cashman plan presentation-final · 2019. 1. 14. · not to be reproduced or circulated course 7;...

DEVELOPING THE FINANCIAL PLAN: The Cashman Financial Plan Presentation

© 2018 Greene Consulting Associates, LLC INTENDED SOLELY FOR USE BY REGISTERED USERS NOT TO BE REPRODUCED OR CIRCULATED Course 7; Lesson 11a

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COURSE 7: LESSON 11

The Cashman Financial Plan Presentation

CFP® and CERTIFIED FINANCIAL PLANNER™ are certification marks owned by Financial Planner Board of Standards Inc. These marks are awarded to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.



A Comprehensive Financial Plan Prepared for John and Jeane Cashman

As of: June 30, Year 1

CONFIDENTIAL

Prepared by

Denise Magellan, CFPâ Practitioner Financial Planning Firm

1234 Windward Way, Suite 100 Breezy City, FL 00000



Table of Contents

Introductory Letter ......................................................................................... 4

Executive Summary ........................................................................................ 8Current Financial Position Evaluation and Recommendations ................. 12

Income Tax Evaluation and Recommendations .......................................... 17Risk Management Evaluation and Recommendations ............................... 19

How Much Care Will You Need? .................................................................... 34

Education Funding Evaluation and Recommendations ............................. 43Retirement Accumulation Evaluation and Recommendations .................. 49

Estate Planning Evaluation and Recommendations ................................... 59

Final REVISED Financial Statements ............................................................ 62Plan Implementation and Monitoring ......................................................... 66

Plan Implementation Timeline Report ........................................................ 67APPENDIX 1 .................................................................................................... 73

APPENDIX 2 .................................................................................................... 76

APPENDIX 3 .................................................................................................... 78APPENDIX 4 .................................................................................................... 80

APPENDIX 5 .................................................................................................... 81

APPENDIX 6 .................................................................................................... 82



Introductory Letter

John and Jeane Cashman 123 Palm Islands Lane Breezy City, FL

Dear John and Jeane:

We have enjoyed our engagement to help you develop a comprehensive plan that will provide the guidelines that enable you to more easily realize your personal and financial goals.

FINANCIAL PLANNING EXPECTATIONS OF YOUR COMPREHENSIVE FINANCIAL PLAN

In our initial discussions, we came to understand that you require guidance in managing your financial affairs on an ongoing basis. You are very prudent savers, but you believe that it is possible to invest your savings to prudently realize better returns. You have stated, “financial affairs do not interest us very much.” You suspect that there are ways to make your money work harder, but you are not sure how to do so without incurring too much risk. The idea of losing saved funds is a great concern for you. Accumulating the necessary funds to provide your two children with college and graduate school educations is your highest priority. You also want to be able to retire with adequate funds to provide what you consider a relatively modest but comfortable lifestyle. You do not want to be a burden to your family in your retirement years. You want to address your insurance coverages - you are not sure which coverages are appropriate. You want efficient insurance coverage – not too much and not too little. You would like to save income taxes as long as the process is legal and not a hassle. You have no real concerns about estate planning issues, but are open to any recommendations we might have.



You expect us to make objective, professional, and well-considered recommendations and suggestions to help you realize your objectives with due regard for your concerns.

We are impressed with how well you have managed your financial affairs and believe we have provided you with sufficient information and recommendations so that you can make good decisions. We all need to remember that a personal financial plan and resulting implementation is an evolving process. Our discussions of this plan will inevitably result in somewhat modified actions other than those suggested by the plan. It is important for all of us to remember that this evolving process is normal and, for optimal results, will require some monitoring and review as your plan evolves.

SCOPE OF PLAN

The development and presentation of this comprehensive financial plan is completed for a fee of $1,500. As we have discussed in our prior meetings, we believe a comprehensive plan can only realize its true potential if it is viewed as an initial roadmap that must be reviewed and modified over time. If you wish to continue to engage us to provide ongoing services, we will be happy to do so.

FINANCIAL INFORMATION

In order to acquire necessary information to complete this plan, you provided us with a completed financial questionnaire and several copies of financial documents, which we were able to review prior to our second meeting on June 14.



FAMILY SITUATION

We have previously verified with you our understanding of your family situation, risk tolerances, and financial goals; thus, we will not repeat them here. As we present recommendations for your consideration regarding specific concerns and objectives, we will repeat your goals and objectives to relate them in a clear context.

A NOTE ABOUT FINANCIAL ASSUMPTIONS IN THE PLAN:

In our evaluations, we have made specific assumptions about inflation, interest rates on debt, interest rates for fixed income assets, and projected rates of return for equities. We would prefer that these assumptions prove to be highly accurate, but we all must realize that these projected rates are subject to change in the short- and long-term, and these assumptions are not guaranteed but prudent and not overstated for purposes of making financial decisions. A copy of these assumptions is included in Appendix 1.

PLAN PRESENTATION AND SUBSEQUENT PROCESS

We are presenting this plan to you in our scheduled meeting on July 11. Please ask all the questions that occur to you at that time. Most clients find that it is a good idea to take notes in that meeting. I do not expect you to absorb all of this information or make decisions about a wide range of recommendations after one relatively brief overview. Please review and contemplate the plan’s observations and suggested changes after our meeting. Jot down your new questions and we will schedule to meet again in a week or so. In that meeting, we will sort out your priorities for implementation so you can begin the process of making the changes that will mitigate your concerns and set you on a more direct path to the achievement of your objectives.



Our recommendations are not didactic – we are providing you with information and objective observations that you must evaluate and use to make decisions about your financial future. Our plan is intended to be based on sound information and estimates and designed to make this planning and decision-making process as easy as possible for you.

At the end of this plan, we have accumulated all of our recommendations in a table called The Implementation Timeline Report. This is a preliminary report that can be used by you and us to facilitate the implementation process. After our presentation and follow-up meeting, we will very likely need to modify this report as you make decisions about our recommendations. In addition, if you choose to continue our engagement, we will maintain this confidential report for you online, which will greatly facilitate the proper scheduling of planning reviews and implementation of planning decisions as they are made. The report can also include completion of tasks thus developing a history or trail of financial planning implementation.

I have written and approved this summary. Let me know if you have any corrections or supplementary information that might cause alterations to our understanding of you, your financial situation, or our evaluation.

_______________________________ _________________________

Denise Magellan, CFP® Practitioner Date



Executive Summary

OBSERVATIONS AND GOALS

Over the past several weeks, we have developed a financial plan for you in order to provide you with a comprehensive strategy to realize your financial goals. In this process, we identified several key financial concerns and objectives:

• Your primary objective is to accumulate sufficient funds to pay one-half of the cost of Sam and Sally’s post-secondary education.

• You would like to be able to retire in about twenty years without sacrificing your lifestyle.

• You believe that your investment and savings assets could realize better returns but you would like us to provide you with a strategy to do that without taking intolerable risks.

• You would like us to identify all of your potential financial risks and recommend strategies to eliminate or mitigate those risks as efficiently as possible.

• You would like to pay less income tax if legally possible.

• In regard to estate planning, in the event of your incapacity or deaths, you do not wish to be a burden to your surviving family members in any way.

You have been excellent managers of your money by maintaining an efficient lifestyle that permitted you to elect to set aside substantial sums into savings and to already have accumulated substantial capital to fund Sally and Sam’s post-secondary education and your financial independence in about twenty years.



You have a relatively conservative “risk profile.” You are more concerned about the return of your money than the return on your money.

PRIMARY RECOMMENDATIONS

After an extensive review of your goals, objectives, available financial resources and current financial position, we make the following primary recommendations (along with expected results) for your consideration:

• Cash Flow/Cash Reserves Maintain your cash reserve of at least $100,000 with periodic fluctuations for emergency use, opportunities, and auto purchases. Add $350 per month into the savings account and any other surplus cash that occurs. A sufficient cash reserve is a key component of risk management and should allow you to purchase future autos for cash. We suggest that in future years you slowly increase this reserve to at least keep pace with inflation. Cash reserves in retirement are very important to help manage retirement income planning.

Use your savings to pay off the balance of your Honda car loan.

Cash Flow and Cash Reserves should be monitored at least annually and adjustments made when necessary to assure non-depletion of assets.

• Net Worth/Balance Sheet As a result of our recommendations, your net worth will increase in the short run by about $2,000; that is essentially unchanged. However, this will change quickly as you continue to invest net discretionary income into your retirement and 529 Plans. Your pace of increasing net worth should accelerate because of slightly more aggressive asset allocation in your cash reserves, education funds, and retirement plan assets and a smaller portion of asset earnings



and growth subject to income taxation. Refinancing your mortgage will accelerate the amortization of your loan.

• Risk Management We have made several recommendations regarding your medical, auto, and homeowners coverage to boost the efficiency of cost and coverage.

Based on your objectives, we have made recommendations to increase insurance coverage to cover risks of personal liability, long-term disability, long-term care, and the possibility of an unexpected death of John and/or Jeane.

• Tax Planning Accumulating assets in a 529 Plan versus personal accounts will significantly increase the after-tax return of accumulating assets.

We have made recommendations regarding the most tax-efficient manner of accumulating retirement income capital.

Use of a FLEX Plan and possibly a Health Savings Account can convert after-tax medical care expense payments into pretax payments.

List all potential Miscellaneous Itemized Deductions each year and submit all of these to tax preparer. There may be potential to shift payments to “overweight” a year to create deductions.

Plan for your itemized deductions to match your estimated taxes for the year to avoid interest-free loans to the U.S. Treasury.

• Investment Performance/Asset Allocation A reallocation of your cash reserves, education funds, and retirement account funds in accordance with your risk tolerance should result in substantially improved long-term investment performance and a greater likelihood of realizing your goals.



• Education Cost Accumulation

• A reallocation of assets, placing these assets in a tax-sheltered 529 Plan, and relatively modest increases to your savings for the next eight years dramatically increases the likelihood of realizing your goals.

• Retirement/Financial Independence Capital Accumulation

A reallocation of assets and increased tax-efficient savings in the coming years dramatically increases the likelihood that you will realize a financially secure retirement in about 20 years. Increases in your savings for retirement will be necessary as soon as your cash flow permits. We have recommended that your make savings withdrawals in Year 1 and Year 2 so that both of you can make full $5,000 Roth IRA contributions in order to get you started in boosting your retirement capital in twenty years. When the children graduate from high school (current cost about $15,000 per year) and enter college (pre-funded) you should be able to make substantial increases to your retirement savings to build more retirement capital making your retirement income more secure and flexible.

• Estate Planning Issues

Meet with an estate planning attorney to draft basic planning documents and provide greater protection for the children. Also, address beneficiary designations to coordinate with the final estate plan.

On the following pages, we will address specific financial planning issues relative to your particular concerns and goals. We have discussed pertinent observations and our recommendations for your consideration.



Current Financial Position Evaluation and Recommendations

In this section, we present two financial statements that provide us with a snapshot of your current financial position, allow us to make observations and recommendations, and provide us with a foundation to later compare these statements to the “REVISED” statements as a result of our cumulative recommendations.

First, we will review the “AS IS” Personal Balance Sheet as of June 30, Year 1. A copy of the statement is available in Appendix 2.

The Balance Sheet lists the current value of all of your tangible assets (in some cases, estimates, such as your personal assets) and current balances of debts. The excess value of your assets over your liabilities is your net worth, currently about $630,000. This substantial net worth is a result of your exceptional ability to live within your means and to consistently set aside substantial sums into your savings account, education accounts for Sally and Sam, plus contributions to your 403(b) Plans and Jeane’s Roth IRA.

The “AS IS” Cash Flow Projections completed as of June 30, Year 1 provide an illustration of your estimated receipts and disbursements for last year, this year and next year. A copy of the statement is available in Appendix 3.

This statement immediately indicates that you are spending less than you are taking in from earned income, savings and investment earnings, and annual gifts from Jeane’s parents. In addition to the specified



contributions to your retirement and education fund accounts, we estimate that you added about $9,000 to your savings account last year (Year 0) and we project additional discretionary cash flow this year and next year (in Years 1 and 2). These projections include income and FICA taxes, which we will review in the next section. Year 0 income taxes are actual from your Year 0 income tax return. We have also included a copy in Appendix 4 of your current estimated living expenses, as well as projected expenses at retirement and in the event either spouse is a survivor.

The footnotes with each statement may amplify your understanding of the statements and stimulate new insights and questions.

