• Need to remove risk exposure to disability (Mary)• Need to remove risk exposure for accident (liability)

o Third Concern is Debt Position• Need to immediately reduce credit card balance with 18%

interest rate• Assets (investment accounts) sufficient to remove debt

Concerns and Issueso Fourth Concern is low Savings Rate

• Low rate impacts ability to meet down payment, retirement, and education goals

• Education goal is too ambitious at this point in time• Down Payment percent is too high, do not need 20% down

o Fifth Concern is retirement funding is missing free employer match via 401(k) contributions• John is at 50% of potential match• Mary is not enrolled in matching program

o Sixth Concern is necessary changes required in spending and savings habits may not be easy for couple spending nearly all current income with minimal savings

Recommendationso Reduce Debt with sell of stock and scooter – no cost

increase• Eliminate credit card outstanding balance• Stay on course with student loan and car payment

o Increase savings via 401(k) accounts with employers using 4% raise next year – no cost increase• This accomplishes two things (1) increases annual savings with

employer’s match above 10% of gross income and (2) projects to be sufficient to meet retirement funds of nearly $1,600,000 (with support from social security)

o Insurance changes for risk reduction – cost increase is $1,105• Add life insurance policies (ten years of current salaries

$360,000 for John and $260,000 for Mary)

Recommendationso Insurance continued

• Add disability insurance for Mary – hopefully through company group plan, if not shop for private insurance disability plan

• John change beneficiary on current life policy to Mary (or when you increase face value to $360,000)

• Increase auto coverage for liability issueso Down Payment on House – change to 10% down payment

target, increase in cost (additional annual savings) is now $6,300

o Legal Documents – one time cost of $1,000• Change beneficiary on John’s will (no cost)• Add Durable Power of Attorney’s for each other• Add Advanced Health Directives

Recommendationso Following these minimum recommendations in five years with

steady markets, following current spending patterns, and receiving annual raises of 4% • Sufficient funds for house purchase at the end of three years and

debt structure should be sufficient to qualify for “good” mortgage and rate for House Ratio 1 at 22% below maximum of 28%

• Debt restructured and House Ratio 2 at 32% and under maximum of 36%

• Annual discretionary funds growing to $5,000• Savings rate in the 10% to 13% range – appropriate for age group• Risk owned appropriate for current age and wealth

o Left to do on your current goals – only one postponed goal• Start of education savings

Income Statement TodayIncome $63,300Personal Savings $2,500Child Support $4,200Retirement $1,080Living Expenses $17,080Debt Service $14,295Insurance $4,200Taxes $17,403Discretionary $1,500Net Cash Flow $1,042

Income Statement Five YearsIncome $76,539Personal Savings $1,000Child Support $4,200Retirement $3,577Living Expenses $29,128Debt Service $7,695Insurance $5,305Taxes $18,782Discretionary $1,739Net Cash Flow $5,113

Balance Sheet TodayCurrent Assets $3,000Investments $24,000Retirement $4,320Personal Assets $57,500Current Liab. $14,000Long-Term Liabilities

Student Loan $54,298

Auto Loan $10,047Deferred Tax $864

Net Worth $9,611

Balance Sheet in Five YearsCurrent Assets $14,491Investments $18,043Retirement $33,679Personal Assets $251,678Current Liab. $0Long-Term Liabilities

Student Loan $31,773

Auto Loan $0Deferred Tax $6,736

Net Worth $107,266

Client Follow Upo First follow-up in three months – anticipated meeting time

approximately two hours • Full review of all changes to insurance policies• Verify disability insurance options (Mary’s company or private)• Legal documents in place and beneficiaries changed• Individuals named for Advance Health Directive have signed and

acceptance responsibilities• Power of Durable Attorney’s properly filed with court• Sale of stocks and scooter completed and credit card balance

cleared• Any new developments or considerations that impact goals

o Second meeting three months later – anticipate time of two hours

o Third meeting one year from now – anticipate time of two hours

Questions?