Personal financial planning: life expectancy, survivorship, and asset disposition

Retirement Plan

Financial Plan

The client is a married male in his mid-twenties. It is projected that the client will graduate from college within the next year or so and immediately enter the workforce. The client's degree is in engineering and he is expected to land a well-paying job in a relatively short time. He and his spouse are currently childless but plan on having at least two children. The couple lives in an apartment but are plan on purchasing a house in whatever city the job is offered. The client comes from a long-lived family with the average family member living well into their eighties. The client wishes to pass on accumulated wealth without paying a large percentage in taxes to the government. The client plans on retiring at the age of 70, and will then travel and enjoy life with his spouse.

Current income needs are approximately $2,000 per month. This amount covers rent, utilities, food, clothing, transportation, entertainment, health insurance and incidentals. The client would like to save approximately $500 ($100 in emergency cash, $200 in mid-term investments, $200 long-term stocks and bonds) per month and would like to purchase a house right away. The client's parents have offered him a lump-sum of money to help him with the down payment for a house. Once a house is purchased future income will need to rise to approximately $3,500 per month from the current level of $2,500. As children are born, expenses will rise that will affect the income stream. The client would like to maintain a 10% savings rate based on the income stream.

2. The client was raised with conservative values and abhors the idea of debt. However, one essential item will have to be purchased that will have to be paid for through a loan. That item is a residence. The client plans on purchasing a modest home for approximately $200,000 or less. The down payment on the house will be 10% ($20,000) leaving a loan amount of $180,000. The client will pay this loan off in 15 years and will be able to get a percentage rate of 4%. The client's bi-monthly payments will be approximately $770.00 (1,540.00 per month) which includes PMI and taxes. This raises his current income needs to $3,500 from his current needs of $2,500. The client does not plan on making any other major purchases with debt financing.

3. Acquiring assets will be done with any additional dollars (above what is needed in current income). Since the client was raised in a debt-free home, that value has stuck with him and he will not be purchasing items unless he has the cash to pay for them. On the reverse side, disposing of assets will be taken in an orderly fashion. Any asset that is not being used in a productive manner will either be sold or donated to a local charity.

4. Emergency cash funds will be part of the $500 per month (initially) that the client sets aside from current income. The amount of emergency cash that will be maintained will fluctuate but will be equal to three months of current living expenses.

5. Client's investment plan will to use the Modern Portfolio Theory and allocate assets into three separate categories for investment purposes. The three categories include; short-term (cash and liquid assets), middle-term (stocks, bonds, mutual funds, CD's etc.) and long-term investments (house, stocks, bonds, life insurance, annuities). Client will pick individual investments based upon the requirements, goals and objectives for each category.

6. Client's retirement plan will also implement the MPT and will be allocated into individual stocks and mutual funds that are geared towards growth (both short-term and long-term). Since the client has quite a number of years until retirement (approximately 45) he can afford to invest into a more volatile scenario (stocks) that historically have provided higher returns than the less volatile marketplace (government bonds and cash investments). Since the client realizes that the stock market is more volatile, he will use the dollar cost averaging method of investing money in a consistent and regular fashion in order to achieve a lower cost basis, and a higher (overall) rate of return. Client anticipates maintaining at least a ten percent (of total income) being invested on a monthly basis. A quick calculation shows that if the client is putting $200 per month away and averaging a 7.5% rate of return over the next 45 years client should be able to accumulate at least $904,000.00. Assuming that the client lives for an additional 15 years client could withdraw approximately $73,000 per year and still maintain the balance. Additionally, the client plans on taking advantage of the 401k plan that will be part of his employment package and setting aside 5% of his income (to be matched by 2.5% by the company). His 401k plan should generate additional dollars after retirement that will allow him to pass on wealth to his family on a yearly basis without depleting from his capital.