We have listed below a few observations and recommendations for your consideration as a result of reviewing these financial statements. As you proceed through this and the subsequent evaluations of this plan, make notes, ask questions, or make comments to us in our next discussion.

RECOMMENDATIONS:

Cash/Savings Accounts

Your savings account represents almost all of your substantial “Emergency Fund” or “Cash Reserve.” Most rules of thumb consider this cash balance of about $131,500 (checking accounts, cash value of life insurance and savings account) excessive since it greatly exceeds 3–6 months of your monthly living expenses. However, we will be recommending additional uses for some of these funds now and in the future, which should periodically reduce the balance and then resume its climb to a higher balance. In addition, we would like you to compare the estimates of your living expenses to actual expenses over the next year or so to make sure that we have an accurate estimate of your actual



expenses and thus a better estimate of how much you can actually add to your cash reserve each month or year.

Henceforth, we would like you to consider also using your cash reserve as a sinking fund to purchase automobiles for cash. You tend to purchase used cars, and the nondeductible interest rates on auto loans for used cars are substantially higher than the funds earn in the cash reserve. We suggest that you pay off the current balance on the Honda loan. This is the equivalent of earning a tax-free, guaranteed rate of return of 5% over the next 18 months. We suggest that you begin adding $350 per month or $4,200 per year to your savings account beginning in Year 3.

Ideally, we would like to see the cash reserve slowly increase over time to where you have a reserve equal to twice your annual expenditures when you retire. If you are able to develop retirement capital from which you draw capital (versus annuitization of all retirement capital to meet your income need), it gives you the option to defer or reduce withdrawals in a downward market cycle of your investment portfolio.

We are recommending withdrawals from savings totaling $8,000 in Year 1 to assist in the payoff of the car loan, an additional $2,000 contribution to Jeane's Roth IRA and $5,000 to John's proposed new Roth IRA, the financial planning fee of $1,500, and the estate planning legal fees estimated to be $1,000 in Year 1. In Year 2, we are recommending a savings withdrawal of $2,500 to fund an additional $2,000 contribution to Jeane's Roth IRA and $5,000 to John's proposed new Roth IRA. No “extraordinary” withdrawals are anticipated after Year 2. We will discuss the above “extraordinary” expenditures in the forthcoming sections. They



are all noted in the “Revised Cash Flow Projections,” which we will review later in this plan after we have discussed all of our recommendations.

Debt Management

We have already mentioned that we think you should pay off the Honda car loan and purchase future cars with cash.

Your $165,025 mortgage balance could currently be refinanced for 15 years at a 3.5% interest rate vs. your existing 30-year mortgage interest rate of 5%. The new mortgage payment would be about $ 1,179.73 per month or $14,157/year versus your current payment of $1,074 per month. The table below summarizes the resulting differences of refinancing the mortgage in calendar Years 1 and 2: (Note the Year 2 numbers are highlighted since these numbers are for a full 12 months and are a better representation of the resulting changes).

AS IS

SCENARIO REFINANCE SCENARIO DIFFERENCES

Monthly Payment $1,074 $1,180 $106/month

Interest Paid Year 1 $8,260 $7,655 (50)/month

Interest Paid Year 2 $8,024 $5,565 (205)/month

Tax Savings Year 1 $2,065 $1,914 (13)/month

Tax Savings Year 2 $2,006 $1,391 $(51)/month

Loan Amortization Year 1

$385/month $462/month 77/month

Loan Amortization Year 2

$405/month $716/Month $311/month



Implications of Cash and Debt Management Recommendations to Finances and Other Planning Objectives:

• Balance Sheet: The refinanced mortgage initially increases the amortization by an additional $311 per month. Paying off the car loan reduces debt and cash.

• Cash Flow: The refinanced mortgage reduces net discretionary cash flow a little, but elimination of the car loan increases cash flow. Paying off the car loan eliminates future payments and eliminates interest cost.

• Income Tax: The refinanced mortgage reduces interest and thus tax reductions by $151 in Year 1 and $615 in year 2.

• Education Planning: Neutral.

• Risk Management: A little better since debt reduction is accelerated.

• Retirement Planning: Accelerated amortization of the mortgage may permit additional retirement savings in fifteen years.

• Estate Planning: Acceleration of debt reduction simplifies estate settlement a bit.



Income Tax Evaluation and Recommendations

INCOME TAX PLANNING OBJECTIVES

You would be delighted to pay less income tax as long as everything you do is perfectly legal and will not create a hassle for you in the future.

RECOMMENDATIONS:

Some of the interest and all of the dividend earnings are attributable to the education accounts. You should consider moving these funds to 529 accounts for Sally and Sam, which will immediately increase their yields by 33%. We will discuss this in more detail in the education funding evaluation.

You should coordinate with us or your tax preparer at the end of each year to make sure that you are having the proper amount of taxes withheld from your paychecks. This planning allows you to keep more cash reserves earning interest throughout the tax/calendar year versus receiving a refund after the end of the tax year.

In order to be able to deduct certain expenses, such as professional dues, tax preparation fees, safe deposit box fee, financial planning fees, and certain types of estate planning legal fees, these miscellaneous itemized deductions must exceed 2% of your Adjusted Gross Income, or AGI. Your AGI is currently about $160,000, thus your Miscellaneous Itemized Deductions would need to exceed about $3,200 before they begin to be deductible. If you track these expenses, you may have opportunities in some years to shift some payments into a previous or future year to make some of these expenses deductible.



Implications of Tax Planning Recommendations to Finances and Other Planning Objectives:

• Balance Sheet: Tax management and savings accelerate cash flow and increase savings over time.

• Cash Flow: Increased.

• Education Planning: Use of 529 Plan leverages return.

• Risk Management: N/A

• Retirement Planning: The Retirement Planning Analysis may uncover accumulation and distribution strategies that will reduce tax depletion of growth and/or distribution amounts.

• Estate Planning: N/A



Risk Management Evaluation and Recommendations

RISK MANAGEMENT PLANNING OBJECTIVES

You want us to help you determine the efficient amount of auto, homeowner’s, life insurance, or whatever other coverages that we think you should consider. You do not want to “over-insure,” but you do not want to be “blindsided” by unanticipated risks.

ESTABLISHING A GOOD DEFENSE

Managing financial risk must be addressed as a priority in any financial plan because substantial assets and apparent financial security can rapidly diminish or dissipate when unexpected events occur that have unanticipated financial costs. The three primary classifications (Personal, Property, and Liability) of an individual’s or family’s risk exposures are listed in the table titled “Potential Risk Exposures for Individuals and Families” on the following page, along with a description of the potential losses associated with those risks.

This table helps us to not only identify and address these risks, but we must also develop a plan designed to mitigate these risks before we address your "offensive" objectives of providing education for your children, financial independence, etc.

There are two primary types of responses to mitigate risks listed below with examples:

1. Risk Control - such as:

• Risk avoidance - Such as purchasing a home not in a flood plain, low crime area, etc.



• Risk diversification - For non-businesses, this typically applies to investment portfolio diversification.

• Risk reduction/prevention - Such as preventative medical care, healthy lifestyle, timely auto and home maintenance, alarms, using seatbelts, etc.

2. Risk Financing - such as:

• Risk retention - Assuming full or partial risk by utilizing cash reserves, deductibles, co-insurance, etc.

• Risk transfer - For individuals, this typically involves social and commercial insurance.

We can apply all of these responses to realize a comprehensive and efficient strategy to manage your risk exposures. On the following pages, we will discuss recommendations to all of these potential risks.



POTENTIAL RISK EXPOSURES FOR INDIVIDUALS AND FAMILIES TYPE OF LOSS EXPOSURE POTENTIAL FINANCIAL LOSS ASSOCIATED

WITH RISK

Personal Poor Health • Medical care expenses

• Loss of income by family caregiver(s)

Disability • Loss of income

• Medical care expenses

• Loss of income by family caregiver(s)

• Long-term/custodial care expenses

• Loss of medical insurance coverage and other employee benefits

• Unfulfilled objectives (e.g., education and retirement capital)

Death • Final expenses - e.g., funeral costs, debt, estate settlement and administration costs

• Loss of income to dependents

• Loss of medical insurance for dependents

• Unfulfilled objectives (e.g., education capital)

Unemployment • Lost income

• Lost employee benefits including medical, disability, life insurance and retirement benefits



• Could coincide with retirement - income may be inadequate.

• Unfulfilled objectives (e.g., education and retirement capital)

Superannuation • Client(s) may outlive ability of financial resources to provide adequate income

Property Real • Cost of repair

• Reduction in value

• Cost of alternative temporary or permanent home

• Loss of rental income

• Loss of asset and possible continued debt obligation

Personal/Tangible & Intangible

• Cost of repair


• Loss of asset

Auto • Cost of repair


• Loss of asset and possible continued debt obligation

• Cost of alternative/new auto

Liability Bodily Injury

Property Damage

• Compensatory Damages to compensate or reimburse for a loss

• Punitive Damages may be awarded to



Personal Injury

Contractual Liability

Wrongful Acts

punish the wrongdoer

THE RISK OF UNEMPLOYMENT, UNEXPECTED REPAIR COSTS AND ASSET VALUE LOSSES

As we discussed above, it is imperative that you maintain a cash reserve for unexpected expenses, opportunities, substantial home repair costs, insurance deductibles and coinsurance, and as a sinking fund for auto purchases.

ASSET LOSS AND PERSONAL LIABILITY RISK RECOMMENDATION SUMMARY

Are You Prepared for these Asset and Liability Risks?

Your current auto and homeowners policies provide necessary or required protection, but you have some unobvious exposures that can be eliminated or mitigated. In addition, your existing coverages can be improved and designed to be more cost effective. We suggest that you meet with your property and casualty agent (or we can recommend one) to perform a thorough review of your property and liability coverages. We can assist you in this process to the degree you deem appropriate. We have addressed these risks more specifically below:

• Auto Insurance: In regard to your auto insurance, we recommend increasing the comprehensive and collision deductibles to the $500-$1,000 range and increasing liability limits to $300,000/$500,000/$100,000. (Your current liability limits are $100,000/$300,000/$100,000. Your current deductibles are $100/$250.) This should result in very little increase in premium and may result in a decrease. The agent will provide you with alternative



limits and costs. Your substantial cash reserve allows you to self-insure the higher deductibles.

• Homeowners Insurance: The HO policy should be reviewed to make sure dwelling coverage is adequate, particularly since you have made improvements to the home over the last eight years. We recommend increasing the liability limit to $300,000 vs. $100,000 and increasing the deductible from $250 to $1,000. This also should result in very little increase in premium and may result in a decrease. The agent will provide you with alternative limits and costs. Your substantial cash reserve allows you to self-insure the higher deductible.

• Personal Articles Floater Insurance: You have indicated that you own some potentially valuable items that may not typically be completely covered by your HO-3 Homeowners policy, such as valuable/antique furnishings, silver flatware, silver serving pieces, crystal, artwork, collections, and valuable jewelry. In order to determine if any items should be appraised for insurance purposes, we recommend that you seek the advice of a qualified appraiser in coordination with your property and casualty agent. It is likely that you will need to purchase supplemental coverage to your homeowners policy to adequately cover certain valuable items. Again, a higher vs. lower deductible would probably be appropriate.

• Umbrella Liability Insurance: We recommend that you purchase a $1,000,000 umbrella liability policy. The agent can select an umbrella policy from an insurance company that includes provisions most appropriate to your situation and lifestyle. The policy will not only increase the liability limits of your homeowners and auto policies, but will also provide broader personal liability coverage. The umbrella coverage should cost only a few hundred dollars per year.



We believe these changes will make your coverages broader, more efficient, provide increased protection and result in relatively modest increases in cost.

Implications of P&C Insurance Recommendations to Finances and Other Planning Objectives:

• Balance Sheet: Neutral.

• Cash Flow: Relatively modest increase in long-term premium cost.

• Income Tax: Neutral.

• Risk Management: Much better coverage for a modest increase in premium. Some risks are currently not covered or coverage is inadequate.

• Retirement Planning: Neutral except less risk to assets and income.

• Estate Planning: Neutral except less risk of decreasing size of estate.

THE RISK OF SUBSTANTIAL MEDICAL EXPENSES

A Substantial Risk

There are actually two parts to this very substantial risk where medical insurance covers a large portion, but not all, medical expenses. The first part involves covering the risk of very substantial or catastrophic medical expenses. The second part involves paying for the insurance and uncovered expenses as efficiently as possible.

