Kevin and Christine Gutierrez Kevin and Christine are prospects a CFP Professional met last month. They were introduced through one of the CFP professional’s top clients, and you believe they would make fantastic clients. Kevin is nearing retirement at Microsoft and is well regarded within the company. His opinion is valued and he would be a strong center of influence to your client base. Christine works part time in a local doctor’s office and truly enjoys her work. Kevin’s mother, Gloria, has recently moved into the home. Christine and Kevin expressed a fantastic disposition and indicated they have been married for the past decade. They both have children from previous marriages and are interested in a long term financial planning relationship. The CFP® professional works as a registered representative at a large brokerage firm and is compensated from commissions. Background Kevin Gutierrez ‐ 61 Kevin is a Sr. Vice President of sales at Microsoft. He heads a department of 30 and is integral in the development of smart phone technology. He has been with Microsoft for the past 15 years, and in that time has received numerous advancements. He would like to end his career with the company. Kevin enjoys spending time with Christine and has a strained relationship with children from his first marriage, Tony and Amanda. Kevin’s father died from a heart attack at 50, and from that experience Kevin maintains a healthy diet and weight. Kevin is an aggressive investor who believes in Microsoft over the long term. Christine Gutierrez ‐ 50 Christine works as a medical assistant at a local doctor’s office on a part time basis; three days a week. She is considering working full time after Ryan has moved away from the home. Christine enjoys traveling and cooking and has a strong relationship with Ryan. Christine is uncertain about Gloria moving into the home. Both of Christine’s parents are healthy and live in a retirement community in Texas. Christine is a risk tolerant investor and prefers to have at least three months of living expenses available in cash. Gloria Gutierrez – 82 Gloria is Kevin’s mother and recently moved into Christine and Kevin’s home. Gloria is no longer able to drive and relies on Christine and Kevin for most of her daily activities; Gloria’s annual living expenses average $2,000 a month. She receives social security retirement of $800 a month, and has a savings account of $310,000 from the sale of her home. Gloria is in fair health, with early signs of osteoporosis. Tony (17) and Amanda (24) Tony and Amanda have a distant relationship with their father. They harbor resentment from his divorce and do not actively participate in his life, but do call to talk to their grandmother. Kevin would like to reestablish a connection with his children. Tony’s mother claims him as a dependent; Tony’s motherand Amanda both work in retail and earn approximately $40,000 annually. Ryan Smith ‐ 24 Ryan recently moved back home after being unable to find employment. He has a MS in fine arts from Maryland State. He is currently working part time at Starbucks earning approximately $100 a week and is hunting for a full time job. Kevin and Christine are willing to help Ryan pay for health coverage; he has a chronic back injury. Kevin and Christine provide more than half of Ryan’s support. When Ryan was 19 he was convicted of a felony drug conviction and received a suspended sentence. Ryan was allowed to attend college. He still meets regularly with his probation officer. Kevin and Christine are concerned about Ryan’s relapsing and ability to manage money. Case Narrative Christine and Kevin met fifteen years ago at a church singles function. After dating for five years, they married and moved into Kevin’s home, which is located in a non‐community property state. Ryan and Gloria have both recently moved into the home and Christine has found herself responsible for most of the caretaking duties. Neither Ryan nor Gloria are paying rent, and in your first meeting with these prospects Christine expressed she was becoming frustrated with her new caretaking responsibilities. Tony and Amanda have not spoken with Kevin directly in the past few years, and Ryan moving into the home has not relieved stress in the Gutierrez family. Kevin has included his children in his estate planning decisions; but is unsure if he will continue to list them as beneficiaries. Christine does not have a relationship with Tony or Amanda but is interested in getting to know them. Financial Planning Objectives In your first meeting with the client; the Gutierrez’s expressed the following financial planning objectives. They are listed in order of priority to the family. •
