FINANCIAL PLANNING CASE 5:

Pre-retirement

January 24, 2018

Benjamin Lau Chuen Yin
Eugenia Cheng
Esther H’ng
Jia Hui Chan
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Financial Planning Case Challenge: 3rd Place

Evaluators: Adam Mohr (Right), Brian T Soley (Center), Korrie Trier (Left)
Team Members (Front- left to right): Esther H’ng, Benjamin Lau, Eugenia Cheng, Jia hui Chan

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1 TABLE OF CONTENTS

Primary Goals and Objectives………………...………………………………………….……………..2

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Client’s Financial Condition……………………………………………………………………………...3
SWOT Analysis...……...………………………………………………………………………………….4
General Recommendations for Various Financial Goals………..…………………………………...5
Net Worth Statement - Current Plan………………………………………………………...………….7
Current Year Cash Flow - Current Plan…………………………………………………………………8
Current Year Cash Flow - Proposed Plan…………………………………………………...………….9
Income Sources & Total Tax………………………………………………………..……………..…...12
Emergency Fund Goal Coverage…………………………………………………………….………..13
Retirement Goal Coverage - Current & Proposed Plan………………………………………..…….14
Inflation-Adjusted Immediate Annuities……………………………………………………………….19
Investment Goal Coverage – Current & Proposed Plan……………………………………………..20
Daughter’s Wedding Goal Coverage - Current & Proposed Plan………………………….………..22
Travel Goal Coverage - Current & Proposed Plan………………………………………………..….23
Education Goal Coverage - Current & Proposed Plan……………………………………………….24
Disability/LTC Insurance Recommendation ………………………………………………………….26
Life Insurance Recommendations………………………………………………………………..……28
Long-term Care…………………………………………………………………………………………. 30
Home Insurance…………………………………………………………………………………………31
Auto Insurance………………………………………………………………………………………….. 33
Major Purchase Goal Coverage - Current & Proposed Plan…………………………………….…..34
Human Life Value Analysis……………………………………………………………………………..35
Estate Planning……………………………………………………………………………………..…...36
References……………………………………………………………………………………………….37

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 2 PRIMARY GOALS AND OBJECTIVES
For: Abigail
2.1 SHORT-TERM (1-3YRS):
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2.1.1 Wedding and honeymoon funds
Objective: Fully fund daughter’s wedding and honeymoon.
2.2 LONG-TERM (>5YRS):
2.2.1 Retirement goals
Objective: Retire at age 64 or later. Have sufficient savings after deduction of other goal
expenses to fund for essentials for self-support until expected death.
2.2.2 Travel and vacation funds
Objective: Travel to Europe every once a year and participate in cooking classes (after retirement)
2.2.3 Education funds
Objective: Funds for grandchildren (within 8 years)
2.2.4 Major Purchases
Objective: Lake cabin purchase

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3 ABIGAIL’S FINANCIAL CONDITION
Financial Position Estate Planning:
Will Page | 4
Assets $1,196,000 Yes
Powers of Attorney Yes
Liabilities $246,964
Trust No
Net Worth $2,002,036
Health Care Directive No
$250,000
Inflows

Outflows $250,000

Protection

Term Life $400,000

Whole Life $250,000

Disability Insurance Not Disclosed

Dwellings: $600,000
Homeowner’s
Contents: $150,000ACV
Policy (HO-3)
Liability: $1,000,000

Health Insurance Not Disclosed

$100,000 Collision
Auto Insurance $$300,000 Comprehensive
$50,000 Liability

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 4 SWOT ANALYSIS

Strengths Weaknesses Opportunities Threats

•Insurances Safe •Weak Cash Flow •Increase in Income •Economic Page | 5

•Estate Planning •High Expenses •Better Money Downturn
•Ability to Cover •Risky Mutual Fund Management •Sudden Loss of
Essentials Portfolio •Improve Approach Income
•Low Liquidity to Portfolio Returns •Pending Taxes
•Outdated Will •Reduce Investment Legislation Change
•Limited Disability Risk
Insurance

4.1 STRENGTHS
Abigail’s financial strengths are insured with adequate insurance plans that protects her short-
term expenses if she is meet up with an accident. She has adequate auto insurance of collision,
comprehensive and liability at 100,000/300,000/50,000 which are good for her $43,000 vehicle and also
a sufficient HO-3 coverage for Eau Claire residence. In addition, Abigail currently have proper disability
insurance and a good health insurance from her company. Abigail has currently a will prepared ahead of
time in case of the unexpected, however she may need to update her will. Notably, Abigail do not have a
cash flow deficit, which is a good habit of promoting general financial wellness.