The first part for you is thankfully taken care of – you both have very comprehensive coverage through your employment and you have allocated the costs efficiently based on your respective employers’ plan design. You will always want to monitor changes in the plan choices



offered to you to determine if changes in your coverage are beneficial to you.

Your employer-sponsored group medical plans provide good coverage at very attractive costs to both of you. John’s coverage is paid for by his employer. Jeane’s plan covers her, Sally and Sam. She has taken advantage of the cafeteria plan and pays her premiums pre-tax. When the annual enrollment period comes up, probably in October or November, we may want to meet and examine the plan options. Since your family health is very good and insurance utilization is low, you may want to consider a Health Savings Plan/High Deductible Insurance plan option to see if this is a viable choice for either and/or both plans. In an ideal situation, this would reduce your premiums and would allow you to build a tax-advantaged Health Savings Account (HSA) or “medical IRA” into your retirement years to pay health care costs from the HSA pretax.

We recommend that you enroll in a FLEX plan during the enrollment period later in Year 1 for the Year 2 plan year. We suggest an amount of $2,500 to be confirmed by you estimating your non-reimbursed health-care expenses. This will save you $625 in federal income taxes.

Implications of Medical Insurance Recommendations to Finances and Other Planning Objectives:

• Balance Sheet: Neutral, although an HSA may accumulate some cash.

• Cash Flow: FLEX Plan will decrease taxes by $625. If viable, an HSA plan would lower premiums and HSA contributions would be tax deductible.



• Income Tax: FLEX Plan will decrease taxes by about $625. If an HSA plan is viable, the HSA contributions would be tax deductible.

• Education Planning: Increases cash flow a bit.

• Retirement Planning: HSA balance theoretically could be available in retirement if utilization in years prior to retirement is low.


THE RISK OF LONG-TERM DISABILITY

Another Substantial Risk What would happen if John or Jeane become disabled for a long-period of time? Not only is there the risk of loss of income for the family, but additional expenses can be incurred for the care of the disabled individual.

There are three primary options available to mitigate this risk:

1. If you have substantial assets, they could be converted into sufficient income-producing assets. This essentially means that you have reached a point where you could retire if one of you no longer worked, or was unable to work for several months or years. When we review the retirement analysis, we will see that this is not the case, especially if the disabled spouse required extra health care not covered by his/her medical insurance. Your primary assets are your home (still mortgaged), your cash reserve, your education accounts, and retirement plan assets. You need to maintain your cash reserve and actually should continue to make contributions to it, your education accounts are committed to an objective that still requires more savings and growth, and your retirement accounts require substantially more savings and growth to provide an adequate amount of lifetime income at an older age let alone your current age.



2. Employer-provided Sick-Pay Plan and Group Long-Term Disability: You are fortunate that you both have group LTD coverage that is provided and paid for by your employers. The details are listed in the table below:

TYPE OF POLICY GROUP DISABILITY GROUP DISABILITY

Insured John Jeane

Insurance Company Unum Unum

Waiting Period 180 days 180 days

Maximum Benefit Period

Age 65 Age 65

Monthly Benefit 50% of salary 50% of salary

Annual Premium Employer-paid Employer-paid

Definition Own Occ 5 years, then education, training and experience

Own Occ 5 years, then education, training and experience

Any LTD benefit payments from these plans would be taxable income to you, the employee. You both also have Sick-Pay plans that accrue days of unused sick-leave that can be used in the event of short or long-term disabilities. Fortunately, you both have been employed for several years and accrued substantial sick-leave days:

• Jeane accrues 1.25 days of sick leave per month of employment. She currently has 120 days of accrued sick leave.

• John accrues 1 day of sick leave per month of employment. He currently has 150 days of accrued sick leave.



Your accrued sick-leave days will probably increase in the future, but they could decrease if you have extended illnesses that “eat up” your sick leave.

3. Personal Disability Income Insurance can be purchased to replace or supplement the group coverage within underwriting limitations of the insurance company. Social Security can also provide long-term disability payments, but these benefits are very difficult to qualify for and we would not want to make a recommendation based on a resource that may not be available. In addition, group LTD often integrates with Social Security benefits.

Below, we will employ a quantitative analysis to evaluate the possible need for personal disability insurance to mitigate the risk of long-term disability of John and Jeane.

DISABILITY RISK EVALUATION – JOHN

Below is a summary of our recommendations. If you wish to review our more detailed quantitative analysis of calculating John’s “need” for Disability Income Insurance, we can easily provide it to you. We completed this analysis in three steps:

1. Determined the need for post-disability income based on the cash flow projections.

2. Identified the current resources of income in the event of John’s disability.

3. Calculate the sources of income less required living expenses and taxes.



Observations The calculated need for additional monthly income of about $2,660 per month does not reveal additional less obvious risks. For example, if John’s disability income lasted several years, the group LTD benefit does not increase with inflation while we assume your living expenses would increase. There is some risk that they could also increase due to increased out-of-pocket health care. John’s medical insurance would no longer be paid by his employer and may increase the cost of medical insurance coverage with Jeane’s plan. John would no longer have the full tax leverage of pretax contributions to a 403(b) Plan and would not receive employer-matching contributions. Obviously, if Jeane were also disabled and/or unemployed, this would put you under a lot of financial pressure. The financially secure retirement of both John and Jeane is significantly threatened by John’s potential disability.

As a point of reference from an underwriting standpoint, a commercial insurance company would issue John a maximum monthly benefit amount of about $2,300 (plus a retirement/trust account benefit of $600 per month) assuming his $10,000 monthly income and his existing group LTD coverage monthly benefit of $5,000.

Since John currently provides 75% of their income, we think it would be prudent for him to purchase the maximum amount of non-cancellable and guaranteed renewable Disability Income coverage. The Elimination Period should be 180 days and the Maximum Benefit Period Age 67. We suggest two riders: a Cost of Living Adjustment (COLA) rider that would increase the benefits by a compounded rate of 3% per year, and a “Retirement Protection” rider that would make additional contributions into a trust for a selected portion John’s income (e.g., $600 per month). Actual design of the policy will vary with insurance companies and should



be handled by an agent experienced in DI coverage. Estimated cost for provisions outlined above is about $130 per month. The coverage and premiums would be guaranteed to the policy anniversary nearest age 67.

DISABILITY RISK EVALUATION – JEANE

Below is a summary of our recommendations. If you wish to review our more detailed quantitative analysis of calculating Jeane's “need” for Disability Income Insurance, we can easily provide it to you.

Observations

The calculated need for additional monthly income of about $380 per month also does not reveal additional less obvious risks. For example, if Jeane’s disability income lasted several years, the group LTD benefit does not increase with inflation while we assume your living expenses would increase. There is some risk that they could also increase due to increased out-of-pocket health care. Jeane’s medical insurance could no longer be continued with her employer; thus, the cost of medical care coverage for Jeane, Sally, and Sam would likely increase under John’s plan. Jeane would no longer have the full tax leverage of pretax contributions to a 403(b) Plan and would not receive employer-matching contributions. Obviously, if John were also disabled and/or unemployed, this would put you under a lot of financial pressure. The financially secure retirement of both John and Jeane is significantly threatened by Jeane’s potential disability.

As a point of reference from an underwriting standpoint, a commercial insurance company would issue Jeane a maximum monthly benefit amount of about $500 (plus a retirement/trust account benefit) assuming her $3,333 monthly income and her existing group LTD coverage monthly benefit of $1,667.



We think it would be prudent for her to purchase the maximum amount of non-cancellable and guaranteed renewable Disability Income coverage. The Elimination Period should be 180 days and the Maximum Benefit Period Age 67. We suggest two riders: a Cost of Living Adjustment (COLA) rider that would increase the benefits by a compounded rate of 3% per year, and a “Retirement Protection” rider that would make additional contributions into a trust for a selected portion John’s income (e.g., $200 per month). Actual design of the policy will vary with insurance companies and should be handled by an agent experienced in DI coverage. Estimated cost for provisions outlined above is about $35 per month. The coverage and premiums would be guaranteed to the policy anniversary nearest age 67.

Implications of Purchasing Disability Income Insurance on John and Jeane to Finances and Other Planning Objectives:


• Cash Flow: Premiums are an expense. Estimate $165 per month.

• Income Tax: Premiums paid after tax, benefits received tax-free.

• Education Planning: Mitigates a potentially significant risk to being able to fund the education expenses of Sally and Sam.

• Retirement Planning: Substantially reduces risk of not being able to save sufficient capital for retirement income.

• Estate Planning: Neutral, except less risk of decreasing size of estate.



THE RISK OF LONG-TERM CARE COSTS

Are you prepared for these potentially very high costs?

You have stated that you do not wish to be a burden to your family or children. The need for long-term care is not ubiquitous, but can often require substantial and consistent care for people of any age, but particularly so for the elderly. The following statistics demonstrate the potential long-term care costs.

The following information about estimated long-term care service usage is copied directly from the website of The National Clearinghouse for Long Term Care Information that was organized by the U.S, Department of Health and Human Services.

Will You Need LTC?

About 70 percent of people over age 65 will require some type of long-term care services during their lifetime. More than 40 percent will need care in a nursing home. Things that increase your risk or make it more likely that you’ll need long-term care include:

• Age: The older you get, the more likely it is that you’ll need help.

• Living Alone: If you live alone, you’re more likely to need paid care than if you’re married or single and living with a partner.

• Gender: Women are more likely to need long-term care than men, primarily because women tend to live longer.

• Lifestyle: Poor diet and exercise habits increase the chance that you’ll need long-term care.

• Personal History: Health and family history can increase the chances you’ll need long-term care.



How Much Care Will You Need?

Service and support needs vary from person to person and often change over time.

• On average, someone who is 65 today will eventually need some type of long-term care services and support for three years.

• Women need care longer (on average 3.7 years) than men (on average 2.2 years), mostly because women usually live longer.

• While about one-third of today’s 65-year-olds may never need long-term care services and support, 20 percent will need care for longer than 5 years.

If you need long-term care services and support, you may receive or use one or more of the following:

• Assistance with personal care or other activities from an unpaid caregiver who may be a family member or friend

• Services in your home from a nurse, home health or home care aide, therapist, or homemaker

• Services in the community such as adult day services

• Care in any of a variety of long-term care facilities

The table below shows that, overall, more people use long-term care services at home than in facilities. Also, people use long-term care services longer at home than in facilities.

Distribution and Duration of Long-Term Care Services



TYPE OF CARE

AVERAGE NUMBER OF YEARS PEOPLE USE THIS TYPE OF

CARE

PERCENT OF PEOPLE WHO USE THIS TYPE OF

CARE (%)

Any Services 3 years 69

At Home

Unpaid care only

1 year 59

Paid care Less than 1 year 42

Any care at home

2 years 65

In Facilities

Nursing facilities

1 year 35

Assisted living Less than 1 year 13

Any care in facilities

1 year 37

This data, in addition to several other studies, indicate that long-term care (LTC) costs can be financially devastating to people of any age, but particularly seniors who have chronic illnesses. Long-Term Care Insurance (LTCi) has evolved over the past couple of decades to provide comprehensive coverage. Premiums vary based on the Maximum Daily Benefit amount, the Waiting Period, the Maximum Benefit Period, and the amount of inflation coverage provided. Other benefits may influence the cost as well. Premiums for LTCi are not guaranteed and will likely increase in the future. A policy designed with “full benefits,” e.g., $150/day, 90-day Waiting Period, Lifetime Benefit Period, and a 5% annual inflation



adjustment, would have a premium of about $3,000 per year. With a 6-Year Benefit Period (or maximum benefit of 72 months x $4,500 per month before inflation increases of $324,000 each) the premium would be about $2,600 per year.

It is an advantage to purchase the coverage at a younger age because the premiums are and will remain lower than if purchased at an older age. In your case, a policy with a shorter maximum benefit period and some self-insurance with a decreased maximum daily benefit would provide substantial protection at a lower cost. We need to consider this coverage carefully and I suggest we meet with a qualified long-term care specialist to review and consider your options.

Implications of Purchasing LTCi on John and Jeane to Finances and Other Planning Objectives:


• Cash Flow: Premiums are an expense. A policy with a maximum daily benefit of $150, a 90-day waiting period, and a 6-year benefit period would have an annual premium of about $2,600.

• Income Tax: Tax credits reduce premium cost. Benefits are received tax-free.

• Education Planning: Mitigates a potentially significant risk to being able to fund the education expenses of Sally and Sam. Note that many LTCi claims are filed by insureds well before retirement age.

