Sarah Sample
GOALS, OBJECTIVES, AND ASSUMPTIONS
I.
Personal Financial Goals
1. Provide for retirement
2. Develop a portfolio that is consistent with risk and return needs
II.
Financial Planning Objectives
1. Determine resources needed to meet Personal Financial Goals.
2. Determine appropriate investment strategy given return objective and risk
tolerance.
3. Confirm optimal strategy for debt paydown and establishing emergency fund
4. Ensure necessary estate documents are in place.
ASSUMPTIONS:
Financial Goal Plan
Plan goals are outlined below:
• Sarah will retire in 2034, and net cash needs in today’s dollars will be
$72,000 annually.
• Sarah will continue paydown of medical school debt and establishing a
$45,000 emergency fund in 2009. She will contribute $15k per year to each,
with the former requiring 4 years and the latter requiring 3 years.
• The standard actuarial life expectancy of 92 years was used for the plan.
In terms of savings, we assumed the following:
• Sarah will contribute the maximum allowable to the retirement plans
provided by her two employers, the Clinic and the University. Employer
matching is assumed based on the current matching policies.
• Once the emergency fund is established and medical school debt is paid
down, the $30,000 earmarked towards those to two items will be directed to
savings in a taxable investment account.
Other salient assumptions include the following:
• Social security income is estimated at just over $27,000 per year assuming
Sarah begins drawing social security at age 66. Given the long-term funding
issues facing social security, we cut this figure in half.
• Sarah will be invested in a diversified portfolio consisting of roughly 70% in
equities and 30% in cash and fixed income while she is employed,
decreasing to 60% equities/40% cash and fixed income when she retires.
Based on the above assumptions, the plan shows that the planning goals are
funded on a straight-line basis, but some stress test results are sub-optimal. The
fact that the plan does not pass all stress tests means there is an increased
likelihood that sub-optimal market performance would cause Sarah’s retirement to
be underfunded.
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OBSERVATIONS AND RECOMMENDATIONS:
Retirement Goal
Based on the assumptions above, Sarah’s plan is fully funded on a straight-line
basis with just under $1 million in today’s dollars remaining at plan’s end. Sarah
can address this shortfall in any number of ways, including reducing planned
spending in retirement, increasing current savings or delaying retirement by a bit.
We elected to model the impact of delaying retirement, and found that by pushing
retirement out two years to age 57, Sarah’s plan passed all relevant stress tests,
making it less likely that poor market performance would derail her goals.
One common question for those retiring early is when to begin drawing social
security. In Sarah’s case, it appears that she would be most likely to achieve her
goals if she delayed drawing social security until age 66. However, we would
recommend revisiting this issue - along with the general plan - every few years to
ensure this remains the case.
Savings
Sarah’s rate of savings is quite high, but she has become accustomed to a level of
spending that is low compared to her income. Thus, she feels comfortable that she
can maintain a savings rate of roughly 25% of her pre-tax income. We
recommend she maximize her contributions to her 403b plans, and once she has
paid down medical school debt and established an emergency fund, she direct
those funds to a taxable investment account.
Insurance
Life Insurance - typically, we view life insurance as a method of income
replacement for a surviving partner or dependent, and secondarily as a means to
pay down liabilities. Sarah has no dependents, so she has no need of life insurance
to provide a stream of income or to pay down liabilities.
Disability
The group long-term disability coverage offered through Sarah’s employer is
designed to replace 66 2/3% of the employee’s income. This will be sufficient to
cover ongoing expenses, but it will not allow her to fund plan savings. We
recommend Sarah explore the cost of additional individual disability coverage.
Should that prove too costly, the plan would need to be revisited and revised in
the event of a disability.
Long-term care
Typically, most clients examine long-term care policies once they reach their 50’s.
While policies can be purchased at an earlier age, we recommend clients fund the
financial goals as needed as well as life and disability insurance before funding
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Sarah Sample
long-term care. Thus, at this point, we feel that long-term care coverage is
optional for Sarah. If she has sufficient discretionary cash flow after meeting the
savings goals outlined above and funding disability insurance, she can look to
LTC coverage if she so desires.
Estate Planning Documents
Sarah has an up-to-date will, as well as financial and medical powers-of-attorney
and a Georgia Advanced Health Care Directive.
Investment Recommendations
As stated in plan assumptions, we recommend that Sarah invest in a portfolio that
is 70% equities and 30% cash and fixed income. More specifically, we
recommend investing as follows:
Cash
Fixed Income
Large Value
Large Blend
Large Growth
Mid-cap
Small-cap
Foreign Developed
Foreign Emerging
Real Estate
Commodities
3.00%
27.00%
8.00%
20.00%
10.00%
7.00%
5.00%
12.50%
2.50%
5.00%
0.00%
NEXT STEPS:
1. Rebalance the retirement accounts to match as closely as possible the allocations
listed above.
2. Continue maximum contributions to 403b, but given that employer matching
differs between the two 403b plans, do so in a way that maximizes employer
contributions.
3. Continue paying down med school debt and establishing the emergency fund.
However, once the debt is paid down and the emergency fund reaches $45,000,
establish an account with a discount broker and direct all contributions to this
account. Maintain overall target allocation for portfolio as outlined above, and be
sure to use tax efficient investments such as municipal bonds and index funds in
this account.
4. Look into cost of additional disability insurance.
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