Week 6 Case Study

 

Readings

In Reality

Case Study

Quiz

 

We've learned this about John and Susan so far:

John and Susan Smith	John dob 3/22/1960 Susan dob 8/27/1960
Daughter Claire, 17, junior in HS	Claire dob 6/4/1998
Planned retirement age, would like to work part-time in retirement at something they like not from need	65 (2025)
AUM	HNW/Affluent
Life-Cycle Stage	Pre-retired
Funding Status	Constrained, FC
CLIENT-PROVIDED DATA ELEMENTS
John's Employment - manager of restaurant chain	$50,000/y + expected annual raises equal to inflation
Susan's Employment - Dir of Comm for mid-sized private college	$50,000/y + expected annual raises equal to inflation
Financial Wealth ($) - FC	1,000,000
John's 401(k)	200,000
John's traditional IRA	200,000
John's Roth IRA	50,000
John's & Susan's Joint taxable accounts	275,000
Susan's 403(b) plan	250,000
Claire's 529 plan, wants to attend the college where Susan works	25,000
Current Retirement Savings	6% each with 3% employer match up to 6%
Home -  15 yrs left on 30 yr 3.75% fixed mortgage balance $200,000, no HELOC, no other debt	$500,000 MV $300,000 equity $3,200/m PTI
Cars - a 2010 Prius and a 2010 Jetta	worth about $20,000
Expected Social Capital Income ($)	John SS 1,550/m/ at FRA Susan SS 1,435/m/ at FRA both in today's dollars
Planned Expenses in Retirement (C)	Estimated at $70,000/y fixed $10,000/y discretionary, both in today's dollars
Net Consumption from Wealth (%) - C/FW - at retirement	4.0%
Pmts Desired Per Yr	12
Risk Aversion	N/A
Retirement Age	65
Age at Death for planning purposes	95
Funding Time in Retirement (Years) - TIR	30
Age	56
Time to Retirement (Years) - TTR	9
ADVISOR-PROVIDED MARKET EXPECTATIONS
Inflation (%)	3.3%
Upside Expected Returns (%)	3.89%
Floor Discount Rate	4.6%
Mortality Credit YTM enhancement	0%
CLIENT-PROVIDED INVESTMENT PORTFOLIO
Current Portfolio: Stocks	60
Current Portfolio: Bonds	30
Current Portfolio: Cash	10
ADVISOR-PROVIDED RETIREMENT PORTFOLIO
Retirement Portfolio: Upside	?
Retirement Portfolio: Floor	?
Retirement Portfolio: Longevity	?
Retirement Portfolio: Reserves	?

 

We've also learned recently that:

-- Daughter Claire is hoping to attend the private college where her mother works

-- John does fine woodworking in his spare time, and thinks he may be able to net about $10,000 a year building cabinets and other furniture in retirement, perhaps for the first ten years or so

-- Susan likes to play golf, and wants to join a local country club, with an estimated $7,500 annual dues and expenses which was not in their original retirement expense estimate; she hopes to shoot her age when she is 80

 -- Susan may be able to work part-time for the college after retirement for 5 to 10 years, but is concerned it will interfere with her golf game; she thinks she may be able to earn $10,000-15,000 yr depending on how many days of the week she works

 -- The Smith's have been thinking about your concerns about long term care expenses and longevity risk 

 

Assignment

The time has come to pull together all that we have learned about the Smiths and put a preliminary plan together around a Retirement Policy Allocation based on their balance sheet. 

First, we need to incorporate the new information into the planned cash flow and balance sheet--

-- Reduced tuition for Claire so perhaps less required savings for her 529 plan. We need to decide how much savings to allocate to the 529 and how much to the retirement plan. For simplicity, we'll keep the 529 account balance off the balance sheet used for the retirement plan.