• Retirement Planning: Substantially reduces risk of depleting retirement capital for retirement income and/or threatening financial security in retirement.




THE RISK OF UNEXPECTED DEATH

From our discussion, you clearly understand that the unexpected death of John or Jeane is a relatively unlikely event but a very substantial financial risk. You believe that your current life insurance coverage is probably inadequate. You are a concerned about the extra expense and you don’t want to buy too much life insurance based “on some complex and mysterious formula.”

Objectives

John made it clear that in the event of his death at any age he wants to be sure that Jeane is financially secure (not wealthy!) for the rest of her life. You both agreed that she would continue to teach because she likes it and the logistics of taking care of the children would be simplified since the children are students at her school. You agreed for purposes of this calculation that Jeane would retire at age 66. Jeane would also need to keep the medical insurance and retirement benefits from her employment. You both would also want to make sure that your plans to educate the children through graduate school are provided for.

In the event of Jeane’s death, she would also want to be sure that John would be financially secure and he would require some help with childcare and homemaking services. She also wants to make sure that their plans to educate the children through graduate school are provided for.



In the event of the death of both John and Jeane, you said that you would want all of the cash needs listed below paid off or set aside for payment as required. You would want the children’s guardians to have sufficient funds to support the children above their education expenses through graduate school. Your wills appoint Jeane’s parents as guardians of the children and you still believe that is the best option. This analysis addresses the need for liquid capital to provide for cash and income for the survivor in the event of John and/or Jeane’s premature death. In the Estate Planning lesson, we will address the distribution of all of your assets, including beneficiary arrangements of life insurance and retirement plans.

Analysis and Recommendations

We have divided your quantified objectives into “cash needs” and “income needs” of the surviving spouse and children. We did an analysis that assumes a current death of either spouse and that whatever plan we decide upon should be reviewed annually, even if it is a brief discussion. We also discussed that your needs and objectives can change over time. We agreed on the following cash needs as follows (stated cash amounts in today’s dollars):



CAPITAL REQUIREMENTS

JEANE’S CASH

NEEDS

JOHN’S CASH

NEEDS – ALT. 1

JOHN’S CASH NEEDS –

ALT. 2

Final expenses $25,000 $25,000

Mortgage Balance 165,000 Prefer to retain

Sally Secondary costs 1 40,000 40,000

Sam Secondary costs 1 70,000 70,000

Sally Post-Secondary costs 1

55,000 55,000 $55,000

Sam Post-Secondary costs 1

45,000 45,000 45,000

Sally/Sam wedding costs

20,000 20,000

Extra Child/Home Care 50,000 75,000

Calculated Income Need 2

96,000 0

Total Capital Required

$566,000 $330,000 $100,000

Less Life Insurance Available3

175,000 40,000 40,000

New Capital Required $391,000 $290,000 $60,000 4



Footnotes: 1 Present value of projected future costs are calculated and rounded up. Presume no future contributions from grandparents. 2The Cash Reserve is maintained – not used to pay cash needs or to provide income.

Projected earned income and Social Security benefits are sufficient to pay Jeane’s expenses up to retirement at age 66. We assume Jeane would continue to fund her 403(b) plan and Roth IRA starting at $3,000 and each contribution increasing by 3% per year. We assume she inherits John’s 403(b) plan balance. She will need an additional $96,000 of capital today to be able to retire with desired income at her age 66.

Earned income and Social Security benefits are sufficient to pay John’s expenses up to retirement at age 66. We assume John inherits the balance in Jeane’s 403(b) plan and Roth IRA. We assume John continues to make increasing contributions to his 403(b) plan and invests his considerable discretionary cash flow.

3Existing group and personal life insurance.

4The cash flow projections for John as a survivor indicate that he would have substantial discretionary cash flow for all of his 20 years from today until retirement. He should be able to handle all cash requirements noted above and still be able to build substantial retirement capital. We believe it is your objective that in the event of death of either or both spouses that you would want to set aside sufficient capital to provide for the post-secondary education of Sally and Sam. Therefore, we have calculated an “Alternative #2”, which only provides sufficient cash to be set aside to fully fund your education objectives.



In order to quantify the income needs of the surviving spouse, we worked jointly with you to estimate living expenses now, in the years after the children are both in college but before retirement at ages 66, and the retirement years beginning at age 66. A copy of these estimated expenses were included earlier with the initial Cash Flow Projections.

There are some calculations involved in determining the cash need. The calculations involving the income needs are much more complex due to estimating variable Social Security payments and varied living expenses. If you would like to review these calculations and assumptions, we will be glad to go over them with you.

We suggest that you purchase $100,000 of ten-year renewable and convertible term insurance with a Disability Waiver of Premium rider (rounded up from $60,000) on Jeane. The beneficiary should be John, or as otherwise directed by legal counsel. The premium for the first ten years should be about $150 per year. You will be accruing education funds, retirement capital, and decreasing the mortgage balance, the need for life insurance on Jeane would seem to decline although the Social Security benefits will provide fewer and fewer years of surplus while the children are at home. In any case, there would be little, if any, savings by reducing the amount of coverage.

To meet your objectives, our calculations indicate that you should purchase about $400,000 of ten-year renewable and convertible term insurance with a Disability Waiver of Premium rider (rounded up from $391,000) of life insurance on John. The beneficiary should be Jeane or as otherwise directed by legal counsel. The premium for the first ten years should be about $600 per year.



Both policies should be underwritten by a financially stable insurance company. Annual reviews are important because needs can easily change at this stage. Your needs for life insurance will probably decline as you accumulate capital and children move on to college. In any case, objectives and circumstances can change and reviews every year or two would be beneficial.

Implications of Life Insurance Purchase Recommendations to Finances and Other Planning Objectives:

• Balance Sheet: Increases size of death estate considerably.

• Cash Flow: Premium payments decrease discretionary cash flow modestly.

• Income Tax: Premiums are payable after tax. Death benefit is income tax-free.

• Education Planning: Mitigates a potentially significant risk to being able to fund the education expenses of Sally and Sam.

• Retirement Planning: The life insurance assures that Jeane would have sufficient income-producing capital for her retirement in the event of John’s premature death.

• Estate Planning: Guaranteed cash at death. We will address the ownership and optimal distribution of your life insurance in the estate planning section.



Education Funding Evaluation and Recommendations

OBJECTIVES

Your primary objective is to make sure that you have set aside sufficient capital to provide one-half of the costs for undergraduate and graduate school for Sally and Sam (7 years for Sally and 6 years for Sam). The type of schools you are considering have an average annual cost of $43,894 in today’s dollars. You would like us to help you develop a strategy to accumulate the necessary capital in a more efficient manner to the degree that is possible while incurring minimal risk.

ANALYSIS AND RECOMMENDATIONS

We did three sets of calculations that all used the following assumptions to determine what it will take to reach your funding objectives for Sally and Sam.

We assumed that college and graduate school costs increased by 5% per year. We assumed that your capital will earn 3% while Sally and Sam are attending college and graduate school. We assumed that you wish to accumulate the necessary funds by the time each child starts college. We assumed that Jeane’s parents continue to gift $10,000 each June for each child’s educational fund until they begin college.

Each of the three sets of calculations assumed different rates of return while accumulating capital until Sally and Sam begin college:

• The first calculation is an “AS IS” calculation assuming that the current asset balances and future contributions are invested proportionally as they are now. The net after taxes, in your 25%



marginal tax bracket, of Sally’s funds are projected to grow at 2.2% per year and Sam’s at 2.56% per year. These same rates of return are assumed to continue while they are in school and withdrawals occur.

• The second and third calculations assume that the education funds are held in 529 Plans for Sally and Sam that shelter the accumulating funds from being taxed on income and capital gains as they accumulate. In addition, the funds are not taxed if distributed to pay for qualified education expenses. Thus, these funds should never be subject to income taxes once they are positioned in a 529 Plan.

We also assumed that the accumulating funds in the second and third scenarios earn 3% and 5% per year until Sally and Sam begin college. Each 529 account thereafter earns 3% per year on the balance in each account.

The calculations answer several important questions:

1. How much capital will we need to fund Sally and Sam’s education when they begin college? If we assume the funds are invested AS IS, you will need accumulated capital of $234,772 for Sally and $206,550 for Sam when they begin college.

2. Will we have sufficient capital to reach these capital requirements if we save and invest as we are now? If not, how short are we? No. In Sally’s case, you will end up about $57,714 short and in Sam’s case about $38,218 short. This would require additional monthly savings of $636 for Sally and $359 for Sam, beginning immediately, to close the gaps.



3. What are our best alternatives to close the gap and reach our goal without taking too much investment risk to reach our goal? • The easiest component is to convert your taxable returns and

withdrawals to NON-taxable accumulation and withdrawals by selling the existing education fund assets and transferring the proceeds to Sally and Sam’s 529 Plans and make all future deposits into the 529 accounts (all 529 Plans must receive only cash deposits). Fortunately, there will be little, if any, taxes on the sale of the ETFs. The CD should be left to mature in January Year 2 and transfer the proceeds then.

• The second component is to increase your rates of return. We have calculated the results of a 5% and 6% rate of return to eliminate the shortfall. These calculations have been done assuming that the funds are transferred to 529 accounts, thus sheltering the returns from income tax. There is a tension here between realizing a higher rate of return and your risk tolerance. In addition, the accumulation periods of seven and eight years are relatively short and there is very little room for volatility – meaning you should NOT have much risk tolerance for funds that are required in the near future for a primary objective.

• The third component would be to increase your monthly savings contribution into the 529 accounts from your current savings amount of $250 per month per child.

Results of recommended alternative strategy

These changes are reflected in the table below:



SALLY SAM

Assumed Rate of Return 5% 5%

Estimated Shortfall of required capital

$26,004 $13,491

Required additional monthly contribution

$259 $115

Assumed Rate of Return 6% 6%

Estimated Shortfall of required capital

$15,623 $3,340

Required additional monthly contribution

$150 $27

In order to increase your rate of return, the assets are subject to some volatility in market value of the accumulated capital. You have, and will have, certain mitigating factors in place to compensate for market losses greater than anticipated education expenses or to delay withdrawals to allow the values to rebound.

You will maintain/increase your cash reserve assets and your Roth IRA contributions can be withdrawn tax-free. You are targeting a full accumulation of needed capital, thus your net discretionary cash flow will increase when Sally and Sam start college, not only because your educational savings will cease, but their high school expenses will also cease as well.



Implications of Education Funding Recommendations to Finances and Other Planning Objectives:

• Balance Sheet: Increase for at least seven years, then steady decline as 529 Plan balances are depleted.

• Cash Flow: Current assumptions are modest increase in savings now but no annual/future increase is planned. Contributions should stop in no more than eight years. Note that when Sally and Sam graduate from high school in seven and eight years, your annual expenditures for educational expenses will decline significantly due to elimination of secondary school expenses and prefunding of post-secondary school expenses.

• Income Tax: The 529 Plans will shelter taxable income generated by plan assets and withdrawals for qualified education expenses will not be taxed. Review of the Alternate Cash Flow Projections will show a reduction in taxes partially due to the repositioning of education assets. This tax-sheltered accumulation environment significantly increases the rate of growth and net distribution amounts when accumulated funds are used to pay for education expenses.

• Risk Management: Based on your goals and objectives, you will want to consider the purchase of additional life and disability insurance to assure completion of your education objectives. Enhanced planning of all risk management issues increases the likelihood of realizing your education goals. We reviewed these issues in a previous analysis.

• Retirement Planning: There is a tension between allocation of Discretionary Cash Flow to your children’s education and your financial independence. We will address this issue in detail when we complete your retirement planning evaluation.



• Estate Planning: Owner of the education assets is currently Jeane and we see no reason why that should change when setting up the 529 Plans. We suggest you name John as successor owner. You will want to discuss this arrangement with your estate planning attorney.



Retirement Accumulation Evaluation and Recommendations

OBJECTIVES

John said that he really does not want to retire; he would be content to continue his teaching and research although he would probably like to reach a point where he could elect to take more time off to read, garden, and do a little more extended traveling. Jeane sees more of a conclusion to her teaching career in about twenty years, or maybe fifteen would be about right. She is feeling a pull to develop her artistic abilities and speculates that she might enjoy spending more time painting and possibly opening an art studio. She may become more involved in her parents’ foundation as they age and she will probably do some pro bono tutoring as long as she is able. You would also like to spend more time in the summer in Jeane’s parents’ mountain home, which you will probably inherit.