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Relieve the caretaker burden currently placed on Christine Consider purchasing a vacation condo in Maui to enjoy today and during retirement. The condo costs $400,000 in today’s dollars; Kevin and Christine would like to put at least 25% down on this purchase. Both spouses retire at Kevin’s age 65 able to spend approximately 70% of what they do today Revisit the allocation of their investment portfolios Review their estate plan and ensure Christine would be able to maintain her standard of living if Kevin died today Economic Environment Kevin will likely not receive any additional raises with Microsoft. He anticipates his compensation will remain constant through his age 65; and that he could potentially be offered a retirement package before then. Kevin and Christine have made the following assumptions in their personal financial plan: They are open to suggestions from a qualified professional if their assumptions are not appropriate. Long Term Inflation Rate 2.0% Large Cap Equities will have greater than a 10% return over time Kevin and Christine believe federal marginal tax rates will likely increase over time. Their highest marginal tax rate is currently 30% and they are subject to a flat 5% state income tax. Interest rates on mortgages are currently 5.0% on a 30 year note, and 4.5% on a 15‐year note. Rates are expected to increase Insurance and Risk Management Data After a first meeting with these prospects, a CFP® professional received information about insurance policies and benefits through Kevin’s employer. Life Insurance •
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Kevin has a group term life insurance policy of twice his base salary ($280,000). The beneficiary is Christine and contingent beneficiaries are Tony and Amanda per stipes. Christine has a whole life insurance policy with a $50,000 death benefit. She purchased the policy when Ryan was born; it currently has a cash value of $12,500 with no remaining surrender charge. The policy has a guaranteed minimum crediting rate of 3.0%, an interpolated terminal reserve of $11,000 and has regularly paid dividends. Premiums are $1,000 annually; Ryan is the sole beneficiary of this policy. Long Term Care Insurance •
Kevin and Christine do not currently have long term care insurance. They recently received an insurance quote qualified long term care insurance. The aggregate premium on policies for Kevin and Christine was $300 a month for Kevin and $200 a month for Christine, or $6,000 annually. Disability Insurance •
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Kevin has a group long term disability policy that provides him with 60% of his base salary and pays for the longer of five years or until he reaches age 65. The premium is paid completely by his employer and policy has a six month waiting period. Kevin has chosen not to participate in his short‐term disability policy. The policy would provide 75% of Kevin’s base compensation for the first six months of a disability. Short‐term coverage would be subject to a three‐week waiting period and cost approximately $22 a month. Christine does not have any disability coverage Medical Insurance •
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Kevin and Christine are covered under Kevin’s group insurance plan. The plan allows coverage within a preferred provider network, all of Christine and Kevin’s doctors are within this network. The plan assess a $50 co‐pay per visit and covers 100% of in‐network doctor costs. The plan only pays 50% of out of network costs and is subject to a $10,000 annual out of pocket family maximum. Kevin pays $100 a month for his portion of health insurance premiums. Gloria is currently enrolled in Medicare part A, B and has opted into a local part D coverage plan. Homeowners Coverage HO‐3 Coverage: 238 Lone Star Circle with a replacement value endorsement on personal property. The home has antique hardwood floors and the replacement cost of the home is $600,000. The policy has a deductible of $5,000 and a premium of $3,000 annually. Automobile Coverage Kevin’s Honda Accord and Christine’s Ford Explorer both carry collision and other than collision (comprehensive) coverage. Kevin and Christine have impeccable driving records and carry state minimum liability insurance limits. The policies each carry a $500 deductible and have aggregate annual premiums of $1,500; $750 each. $25,000 Bodily injury‐one person $50,000 Bodily injury‐all persons $30,000 Property damage Equity Indexed Annuity Christine owns a deferred equity indexed annuity. Last year, the contract value was $45,000. The annuity has an annual minimum credit of 1%. Annual performance is calculated on a weekly measure of the S&P 500 performance and capped at a 0.23% weekly crediting rate. The annuity contract is non qualified and was purchased three years ago for $40,000. The contract has a surrender charge of 4% remaining. The surrender charge reduces by 1% annually. Retirement Plan and Brokerage Account Details Brokerage Account Kevin and Christine regularly contribute cash surpluses into their brokerage account. The account is self directed and managed by Kevin. Last year the Gutierrez’s contributed $20,000 into a cash position in the account. Reported cost basis of this account is $240,000. Assume all positions have been held over one year. FMV Cost Basis Microsoft Stock $50,000 $40,000 S&P 500 ETF $ 80,000 $80,000 Gold ETF $ 50,000 $20,000 High Yield Bond Fund $100,000 $80,000 Cash $20,000 $20,000 401(K) Plan Kevin contributes 10% of his base pay annually and has for some time. His contribution is matched 100% up the first 6% of his base compensation. Microsoft periodically makes an additional profit sharing contribution to Kevin’s account based on a percentage of his annual salary. Christine is the