RETIREMENT AND ESTATE PLANNING Life Situation Financial Data Pam, 48 Josh, 50 Ch
ID: 2652906 • Letter: R
Question
RETIREMENT AND ESTATE PLANNING
Life Situation
Financial Data
Pam, 48
Josh, 50
Children ages 21, 19 and 16
Monthly income $6,700
Assets $242,500
Living expenses $5,600
Liabilities $69,100
With two children in college, the brocks once again find their life situation changing. Compared to five years ago, their total assets have declined due to college expenses. The Brocks’ oldest child will graduate next year, but the youngest will enter college in a couple of years. The drain on the family’s finances will continue.
While the family’s finances are adequate, both Pam and Josh are beginning to think more about retirement. Over the years, Josh has taken advantage of different career opportunities. Today his annual salary is higher than ever. However, his employment changes have resulted in a smaller pension fund than would have been available had he remained with the same organization.
The current value of his pension plan is just over $115,000. The investment program he and pam started almost 10 years ago is growing and is now worth about $62,000. But they still worry whether they will have enough money to finance their retirement when Josh retires in 15 years.
Pam and Josh should also be concerned with various estate planning actions. They have talked about a will and investigated the benefits of several types of trusts. However, they have not taken any specific actions.
Questions
Q1. What steps do the Brocks need to take to prepare for retirement?
Life Situation
Financial Data
Pam, 48
Josh, 50
Children ages 21, 19 and 16
Monthly income $6,700
Assets $242,500
Living expenses $5,600
Liabilities $69,100
With two children in college, the brocks once again find their life situation changing. Compared to five years ago, their total assets have declined due to college expenses. The Brocks’ oldest child will graduate next year, but the youngest will enter college in a couple of years. The drain on the family’s finances will continue.
While the family’s finances are adequate, both Pam and Josh are beginning to think more about retirement. Over the years, Josh has taken advantage of different career opportunities. Today his annual salary is higher than ever. However, his employment changes have resulted in a smaller pension fund than would have been available had he remained with the same organization.
The current value of his pension plan is just over $115,000. The investment program he and pam started almost 10 years ago is growing and is now worth about $62,000. But they still worry whether they will have enough money to finance their retirement when Josh retires in 15 years.
Pam and Josh should also be concerned with various estate planning actions. They have talked about a will and investigated the benefits of several types of trusts. However, they have not taken any specific actions.
Questions
Q1. What steps do the Brocks need to take to prepare for retirement?
Explanation / Answer
Brocks need to plan for their retirement by step-by-step process as follow.
(1) Objectives
Brocks need to identify their objectives of planning. Do they want to accumulate large savings (maximize assets) by the time Josh retires, or do they want a fixed-income post-retirement stream of income? If they want to accumulate fund in the 15 years left until Josh retires, how do they want to invest?
(2) Gap Analysis
This gives an approximation of difference between current income & expenses (that is, current savings). Currently their monthly savings are $1100 ($6700 - $5600). They need to calculate how much of the current monthly expense is permanent in nature & how much will be free after how many years (for example, when both kids complete their education). An annual projected income/expense plan should be drawn out.
(3) Brocks should decide on the amount of discretionary savings (or contingency fund) that they wish to maintain, out of their saving of $1100 per month.
(4) The net savings per month is the balance left, after deducting the contingency funding from monthly gross savings. This amount is the amount available for funding their retirement.
(5) Next, Brocks need to decide on the minimum fixed amount per month they would require to be comfortable, post-retirement. This requires an expected rate of return estimation.
(6) The financial estimations & projections should be made on a post-tax basis.
(7) They should define what percentage of their asset portfolio they want to keep in risk-free or riskier assets. It depends on their risk-acceptance aptitude.
(8) As part of estate planning, Brocks need to make a will defining the distribution of their regular income & savings and other assets, among their children and other beneficiaries, if any. Secondly, the life insurances have to be decided upon, based on their preferences.
All of the above factors should be discussed in detail with the Brocks/ portfolio manager to ensure the best possible asset allocation to meet the post-retirement requirements of Brocks family.
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