You both would like employment in about 20 years to be optional. That is, you would like to achieve financial independence in no more than twenty years. You are concerned about needing to rely on Social Security too much. You do not want to be a financial burden to your family/children.

“When CAN we retire?” Are we saving enough? Can we make our retirement savings work more efficiently?

Your estimated “retirement budget” requires $94,000 per year of expenses in today’s dollars, including income taxes. Your retirement income should be inflation-hedged.



ANALYSIS PROCESS

Our primary objective is to calculate to what degree your current asset allocation, types of retirement vehicles used, current level of savings, and projected Social Security benefits will realize your objective of accumulating sufficient capital to provide sufficient retirement income in no more than twenty years. We will then determine what changes to your “current plan” will increase the efficiency of the accumulation of capital within the boundaries of your risk tolerance. We had several sets of calculations to do. We have grouped them into two phases:

1. Phase One – Analyze the current “AS IS” plan • Calculate the amount of retirement income required in today’s

dollars, including estimated income taxes.

• Calculate the retirement income objective to inflated dollars in twenty years.

• What are the anticipated Social Security retirement benefits to be received at the projected retirement date in twenty years?

• Calculate income required net projected Social Security benefits; that is, income that is provided by the Cashmans’ personal retirement capital (PRC).

• Calculate the capital amount required to provide the income needed from personal capital.

• Identify current resources and committed savings that are earmarked for retirement and calculate how much capital will be accumulated in twenty years. In this case, we assume that your 403(b) contributions, as well as the employer matches, increase by 3% per year over the next twenty years.



• Determine if the accumulated capital is sufficient or insufficient to meet the capital requirement calculated in Step 5.

Conclusions realized from the Phase One calculations:

We estimate that your required annual gross income in twenty years will be about $170,000, assuming 3% inflation.

We estimate your annual Social Security retirement benefits beginning in 20 years to be about $86,000.

Thus, your personal financial resources will need to provide a minimum inflation-indexed income of $84,000 per year (this assumes reliance on Social Security for just over one-half of your income.

In order to estimate the amount of income that can be provided by the projected amount of accumulated retirement capital in twenty years, we use two calculations based on two relatively conservative and pragmatic retirement income strategies. We use what we call the “Safe Rate Withdrawal” model and the “Immediate Fixed Annuity” model, which we describe briefly below. The two key reasons we are using these two models are:

• The two options are realistic, prudent, flexible, and can be easily blended with one another to suit any client’s situation and risk tolerance.

• They represent realistic outer boundaries of the dollar amount of capital required to provide a dollar amount of income.



We used withdrawal rates of 4% for the “Safe Rate” model and 6.6% for the “Immediate Annuity” model. The Safe-Rate model assumes that annual withdrawals increase each year by the inflation index. The annuity rate is a 100% Joint & Survivor option with an automatic 3% increase in the benefit amount each year.

The capital required for the “safe rate” model is about $2,185,000. Based on very long-term actual historical market return studies, the probability of retaining at least some capital throughout your lives using this method at an initial 4% withdrawal rate is very high. You would likely have the benefit of being able to bequeath assets to heirs or charities, etc. You also have the flexibility of having access to your capital at any time.

The capital required for the immediate annuity model is $1,273,000. This is the bare minimum amount of projected capital required. This provides a guaranteed income (by one or multiple insurance companies), with automatic increases of 3% per year, to both of you for as long as you live. No portfolio management is required.

If we assume that you both continue contributing 6% of your compensation to the 403(b) Plans, $2,000 per year to Jeane’s Roth IRA, and the same investment allocation continues, these assets should accumulate to approximately $1,035,288 in twenty years. The weighted return of your current asset allocation is approximately 4.1%.



Thus, if we assume your accumulated capital is annuitized, we estimate that you will be $238,000 short of capital in twenty years. Or, 238,075 x .066 = $15,713 of annual income.

If we assume the use of the Safe Rate Model for providing retirement income, we estimate that you would be about $1,150,000 short of capital in twenty years. Or, 1,065,761 x .04 = $46,000 short of annual income.

2. Phase Two – Options and recommendations to improve your ability to reach your objective and to enhance efficiency of your accumulation strategy. Realistically, you are currently about $250,000 short of your capital accumulation objective IF we assume you are comfortable with all of your retirement capital being annuitized and that over one-half of your income is provided by Social Security (under current law, a very small portion is subject to income tax). In addition, you may wish or need to retire in somewhat less than twenty years. What realistic options are available to allow you to accumulate the amount of capital necessary in twenty years, within the boundaries of your risk tolerance, to reach your objective, or make the process more efficient?

Conclusions realized from the Phase Two calculations:

Below we have culled a list of options available to you to resolve the shortage of retirement capital in twenty years:

• Lower the objective – not necessary.

• Work Longer –The mathematical effect of time for additional savings, increased compounding, increased Social Security benefits, and a shorter life expectancy all together can make a



significant difference in a short period of time. John has suggested that he “may never retire” and Jeane may consider a “second career” that might develop some income. These inclinations may provide additional time for income-producing resources to appreciate and continued savings and/or a shorter period of time that your retirement capital would need to provide the desired amount of income.

• Work Part-Time in Retirement – (Same as "Work Longer" above.)

• Make more income – N/A. You both like your current work.

• Save more money – There should be some room in the next seven years for additional savings, if only on a non-consistent basis. For example, if you can invest some funds in a Roth IRA for the next twenty years, then this could add significantly to your retirement capital. In addition, when Sally and Sam complete high school, your discretionary cash flow should increase by $15,000 in today’s dollars. With twelve years remaining until your retirement, redirecting that $15,000 into retirement savings would substantially add to your retirement capital.

• Make sure that you are taking advantage of all helpful employment benefits - You both are already taking advantage of the 403(b) Plans to the maximum employer match. We have done an analysis and believe that if additional savings are in order and possible, they should be Roth IRA contributions. Neither of you have a Roth option in your 403(b) Plans at this time. If it becomes available in the future, we should evaluate its use vs. traditional pretax contributions. However, as an “extra” contribution above the match, the Roth IRA is probably superior because it is not subject to



Required Minimum Distributions and the investment options are much broader (not restricted to the plan’s finite menu).

• Improve Investment Performance – The current asset allocation of your retirement assets projects a rate of return of about 4.1%, which is below our most conservative long-term risk profile of 5% per year. We believe you have a long-term risk profile of “moderate-conservative” that has a long-term projected rate-of-return of 6% per year. Thus, we calculated comparisons at the 6% rate of return and determined how much capital would be accumulated relative to your capital objective in twenty years.

How much difference does it make to reallocate the retirement plan and IRA assets to a “Moderately Conservative” asset allocation profile that has a projected rate of return of 6%? At a growth rate of 6% vs. 4.11%, the retirement assets will grow to $1,266,520, a 23% increase that is just short of the “minimum” capital requirement of $1,273,364 by $6,844 and reduces the “Safe-Rate” capital requirement shortfall to $834,530.

Other Realistic Options for the Cashmans

We recommend that you immediately establish a Roth IRA for John and fund it with $5,000 from your savings account. Add $2,000 to Jeane’s account, also using savings funds. These are Year 1 contributions. We recommend that you do the same on Year 2 on a monthly basis. That is, each of you will make monthly deposits of $416.66 into your Roth IRA accounts in Year 2. We will review your cash flow in the future to determine to what degree post-Year 2 contributions are affordable. This additional capital of $14,000 at 6% will grow to about $44,000 in twenty



years from now. Continuing the Roth contributions for twenty years would make an even more substantial difference of $337,000 and all withdrawals from the Roth IRAs under current law would be income tax-free and not subject to Required Minimum Distributions. They are also not currently considered when determining how much of the Social Security benefits are taxable.

You may consider increasing the risk profile of some or all of your retirement capital to a “Moderate” risk profile. This would increase your projected rate of return to 7%. This revised strategic allocation projects accumulated capital in twenty years to $1,448,385 (not including the additional funding into the Roth IRAs). This increases the projected retirement capital by $413,096, or by 40% above the “AS IS” investment allocation. This exceeds the “minimum” capital requirement of $1,273,364 by $175,021 and reduces the “Safe-Rate” capital requirement shortfall to $736,707. This allows a blend of the Safe-Rate and Annuity methods to provide the desired retirement income.

As cash flow is available in the future, any additional contributions to retirement capital will make your future financial independence more secure, less dependent on Social Security, and give you more flexibility when considering future retirement options.

A Few Other Relevant Factors

It appears that your employment should be stable and your earnings will probably keep pace with inflation.



Roth IRA contributions can be withdrawn without penalty or taxation at any time.

Implications of retirement planning recommendations to Finances and Other Planning Objectives:

• Balance Sheet: Steady increase.

• Cash Flow: Current assumptions are a two-year transfer of savings to retirement capital. Hopefully, you will be able to increase savings to retirement accounts in the future. Note that when Sally and Sam graduate from high school in seven and eight years, your annual expenditures for educational expenses will decline significantly.

• Income Tax: The 403(b) Plan contributions are made on a pretax basis and are supplemented with non-taxable employer contributions. All earnings and growth occur free of income tax. Withdrawals from your 403(b) Plans are subject to ordinary income tax. The Roth IRAs will shelter taxable income generated by plan assets and withdrawals for retirement income will be tax-free. Strategically, you will probably withdraw funds from your 403(b) Plans as much as possible to meet your income needs in the early years of retirement since these funds are subject to Required Minimum Distributions. The Roth IRAs will probably be withdrawn as needed and will, therefore, have a longer investment horizon. You will actually make logistical retirement income planning decisions when you actually retire, but in the years leading up to retirement, annual reviews can make adjustments with future retirement income planning in mind.

• Risk Management: Based on your goals and objectives, you will want to consider the purchase of additional life and disability insurance to assure completion of your education objectives. We



reviewed these issues in a previous analysis. You also may want to consider the purchase of Long-Term Care insurance since substantial long-term care expenses in retirement can rapidly drain your financial resources.

• Education Planning: Providing a high quality education for Sally and Sam is your highest priority and requires substantial financial resources. At this time, the “competition” between allocating cash flow to retirement capital for a secure retirement and education expenses seems manageable, but you will need to be consistently diligent about adding to your retirement accounts.

• Estate Planning: We will discuss beneficiary arrangements of your 403(b) accounts and IRAs in the estate planning section.



Estate Planning Evaluation and Recommendations

OBJECTIVES

• You do not want to be a burden to family if one of you should become severely disabled or incompetent.

• You want to make sure funds are available to complete your children’s education and provide for their marriage expenses.

• You would like to be able to gift funds to your grandchildren for education.

• You are not charitably inclined at this time. However, once you have more substantial assets and know that your children are provided for through completion of their education, you may wish to make charitable bequests.

• You want to make sure your surviving spouse and children will be able to maintain a lifestyle that would be comparable to what they have now.

• If Jeane was the survivor, she would prefer to have assets managed, or at least get guidance if assets were not substantial enough for economical professional management.

ANALYSIS AND RECOMMENDATIONS

1. Get legal documentation in place to provide some protection in case of incapacity or life-threatening injury/illness:

• A Durable Power of Attorney – You should each consider a durable power of attorney to give each other full access to manage the financial assets of the other in case one of you becomes incapacitated.



• A Living Will – This allows you to provide directives regarding the use of life-sustaining measures to be used in the event of a critical illness or accident.

2. Replace your simple “I Love You” wills, where you leave everything to the survivor, with estate plans that utilize trusts at death to provide:

• Greater protection for your minor children. You need to plan for the possibility that you could both die while your children are still minors, e.g., in a common accident. With your present plans, the Sally and Sam would receive their inheritance at age 18, possibly before they are mature enough to handle the funds. The temptations and distractions that can come with such an inheritance could jeopardize your greatest dream for your children – receiving a quality education. Through the use of trusts, you can assure that those funds first get used for education and can stagger the distributions of principal to the children at more mature ages, when they are more likely to use the funds wisely.

• Specific funding for your children’s marriages. Specific language could be provided to empower the trustee to make distributions of funds for this purpose, thereby preserving your specific wish. The trustee AND the children would know that funds were being held in trust specifically for this purpose.

• Financial management for Jeane. Jeane indicated that if she were to survive John, she would prefer professional investment management of the funds. While not the only solution, this might possibly be achieved through placing funds in trust for Jeane (and the children) rather than distributing them directly to her.