-- Estimated human capital in retirement added to the balance sheet

-- Adjustments to estimated annual expenses in retirement.
      >> It may make sense to show the Smith's how planning for more or less discretionary expenses changes their Funded-ness
      >> You might also show how covering fixed and some amount of discretionary expenses with Floor and the rest of discretionary expenses with Upside changes their Floor/Upside allocation

-- Estimate the cost for LTCI and include the cost in their annual retirement expenses; as a fixed expense, it will be covered by the Floor

-- Look at their options for QLAC longevity insurance, and propose a plan and Longevity allocation (%) accordingly. Since longevity insurance protects the income floor, take the Longevity allocation out of the Floor allocation ( Income Floor = Floor + Longevity).  

 

Based on your best recommendation for balancing their hopes and their funding, prepare the following to share and discuss with them:

-- 1) Their funded-ness, and your guidance based on funded-ness for both Susan's possible retirement income and the level of their planned discretionary expenses

-- 2) Their updated current year and retirement year household balance sheets

-- 3) Their  Retirement Policy Allocation based on their current year balance sheet with $ and % for Upside/Floor/Longevity/Reserves.

-- 4) Include these explanatory notes:

      >> List their "Plan B" assets separately off the balance sheet--in this case, their home equity--if don't plan to "spend" it as part of the plan supporting the Floor; off-sheet, it is a deep reserve that adds resilience to the plan

      >> If you feel the home equity should be held as a reserve for potential LTC expenses instead of buying LTCI, then show the home equity as an asset on the balance sheet offsetting the PV of LTC expenses as a liability; in this way it will be spent against a future liability should that liability arise

     >> Explain your proposed Longevity allocation 

     >> Explain your proposed Reserves allocation based on your analysis of the Smith's household risk exposure

     >> Explain how you plan to manage the Floor--what implementation approach and method you will use to assure the Smith's that they'll have the income from the Floor that the plan indicates

We'll be detailing out the implementation next week, so a general description of the approach will suffice for now

 

For this assignment you can use the "Funded-ness-Balance Sheet-Allocations" tool (now updated to v04 this week and available under the Multimedia button with a new "Today's Dollars" input for SS benefits along with "Today's Dollars input for planned retirement expenses) to work through the Funded-ness, Balance Sheet, and Retirement Allocations, but prepare your own charts of the information--ie, a screen capture of the tool is not what we want to show the Smiths

 

 

So you'll want to show:

-------------------------

Annual Retirement Income @ Retirement = Annual Earnings + SS benefits + Pensions

Annual Retirement Expenses @ Retirement = Fixed Expenses + Discretionary Expenses

Fundedness @ Retirement = C1 / FC       (C1 = C - Retirement Income)

-------------------------

HHBS

Assets                             Liabilities

CV FC                             PV of Pre-retirement + Retirement Expenses

PV SC

PV HC

Total Assets                   Total Liabilities

                                       Cushion

(If you're going to reserve home equity for LTC expenses, show home equity under Assets and PV of LTC expenses under Liabilities)

---------------------------                                      

FC - PV (SC + HC) = Income Floor

Income Floor = Floor + Longevity

Upside = FC - (Floor + Longevity + Reserves)

---------------------------

Retirement Policy Allocation

Upside $$$ & %/ Floor$$ $ & %/ Longevity $$$ & %/ Reserves$$ $ & %

 

The Fundedness-Balance Sheet-Allocations Excel tool has been updated and now includes two example withdrawal cash flows over the plan horizon that help visualize how the plan provides retirement income Download The Fundedness-Balance Sheet-Allocations Excel tool has been updated and now includes two example withdrawal cash flows over the plan horizon that help visualize how the plan provides retirement income

. You will need to remove the placeholder data and enter the correct case study data. Here is the updated guide to the tool including these cash flow run-outs, as well as the setups to last week's Case Study assignment for your reference. Download Here is the updated guide to the tool including these cash flow run-outs, as well as the setups to last week's Case Study assignment for your reference.