primary beneficiary of Kevin’s 401(k) and his children are contingent beneficiaries of the plan. 100,000 Domestic Equity Growth Fund 100,000 Domestic Equity Value 100,000 International Equity 60,000 Domestic Fixed Income Fund 70,000 Global Fixed Income Fund 70,000 MSFT Stock1 700,000 Money Market Fund (23,000 shares – average cost basis of $13.00/share) IRA Accounts Kevin and Christine are maximizing their IRA contributions. They have listed each other as primary beneficiaries on their accounts; neither account has a named contingent beneficiary. Kevin’s has made total after tax contributions of $35,000. Christine has made total after tax contributions of $25,000 to her IRA. Kevin’s IRA is allocated 100% in an S&P 500 ETF; Christine’s is invested in a ETF tracking a banking index. Statement of Financial Position Kevin and Christine Gutierrez Beginning of Year ASSETS:1 Cash and Cash Equivalents Checking Account $30,000 Checking Account 4,500 (JTWROS) 50,000 (JTWROS) Savings 12,500 Life Insurance Cash Value Total Cash and Equivalents Investments Brokerage Account (C) $97,000 300,000 401(k) Plan (K) (JTWROS) 1,200,000 (K) IRA 85,000 (K) IRA 20,000 (C) Equity Indexed Annuity 45,000 (C) Total Investments $1,650,000 Personal Home2 500,000 (K) Auto – Kevin 30,000 (K) Auto – Christine 30,000 (C) Personal Property 100,000 (K) Total Personal $660,000 Total Assets
$2,407,000
LIABILITIES: Mortgage3 $174,600 15,400 Credit Card – ABC Bank4 Total Liabilities
$190,000
Net Worth
$2,217,000
Total Liabilities and Net Worth $2,407,000
Notes To Financial Statements: 1 All assets are stated at fair market value. (K) indicates ownership by Kevin; (C) ownership by Christine; (JTWROS) Joint with rights of survivorship. 2 Home was purchased four years ago for $440,000. FMV is based on similar home sales in nearby neighborhoods. 3 Mortgage is a 6% fixed 15 year note with 10 years remaining. 4
19.5% Variable APR Statement of Cashflow Kevin and Christine Gutierrez For the Year 20XX CASH INFLOWS Salary – Kevin $140,000
Salary – Christine 12,000
Bonus – Kevin 40,000
Investment Income 5,000
Total Inflows CASH OUTFLOWS 401(k) Contribution – Kevin $14,000
IRA Contributions 12,000
Mortgage 40,500
Real Estate Taxes 12,000
Homeowners Premiums 3,000
Auto Insurance Premiums 1,500
Life Insurance Premiums 1,000
Charity 2,000
Entertainment 8,000
Personal Care 5,000
Food 9,000
Utilities 12,000
Health Care Costs 2,000
Taxes Withheld 40,000
Other Expenses 7,000
Total Outflows $197,000
$169,000
Discretionary Cash Flows $28,000
Consider addressing the following questions when completing this case I.
Establish and define the client‐planner relationship • Do you see any potential hurdles in moving this prospect to a client? • How would you be compensated for working with Kevin? • Do you have the resources in place to handle this client? If not, what steps do you need to take to work with the client? • Does your business model have any limitations on your ability to work with this client? How can you overcome those limitations? II.
Gather client data, including goals • What additional information can help you create a financial plan for Kevin and Christine? • How would you structure your contacts and data gathering after an initial meeting? • What questions are important to ask about the client’s goals? • Based on the information provided, how would you prioritize and quantify client goals and objectives? III.
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Analyze and evaluate financial status • What resources does the client have available for their goals? • What types of retirement plans are appropriate for the client? • How would you calculate Kevin’s disability and retirement needs? • What risk management solutions should Kevin consider for himself and his family? • Do Christine and Kevin need to re‐evaluate their estate plan? What suggestions would you make towards the plan evaluation? • Do you foresee any tax problems Kevin might face this year? What changes can Kevin make to limit his audit risk? Develop and present financial planning recommendations and alternatives • How would you present your recommendations to Kevin and Christine? • How would you prioritize Kevin’s recommendations? Assuming he has limited time to meet with you, which recommendations would you stress today? • Would you involve Kevin or Christine’s children in the planning process? • What are the key elements to Kevin’s success? •
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Why include alternatives along with recommendations when presenting the plan? How might your recommendations change if you were compensated under a different business model? V.
Implement recommendations • Which implementation duties would you delineate to Kevin, Christine, or your firm? • How can Kevin generate the annual cash flow necessary for a successful implementation? • What products would you consider implementing with Kevin and Christine? • How do needs for liquidity and creditor protection impact plan implementation? VI.
Monitor the financial plan recommendations • What systems will you put in place to help Kevin grow with you into the future? • How will other professionals be involved in monitoring the plan? • How does your business model compensate you for monitoring the plan?