• Preserve the funds for the surviving spouse and children in the event of remarriage. This may or may not be an issue that concerns you, but it is one that should be discussed in the planning process. A remarriage after the death of one spouse, especially one where other children are involved, could potentially undermine some of the goals you have set for your own children and could potentially diminish or deprive your children of their inheritance. Funding a trust when one spouse dies, rather than leaving the funds to the survivor, could potentially provide some protection in this regard.

Address the beneficiary designations to support the restructured estate plan of number 2 above. Since there are many ways the estate plan could be structured (using testamentary trusts or revocable living trusts, as just one example), we leave it to the attorney to determine how best to structure the plan to address the preliminary needs identified in (2) above. No doubt, this will be done with further discussion with you to better tailor the plan to your preferences. However, beneficiary designations will need to be structured to support, and not work against, the final estate plan.



Final REVISED Financial Statements

A review of the Revised Balance Sheet and Revised Cash Flow Projections provides the opportunity to see the immediate impact of our cumulative recommended changes and can serve as a focus of discussion to review our recommendations. These two statements are in Appendix 5 and 6.

Note that the Revised Balance Sheet compares the assets, liabilities, and altered values of the assets and liabilities as they are now in the “AS IS” statements versus the adjacent column which shows the effect of the recommended changes that are assumed to be implemented. The Revised Cash Flow Projections compare the receipts and disbursements before and after presumed implementation of our recommendations. If necessary, we can easily estimate and/or run new projections to reflect implementation actions that differ from those recommended.

The footnotes provide clarifying information.

Key Points to Consider:

• Balance Sheet: Let’s start from the top and move to the bottom and state the consequences of our recommendations to your assets, liabilities, and net worth:

1. We are recommending that you withdraw $8,000 in Year 1 and $2,500 in Year 2 from your savings account to pay certain expenses, pay off your auto loan ($4,400) in Year 1 and add an additional $7,000 to your Roth IRAs in Years 1 and 2. Discretionary Cash Flow is also used to implement our recommendations. Note that the $18,400 of IRA additions and debt reduction have a neutral immediate effect on your net



worth, but these actions should increase your assets more rapidly in the future. The cash reserve will continue to earn interest.

2. Since the additional Roth IRA deposits are considered temporary, the cash flow projections suggest that beginning in Year 3, you should be able to add at least $350 per month to your savings account and increase savings deposits each year by the inflation index. Our calculations indicate that these deposits should assure a growing cash reserve with periodic cash withdrawals to purchase autos. Hopefully, you will also be able to make additional deposits of some amount to your Roth IRAs. We should revisit these important issues in annual reviews.

3. The CD and two ETFs are liquidated because only cash can be deposited into a 529 Plan. There will be little, if any capital gain realized from the sales. Thus, these three assets are “transferred” to the two new 529 accounts for Sally and Sam. The return will be increased by a tax-free accumulation of earnings and a tax-free withdrawal of cash for qualified education expenses. This tax leverage significantly increases your rate of return in your accumulation assets for education costs. In addition, we are recommending a reallocation of assets to increase your rate of return with a modest increase in risk.

4. Your net worth is essentially unchanged. However, your assets and future earned income will be substantially better protected by recommended changes to your insurance coverages that have much broader and more substantial limits. In addition, your accumulation accounts will earn higher net returns due to



tax leverage and asset allocations more suitable to your risk tolerance.

• Cash Flow Projections: Let’s start from the top and move to the bottom and state the consequences of our recommendations to receipts, disbursements, and net discretionary cash flow:

1. While it appears the income from assets is declining in Year 1 and Year 2, actually about $99,000 of educational savings funds in Year 1 and Year 2 are transferred to tax-sheltered accounts that were previously projected to earn taxable interest, dividends and capital gains in non-trusteed and taxable accounts. In addition, $14,000 of additional cash is transferred into tax-sheltered Roth IRA accounts.

2. Transfer of funds from taxable accounts to tax-sheltered accounts plus participation in a FLEX Plan will reduce income taxes this year and in future years with no cost or sacrifice.

3. The purchase of strategically-designed insurance coverage requires allocation of some income to insurance, but the cost of some coverages may decline slightly and the added coverages significantly reduce your exposure to a broad range of unexpected events.

4. Refinancing of your mortgage to a lower rate and to a 15 versus 30–year loan significantly reduces the current and long-term interest expenses and deductions, and accelerates the amortization of the loan. The pay-off of the Honda loan provides an attractive 5% after-tax rate of return, guaranteed.

5. In Years 1 and 2, you are in a “transition period” and your contributions to your savings account will stop. Setting a scheduled savings amount each month beginning in Year 3



gives you a predetermined baseline for managing your cash flow.

6. An increase in your savings for education greatly increases the likelihood of reaching your objective of prefunding the costs before Sally and Sam begin college.

7. Investing an extra $14,000 in Roth IRAs in Years 1 and 2 gives you a head start on accumulating more funds for retirement.

8. In the Final Revised Cash Flow Projections, we estimate a small amount of Net Discretionary Cash Flow in Years 1 and 2. Several factors and decisions you make will increase or decrease these projected cash flow surpluses. It is important to monitor your actual cash flow in the future to make sure that you maintain positive cash flow.



Plan Implementation and Monitoring

The Implementation Timeline starting on the next page provides a list of all of our recommended changes in the order that we suggest is the most practical to implement over the next several months. The recommendations discussed in this report are intended to be supplemented and/or amended by our discussion and/or after you have had some time to read over and absorb them. This study may cause you to alter some of your goals or raise additional concerns that you had not previously considered. This is perfectly normal, and our purpose is to assist you in making sound proactive financial planning decisions that will serve you well in the future.

We must remember that projections are never exactly accurate, particularly several years into the future. It is imperative that your financial planning be consistently monitored to make sure that you are “on-course” regardless of what unanticipated or unpredictable events occur in your future. We are ready to assist you in that process. Ideally, this Timeline can be installed on our website and is accessible to you as well as myself and our staff. We can monitor and assist in the implementation process as well as scheduling reviews as necessary.



Plan Implementation Timeline Report

IMPLEMENTATION TIMELINE

WHEN RECOMMENDATION WHO/HOW WHY

ASAP Identify the best 529 Plan that has a fee structure and investment options that will best meet your objectives. Establish accounts for Sally and Sam. Liquidate the two bond ETFs, close the accounts, stop the ETF bank drafts, and transfer the cash into the 529 accounts. Transfer the maturing CD proceeds to each 529 account in January, Year 2.

We can assist John and Jeane in this process.

Significant tax advantages by increasing growth rate and no taxation incurred on withdrawals for qualified education expenses.

ASAP Implement agreed upon asset allocation in 529 accounts for both lump sum transfers and monthly contributions.

John, Jeane and Denise

Strategic allocation for maximum results per risk tolerance.

ASAP Establish automatic monthly payments into Sally’s and Sam’s 529 accounts and allocate into agreed upon asset allocation.

John and Jeane Calculated funding needed to reach objective.

ASAP Apply for agreed upon amount of Disability

John, Jeane, and Denise, if

Mitigates substantial



Income Insurance on John and Jeane

necessary. financial risk

ASAP Apply for agreed upon life insurance for John and Jeane.

John and Jeane. We will communicate with your agent regarding specifications of the coverage, including ownership and beneficiary arrangements.

Meets your risk management objectives.

At Your Earliest Convenience

(AYEC)

Withdraw $4,400 from savings and pay off the auto loan.

Jeane Reduces interest expense.

AYEC Determine an agreed upon asset allocation for the 403(b) Plans and Roth IRAs

John, Jeane, and Denise

Projected maximum return within the Cashmans’ risk tolerance. Should increase likelihood of reaching retirement objectives.

AYEC Increase Jeane’s Roth IRA contribution by $2,000 (to $5,000). Also set up new Roth IRA for John and contribute $5,000.

John and Jeane Enhances retirement capital to more easily reach retirement objectives.

AYEC Discuss increase in deductible and

John, Jeanie, and your

Better coverage at little, if any



maximum liability limit of $300K in HO policy with agent

property and casualty agent

extra cost

AYEC Discuss increase in deductible and maximum liability limit of 300/500/100 in auto policy with agent

John, Jeanie, and your property and casualty agent

Better coverage at little, if any extra cost

AYEC Discuss purchase of personal liability umbrella policy with agent of $1M.

John, Jeanie, and your property and casualty agent.

Mitigates potentially substantial risk for minimal cost.

AYEC Coordinate appraisals and supplemental insurance for selected valuable items of personal property.

John, Jeanie, an appraiser, and your property and casualty agent.

Mitigates a possibly uninsured risk.

AYEC Apply for agreed upon long-term care insurance for John and Jeane.

John and Jeane. We will communicate with your life and health agent regarding specifications of the coverage

Mitigates substantial financial risk

AYEC Meet with Attorney to evaluate estate plan

John, Jeane, and attorney. Denise can arrange and participate to the degree needed.

Assures that objectives are realized both seen and unseen.



AYEC Be sure to address issue of beneficiary arrangements for all life insurance policies, retirement plans, and IRAs.

John, Jeane, and attorney.

Assures objectives are realized in a broad range of contingencies.

AYEC Meet with Attorney to evaluate estate plan and draft estate planning documents.

John, Jeane, and attorney. Denise can arrange and participate to the degree needed.

Assures that objectives are realized, both seen and unseen.

AYEC Be sure to address issue of beneficiary arrangements for all life insurance policies, retirement plans, and IRAs.

John, Jeane, and attorney.

Assures objectives are realized in a broad range of contingencies.

Now and Ongoing

Proactively manage insurance advisors.

John and Jeane.

Annual reviews will maintain proper coverage.

By 9/30/Year 1 Refinance residence. John and Jeane. We can assist as needed.

Reduce interest cost and accelerate amortization of loan.

10/15/Year 1 Enroll in FLEX Plan for Year 2 John and Jeane

Tax savings

10/15/Year 1 Look at HSA and other medical plan options at next open enrollment date.

John, Jeane and Denise

Efficiency and potential premium and tax savings.

12/1/Year 1 List of all potential John and Potential tax



Miscellaneous Itemized Deductions each December to see if there is potential to shift payments to “overweight” a year to create deductions.

Jeane. We or tax preparer can assist as needed.

savings.

By 12/10/Year 1 Determine proper amount of withholding for Year 2.

John, Jeane, tax preparer or Denise

Increases time dollars have to earn interest and/or appreciate.

By 12/31/Year 1 Keep receipts for all potential Miscellaneous Deductions for preparation of Year 2 Income Tax Return.

John and Jeane. Denise provide list of potential deductions.

Could increase tax savings.

1/2/Year 2

Transfer the maturing CD proceeds to each 529 account in January. Also transfer gifts of $10,000 to each 529 Plan as soon as received in June and allocate contributions as agreed upon.

Jeane and John. Contact Denise regarding asset allocation of these contributions.

Get dollars working ASAP.

1/Year 2 Deposit $5,000 into both Roth IRAs as a Year 2 contribution. May be best to pay monthly to take advantage of dollar-cost-averaging.

John and Jeane

Enhances retirement capital to more easily reach retirement objectives.

By 6/30/Year 2 We suggest annual reviews that would include reviewing the 529 Plan

John, Jeane, and Denise

Assures efficient movement



performance and rebalancing of assets.

toward achieving objectives.



APPENDIX 1

LIST OF ASSUMPTIONS FOR CASHMAN COMPREHENSIVE FINANCIAL PLAN

The following is a complete listing of all assumptions. These assumptions will be used throughout the Case Study and the Examination Case Study that you will eventually prepare and present.

DESCRIPTION QUANTITATIVE FACTOR

Cash/Cash Equivalents

Checking Accounts 1.00%

Savings Accounts 2.00%

Money Market ETFs 2.50%

1-year CD 2.75%

Fixed Income Mutual Funds

Short-Term US Treasury Bond ETF 2.50%

Interm.-Term US Treasury Bond ETF 3.50%

Long-Term US Treasury Bond ETF 5.50%

Short-Term Inv.-Grade Bond ETF 3.00%

Interm.-Term Inv.-Grade Bond ETF 4.00%

Long-Term Inv.-Grade Bond ETF 6.00%

Long-Term High-Yield Bond ETF 7.00%

Short-Term Tax-Exempt Bond ETF 1.90%

Interm.-Term Tax-Exempt Bond ETF 2.80%

Long-Term Tax-Exempt Bond ETF 4.20%



Equity Mutual Funds

Large Cap U.S. Market Index 9.00%

Mid-Cap U.S. Market Index 9.50%

Small-Cap U.S. Market Index 10.00%

Health Care Specialty Fund 7.00%

International Growth Index Fund 8.50%

Emerging Markets Stock Index Fund 10.00%

Consumer Rates

Long-Term Inflation 3.00%

Education Expense Inflation Post Primary/Secondary School

5.00%

Education Expense Inflation Primary/Secondary School

6.00%

Auto loan rate for new cars 5.00%

Mortgage rates w/ no points - 30 year 4.375%



Miscellaneous

Social Security Normal Ret. Age 66

Marginal income tax bracket 25%

Effective tax rate on personal asset accumulations

10%

Social Security Wage Base – Year 0 106,800





Safe-Rate for Retirement withdrawals 4.00%

J&S 100% Annuity Rate, 3% annual increases, Female age 64, Male age 66

6.6%

Female Straight Life Annuity Rate age 66, 3% annual increases

6.5%

Male Straight Life Annuity Rate age 66, 3% annual increases

7.0%

APPENDIX 2

"AS IS" Value "AS IS" Value "AS IS" Value "AS IS" ValueOwner-John Owner-Jeane Owner-Joint TOTAL

Cash & Cash Equivalents

Checking Accounts 1 2,500$ 1,000$ 5,000$

Savings Account 2 115,000

NML WL Policy Cash Value 3 8,000

1-year CD - matures 12/31 in Year 1 4 32,440

SUBTOTAL: 10,500$ 1,000$ 152,440$ 163,940$

Investments

ST Inv-Grade Bond Fund for Sally 5 42,000$

Interm-Term Inv-Grade Fund for Sam 6 18,000 -

SUBTOTAL: -$ 60,000$ -$ 60,000$

Tax-Deferred Retirement Investments

John's 403(b) Plan 7 91,000$

Jeane's 403(b) Plan 8 21,000 Jeane's Roth IRA 9 11,000

SUBTOTAL: 91,000$ 32,000$ -$ 123,000$

Personal Use Assets

Residence 10 325,000$

7-year-old Honda Minivan 11 10,000 8-year-old Toyota Camry 7,500 Furnishings 6,000 46,000 20,000 Personal assets 15,000 25,000

SUBTOTAL: 28,500$ 81,000$ 345,000$ 454,500$

TOTAL ASSETS: 130,000$ 174,000$ 497,440$ 801,440$

"AS IS" Value "AS IS" Value "AS IS" Value "AS IS" ValueOwner-John Owner-Jeane Owner-Joint TOTAL

Short Term

John's Visa 12 1,200$

Jeane's MC 12 800 Honda loan 11

4,400

SUBTOTAL: 1,200$ 5,200$ -$ 6,400$

Long Term

Residence 30-year mortgage 10 165,025$

SUBTOTAL: -$ -$ 165,025$ 165,025$

TOTAL LIABILTIES: 1,200$ 5,200$ 165,025$ 171,425$

NET WORTH: 630,015$

John and Jeane Cashman"AS IS" Balance Sheet for Internal Analysis

As of June 30, Year 113

ASSETS:

LIABILITIES:

1

2

3

4

5

6

7

8

9

10

11

12

13

Allocated 100% to a U.S. Govt. Intermediate Bond Fund. Projected ROR 3.5%. Jeane allocates 6% of her income to her 403(b) account and her employer matches at 50% up to a maximum contribution of 3% of the employee's compensation.

Jeane started a Roth IRA a few years ago and all of her deposits go directly into a Health Care sector fund. Projected ROR 7.00%.

Home purchased 9 years and 6 months ago for $250,000. Financed $200,000 at 5% for 30 years. Payment is $1,074 per month. Current balance calculated on HP-12c as follows: [f CLR, g 8, 200000 PV, 30 g n, 5 g i, PMT, 114 f AMORT, RCL PV]. Calculated on HP-10bII as follows: [Shift C ALL, END mode, 200000 PV, 30 x 12 N, 5 ÷ 12 I/YR, PMT, 103 INPUT 114 Shift AMORT, = = =].

Minivan purchased four years ago for $20,000, Financed 100% of purchase for 60 months at 5%.

Credit card balances are paid in full each month to avoid interest charges.

These are rough estimates based on simple calculations. It is not important that they be exact, so long as they are close. Financial planning software would be more accurate IF all dates of balances, deposits and withdrawals are correct.

We assumed the average balance and interest rate (currently 2%) remain the same.

Current Death Benefit is approximately $55,000.

CD pays 2.75% interest.

Short-Term Inv. Grade Bond Fund; projected ROR = 3.00%

Intermediate-Term Inv. Grade Bond Fund; projected ROR = 4.0%

Allocated 90% to a U.S. Govt. Intermediate Bond Fund and 10% to an International Growth Fund. Projected ROR 3.5% & 9.00% respectively. John allocates 6% of his income to his 403(b) account and his employer matches at 50% up to a maximum contribution of 3% of the employee's compensation.

We assumed the average balance and interest rate (currently 1%) remain the same.

FOOTNOTES:

APPENDIX 3

ACTUAL Year 0AS IS Year 1 Projection

AS IS Year 2 Projection

AS IS Year 3 Projection

Earned Income2

John's Salary 116,500$ 120,000$ 123,600$ Jeane's Salary 38,800 40,000 41,200

SUBTOTAL: 155,300$ 160,000$ 164,800$ -$

Unearned Income from Investments

Interest from Cash Accounts, CD 3 3,135$ 3,265$ 3,385$

Dividends from Mutual Funds 4 1,150 1,825 2,725 -

SUBTOTAL: 4,285$ 5,090$ 6,110$ -$

Other Receipts Gifts from Jeane's Parents 20,000$ 20,000$ 20,000$ Federal Income Tax Refunds 5 2,000 654 650 (250)

Subtotals: 22,000$ 20,654$ 20,650$

TOTAL RECEIPTS: 181,585$ 185,744$ 191,560$ -$

ACTUAL Year 0"AS IS" Year 1

Projection"AS IS" Year 2


Projection

Family Living Expenses:

Nondiscretionary Expenses 6 64,078$ 66,000$ 67,980$ Discretionary Expenses 6 14,563 15,000 15,450

Subtotals: 78,641$ 81,000$ 83,430$ -$

Liability Payments

Residence 30-year mortgage 7 12,884$ 12,884$ 12,884$

Honda Loan 8 4,529 4,529 2,265

Subtotals: 17,413$ 17,413$ 15,149$ -$

Income Taxes

Federal Income Tax Paid 9 21,500$ 23,000$ 23,500$

FICA Tax 10 11,279 11,626 11,975

Subtotals: 32,779$ 34,626$ 35,475$ -$

Wealth Accumulation Investments John's WL Policy Premiums 720$ 720$ 720$ Savings Contributions 11 9,000 8,000 11,500 Education Funding for Sally 12 13,000 13,000 13,000 Education Funding for Sam 12 13,000 13,000 13,000 Reinvest Interest, Dividends and Cap Gains 13 4,285 5,090 6,110 Jeane's Roth IRA Contributions 14 3,000 3,000 3,000 Jeane's 403(b) Plan Contributions 15 2,328 2,400 2,472 John's 403(b) Contributions 15

6,990 7,200 7,416

Subtotals: 52,323$ 52,410$ 57,218$ -$

TOTAL DISBURSEMENTS: 181,156$ 185,449$ 191,272$ -$

NET DISCRETIONARY CASH FLOW 11 429$ 295$ 288$ -$

John and Jeane Cashman"AS IS" Cash Flow Projections

As of June 30, Year 1For Calendar and Tax Years 0, 1, and 2

RECEIPTS1

DISBURSEMENTS:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

FOOTNOTES:

In both cases, the 403(b) contributions are 6% of their earned income, which is projected to increase 3% per year. Remember, this does not include employer match.

We have not inflated future contributions because Jeane would have to make a conscious decision to do so.

Interest, dividends, and any capital gains distributions from the mutual funds, checking accounts, savings account and CD are automatically reinvested and should be accounted for as a disbursement.

Represents $10,000 lump sum received per child from Jeane's parents end of June each year plus $250 per month saved by John & Jeane.

Theoretically, all of the estimated net discretionary cash flow in Year 0 was deposited into the savings account, but there is typically some variance in actual expenses. In Years 1 and 2, the net discretionary cash flow in the AS IS scenario is assumed to be deposited into the savings account. After we have concluded cash flow revisions in the Revised scenario as a result of recommendations, we will determine a minimum amount of scheduled monthly savings.

The Social Security and Medicare taxes are calculated at 6.2% and 1.45% of their gross earned income and account for the varied wage bases each year as indicated in the Case Study Assumptions.

Note that we calculated the "effective" tax rate or percentage of income taxes paid relative to total income received, which is about 13%. We also noted that their marginal income tax bracket is 25%; a good number to know as you adjust income or deductions/credits up and down to alternative recommendations.

This is Jeane's auto loan that is scheduled to be paid off in June, Year 2. Payment is $377.42/month.

The mortgage payments for the existing mortgage are $1,074 per month or $12,884 per year NOT including taxes and insurance.

The Cashmans provided a detailed estimate of their current nondiscretionary and discretionary expenses for Year 1. We reduced them by 3% for Year 0 and increased then by 3% for Year 2.

Refunds received in Year 0 and Year 1 are actual. We estimated refunds in Year 2 and Year 3. We assumed their itemized deductions did not change. In your examination case-study, we will provide you with the "AS IS" income tax amount due as well as the "AS IS" withholding amounts paid or to be paid so that you can calculate the amount of the refund, if any.

These estimated dividends increase faster because we assume that $10,000 is added to each fund in January plus $250 per month per account.

Year 0 shows actual interest earned from the Year 0, as taken from the Income Tax Return. Year 1 numbers are estimates of interest income from checking, savings, and CD. In your examination case, we will provide you with these estimates for the "AS IS" scenario. If they change, you will estimate the changes.

Remember to think of RECEIPTS as dollars coming in. These are not necessarily "Income."

Year 0 and Year 1 are actual income. Year 2 increased by an inflation factor of 3%.

APPENDIX 4 – Cashman Expense Budgets

CASE STUDY - Cashmans Average Monthly & Annual living expenses provided by the client

John orCurrent John or Jeane as Retired Joint Expenses

Personal Monthly Jeane as a Survivor Solo at RetirementNondiscretionary a Survivor without Survivor in in 20 Years in

Residence Expenses w/kids kids 20/22 years today's dollarsProperty taxes 300$ 300$ HO Insurance 75 75 Utilities 525 525 Maint. & Repair/Improvement 400 400

1,300$ 1,300$ 1,300$ 1,300$ 1,300$

TransportationAuto insurance 125$ 125$ Fuel 200 200 Maintenance & Repair 100 100 Tag Fees/Tax 40 40

465$ 250$ 250$ 250$ 465$

Household/PersonalGroceries 600$ 400$ Clothing 375 250 Personal care 275 400 Health Care 200 300 LTCi - 300 Professional dues 25 - Cell phones 250 275

1,725$ 1,550$ 1,250$ 1,200$ 1,925$

ChildrenDependent Care 50$ -$ Sally tuition 500 - Sam tuition 750 - Music lessons 125 - Sports 125 -

1,550$ 400$ 200$ -$

Personal InsuranceMedical 400$ 400$ NML Policy on John 60 60

460$ 400$ 400$ 450$ 460$ monthly 5,500$ 3,900$ 3,400$ 3,200$ 4,150$ Totals of Discretionaryper year 66,000$ 46,800$ 40,800$ 38,400$ 49,800$ Expenses

John orCurrent John or Jeane as Retired

Personal Monthly Jeane as a Survivor SoloNondiscretionary a Survivor without Survivor in

Expenses w/kids kids 20/22 yearsPersonalDining out 150$ 50 50 50 300$ Recreation/Hobbies 300 100 100 100 500 Vacation/Travel 350 150 150 150 750 Gifts-General 150 100 100 100 200 Cash Reserve savings 167 300 Gifts-Grandchildren - 100 100 100 1,000 Charitable giving 300 100 100 100 400

monthly 1,250$ 600$ 600$ 767$ 3,450$ Totals of Nondiscretionaryper year 15,000$ 7,200$ 7,200$ 9,200$ 41,400$ Expenses

monthly 6,750$ 4,500$ 4,000$ 3,967$ 7,600$ Totals of Allper year 81,000$ 54,000$ 48,000$ 47,600$ 91,200$ Expenses

APPENDIX 5

"AS IS" Value REVISED Value "AS IS" Value REVISED Value "AS IS" Value REVISED Value "AS IS" Value REVISED ValueOwner-John Owner-John Owner-Jeane Owner-Jeane Owner-Joint Owner-Joint TOTAL TOTAL

Cash & Cash Equivalents

Checking Accounts 1 2,500$ 2,500$ 1,000$ 1,000$ 5,000$ 5,000$

Savings Account 2 115,000 107,000

NML WL Policy Cash Value 3 8,000 8,000

1-year CD - matures 12/31 in Year 1 4 32,440

SUBTOTAL: 10,500$ 10,500$ 1,000$ 1,000$ 152,440$ 112,000$ 163,940$ 123,500$

Investments

ST Inv-Grade Bond Fund for Sally 5 42,000$

Interm-Term Inv-Grade Fund for Sam 5 18,000

SUBTOTAL: -$ -$ 60,000$ -$ -$ -$ 60,000$ -$

Tax-Deferred Retirement Investments

John's 403(b) Plan 6 91,000$ 91,000$

Jeane's 403(b) Plan 7 21,000 21,000

Jeane's Roth IRA 8 11,000 13,000

John's Roth IRA 9 5,000

529 Plan for Sally 4, 5 58,220 529 Plan for Sam 4, 5

34,220

SUBTOTAL: 91,000$ 96,000$ 32,000$ 126,440$ -$ -$ 123,000$ 222,440$

Personal Use Assets

Residence 10 325,000$ 325,000$

7-year-old Honda Minivan 11 10,000 10,000

8-year-old Toyota Camry 12 7,500 7,500

Furnishings 12 6,000 6,000 46,000 46,000 20,000 20,000 Personal assets 12

15,000 15,000 25,000 25,000

SUBTOTAL: 28,500$ 28,500$ 81,000$ 81,000$ 345,000$ 345,000$ 454,500$ 454,500$

TOTAL ASSETS: 130,000$ 135,000$ 174,000$ 208,440$ 497,440$ 457,000$ 801,440$ 800,440$

"AS IS" Value REVISED Value "AS IS" Value REVISED Value "AS IS" Value REVISED Value "AS IS" Value REVISED ValueOwner-John Owner-John Owner-Jeane Owner-Jeane Owner-Joint Owner-Joint TOTAL TOTAL

Short Term

John's Visa 13 1,200$ 1,200$

Jeane's MC 13 800 800 Honda loan 11

4,400

SUBTOTAL: 1,200$ 1,200$ 5,200$ 800$ -$ -$ 6,400$ 2,000$

Long Term

Residence mortgage 10 165,025$ 165,025$

SUBTOTAL: -$ -$ -$ -$ 165,025$ 165,025$ 165,025$ 165,025$

TOTAL LIABILTIES: 1,200$ 1,200$ 5,200$ 800$ 165,025$ 165,025$ 171,425$ 167,025$

NET WORTH: 14 630,015$ 633,415$

1

2

3

4

5

6

7

8

9

10

11

12 Estimated current values of personal asets.13

14

FOOTNOTES:

Current balance of Jeane's Roth IRA plus recommended immediate additional deposit of $2,000 for Year 1. We have recommended a reallocation of retirement assets.

We have recommended immediate funding of Year 1 into new Roth IRA for John.

Estimated current market value of residence. We have recommended refinancing to lower interest rate and accelerate amortization of the loan.

Estimated current value of minivan. We have recommended that auto loan be paid of in full with cash reserve funds.

Credit card balances are paid in full each month to avoid interest charges.

After illustrated adjustments in this statement, Net Worth increases by $3,400. Assuming implementation of other recommendations or existing plan, Net Worth should also increase by end of Year 1 because of gift received and deposited to 529 plan, additional monthly deposits to 529 plans, 403(b) plans, and Jeane' Roth IRA. Some interest should be earned and assets may appreciate or depreciate.

Savings account balance will fluctuate and we assume 2% annual interest rate. We have recommended estimated withdrawals of $8,000 from savings in near future, thus we show the effect.

Current Death Benefit is approximately $55,000.

We illustrate recommended transfer of the CD funds now even though it matures in January, Year 2 equally to the new 529 accounts for Sally and Sam. Note: No change to Net Worth.

We also recommend the immediate liquidation of the two mutual funds earmarked for education to new 529 accounts for Sally and Sam. We have illustrated the effect here; note no change to Net Worth.

Current balance of John's 403(b) account. We have recommended a reallocation of retirement assets.

Current balance of Jeane's 403(b) account. We have recommended a reallocation of retirement assets.

John and Jeane CashmanRevised Balance SheetAs of June 30, Year 1

ASSETS:

LIABILITIES:

Assumed balances remain same on average and annual interest rate 1%.

APPENDIX 6


ProjectionREVISED Year 1





Projection

Earned Income2

John's Salary 116,500$ 120,000$ 120,000$ 123,600$ 123,600$ Jeane's Salary 38,800 40,000 40,000 41,200 41,200

SUBTOTAL: 155,300$ 160,000$ 160,000$ 164,800$ 164,800$ -$ -$

Unearned Income from Investments

Interest from Cash Accounts, CD 3, 10 3,135$ 3,265$ 3,265$ 3,385$ 2,481$

Dividends from MFs 4, 10 1,150 1,825 913 2,725 - -

SUBTOTAL: 4,285$ 5,090$ 4,178$ 6,110$ 2,481$ -$ -$

Other Receipts

Gifts from Jeane's Parents 5 20,000$ 20,000$ 20,000$ 20,000$ 20,000$

Liquidation of Savings Acct Funds 11 8,000 2,500

FLEX Plan Reimbursements 7 2,500 Federal Income Tax Refunds 8, 9, 10

2,000 654 654 650 727 (250) 214

Subtotals: 22,000$ 20,654$ 28,654$ 20,650$ 25,727$

TOTAL RECEIPTS: 181,585$ 185,744$ 192,832$ 191,560$ 193,008$







Projection

Family Living Expenses:

Nondiscretionary Expenses 6 64,078$ 66,000$ 66,000$ 67,980$ 67,980$

Financial Planning Fees 13 1,500

Discretionary Expenses 6 14,563 15,000 15,000 15,450 15,450

Legal Estate Planning Fees 13 1,000

DI for John 14 390 1,560

DI for Jeane 14 105 420

Life Insurance on John 14 150 600

Life Insurance on Jeane 14 40 150

LTC Ins on John 14 325 1,300

LTC Ins on Jeane 14 325 1,300

Umbrella Liability Policy 14 75 300

Appraisal of Personal Property 15 500 - PAF Rider to HO Policy 14

75 300

Subtotals: 78,641$ 81,000$ 85,485$ 83,430$ 89,360$ -$ -$

Liability Payments

Residence 30-year mortgage 9 12,884$ 12,884$ 13,202$ 12,884$ 14,160$

Honda Loan 11 4,529$ 4,529$ 6,665$ 2,265$ -$

Subtotals: 17,413$ 17,413$ 19,867$ 15,149$ 14,160$ -$ -$

Income Taxes

Federal Income Tax Paid 16 21,500$ 23,000$ 23,000$ 23,500$ 23,500$

FICA Tax 12 11,279$ 11,626$ 11,626$ 11,975$ 11,975$

Subtotals: 32,779$ 34,626$ 34,626$ 35,475$ 35,475$ -$ -$

Wealth Accumulation Investments John's WL Policy Premiums 720$ 720$ 720$ 720$ 720$ Savings Contributions 17 9,000 8,000 11,500

Education Funding for Sally 18 13,000 13,000 14,554 13,000 16,108

Education Funding for Sam 18 13,000 13,000 13,690 13,000 14,380

Reinvest Interest, Dividends & Cap Gains 19 4,285 5,090 4,178 6,110 2,481

Jeane's Roth IRA Contributions 22 3,000 3,000 5,000 3,000 5,000

Jeane's 403(b) Plan Contributions 20 2,328 2,400 2,400 2,472 2,472

John's Roth IRA Contributions 21 - 5,000 5,000 John's 403(b) Contributions 20

6,990 7,200 7,200 7,416 7,416

Subtotals: 52,323$ 52,410$ 52,742$ 57,218$ 53,577$ -$ -$

TOTAL DISBURSEMENTS: 181,156$ 185,449$ 192,720$ 191,272$ 192,572$ -$ -$

NET DISCRETIONARY CASH FLOW 23 429$ 295$ 112$ 288$ 436$ -$ -$

John and Jeane CashmanStatement of Cash Flow Projections

As of June 30, Year 1For Calendar and Tax Years 0, 1, and 2

RECEIPTS1

DISBURSEMENTS:

1

2

3

4

5

6

7

8

9

10

11

12 Includes OASDI and Medicare tax. Wage base in Year 2 estimated to be $113,400.13

14

15Estimated cost of appraisal for personal and hosusehold items to determine if insurance coverage is adequate.

16

17

18

19

20

21

22

23

FOOTNOTES:

We assume John opens a new Roth IRA and makes $5,000 contributions in 2011 and 2012.

We assume Jeane will increase her contributions to her Roth IRA to $5,000 in Years 1 and 2.These projections indicate that all of the recommendations we have made are "doable" from a cash flow standpoint although many of the outlays are estimates and will change with implementation. Actual results should be monitored because "actual" versus "projections" will differ and unanticipated events can alter results significantly.

We assume all recommended insurance is purchased and premiums are paid monthly or quarterly beginning fourth quarter of 2011.

Current and estimated federal withholding taxes.

Estimated savings in last year and this year in AS IS scenario. If we assume all recommendations are implemented as estimated in this projection, savings will be minimal in Years 1 and 2. In Year 3, we have recommended that savings resume at at least $350 per month.We have recommended increased monthly deposits into two 529 accounts beginning in July, 2011. Additional $259/month for Sally and $115/month for Sam.

Interest, dividends, and any capital gains distributions from the mutual funds, checking accounts, savings account and CD are automatically reinvested and are accounted for as a disbursement.

For both John and Jeane, the 403(b) contributions are 6% of their earned income, which is projected to increase 3% per year.

Participation in FLEX Plan beginning in 2012 results in tax savings of $625. Refund reflects reimbursement - costs are already included in nondiscretionary family expenses.

Changes in Year 1 income taxes are reflected in the Year 2 refund and Year 2 changes in income taxes are relected in the Year 3 refund. The changes result from the following recommendations noted in footnotes 9: - Your current taxable income is about $118,000. - Your marginal income tax bracket is 25%. - In Year 1, your taxable income would need to exceed $139,350 in order to reach a marginal rate of 28%. - Your taxable income would need to fall to $69,000 in Year 1 to reach a 15% marginal tax bracket.

We recommend refinancing the mortgage balance of $165,025 to a 15-year amortization and a reduced interest rate from 5% to about 3.5%. This will increase the monthly payment by about $106 and reduce the tax savings on interest by $151 in Year 1 and $615 in Year 2. The amortization of the loan will initially increase by over $300 per month.

We revised the income tax refund estimates for upward in Years 1 and 2 because the taxable interest and ordinary dividends are projected to have decreased because of the transfer of the CD and mutual fund bond accounts to 529 plan accounts (not taxable).

Assume auto loan balance paid off July, Year 1. Year 1 disbursements include six months of payments. Funds withdrawn from savings account are used to fund payment. We assume impact on interest/income taxes to be negligible at this point.

In Year 1, Estate Planning legal fees estimated to be $1,000 and Financial Planning Fees estimated to be $1,500.

Think of RECEIPTS as dollars coming in. These are not necessarily "Income."

Year 0 and Year 1 are actual income. Year 2 increased by inflation factor of 3%.

Year 0 are actual numbers from Year 0 Income Tax Return. Year 1 and Year 2 are estimates of income from checking, savings, and CD. Reflects transfer of two mutual funds earmarked for Sally and Sam's education to 529 accounts in July, Year 1 and CD to 529 accounts in January, Year 2. Accounts for withdrawals from savings account in Years 1 and 2 respectively.

Mutual funds earmarked for education are recommended to be liquidated mid-Year 1 and proceeds transferred to 529 accounts. Thus, projected dividends reduced by half in Year 1 and eliminated in Year 2.

Currently, $10,000 lump sum received per child from Jeane's parents end of June each year plus $250 per month saved by John & Jeane for education expenses of Sally and Sam.

You have provided us with a detailed estimate of your current nondiscretionary and discretionary expenses for Year 1. We reduced them by 3% for Year 0 and increased then by 3% for Year 2.

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