4.2 WEAKNESS
Abigail’s financial weaknesses includes very little liquid assets and no emergency funds. This can be
troublesome as emergency funds is required as a source of backup to prevent bankruptcy and to fund
necessary expenses in times of need without much difficulties. Despite having a cash flow deficit, Abigail’s
high spending habits have deprived her of a potential cash surplus to allocate to fund other goals. Abigail
also have risky mutual fund and 401k portfolio allocations, which she should consider reallocating as she
gets closer towards retirement. Abigail should also consider reviewing her will more often to make minor
updates when necessary.

4.3 Opportunities

Abigail’s opportunities include a potential increase in income, which can be an overall boost to her
accounts. An increase in interest rates can also boost her investments and overall planning. Abigail has
potential of improving money management and have better spending habits.

4.4 THREATS
Abigail’s threats include pending taxes legislation changes, which may be a dreadful situation that can be
taxed higher for capital gains, interests and withdrawals. An economic downturn can also negatively
impact her portfolios when they lose value. The biggest threat to Abigail’s financial wellbeing may be a
sudden loss in income which can impact her ability to spend and pay bills simultaneously.

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 5 RECOMMENDATIONS
General Recommendation and Practices.
Currently Abigail have no surplus nor deficit. We believe that Abigail is overspending her income
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and leaving no surplus on her cash flow statement. Therefore, we strongly recommend that
Abigail reduces her expenses at a reasonable amount (refer to page 12). Due to some financial
shortfall and to achieve her goals, we suggest a retirement age of 67, which is a three-year
addition to what she had initially planned. In addition to better financing Abigail’s goals, it allows
her to pay off her mortgage by the time she retires and entitled for the full retirement benefit from
social security.

5.1 RETIREMENT GOAL RECOMMENDATION

We recommend that Abigail remain contributing at 4.8 percent of income to existing 401k account until
retirement at age 67. After retirement, we recommend to rollover a portion of Abigail’s 401k funds,
brokerage funds, and all holdings on company stocks into an inflation adjusted immediate annuity
account so that she will have consistent income to cover for personal expenditures for the next 30 years.

5.2 EMERGENCY FUND GOAL RECOMMENDATIONS

Abigail do not have an emergency fund currently, which can be troublesome if she loses her
income suddenly or meet up with an emergency. Assume there is no increase in income, we
recommend that Abigail contribute 24 percent of her income in 2018 and 13.3 percent of her
income in 2019 to cover emergency fund goal.

5.3 MAJOR PURCHASE GOALS RECOMMENDATIONS

We would recommend Abigail to purchase a cabin at age 68 for a price lower than $150,000.

5.4 WEDDING FUND GOAL RECOMMENDATIONS

It would be difficult to produce enough funds for Abigail to sponsor her daughter’s wedding within two
years by only reducing her expenses. An estimation of $17,509.80 will be needed to fund for her
daughter’s wedding and honeymoon.

5.5 TRAVEL GOAL RECOMMENDATIONS

The best way to meet this goal is by reducing Abigail’s current travel expenditures until retirement. We
believe that Abigail is currently overspending on pre-retirement travels and recommend that she allocate
$3,000 annually for travel expenditures.

5.6 DISABILITY INSURANCE GOAL RECOMMENDATIONS

Since we have not much information given on the company’s coverage on her disability insurance, we
assume that Abigail’s company has provided an average disability insurance coverage as the common
standard. We would not recommend Abigail to purchase any other disability insurance as social security
will provide similar protection and will not cost any cents.

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6.1 INVESTMENT GOAL RECOMMENDATIONS
We recommend Abigail to be more conservative as she get closer to retirement. Abigail’s income will be
much lower when she retires. A conservative approach would help earn a steady flow of income and Page | 7
reduce the risk of losing whatever asset she has left. The suggested conservative portfolio mix is 60
percent bond/treasury and 40 percent stocks.

6.2 ALL ESTATE PLANNING RECOMMENDATIONS

We recommend her to update her will involving every single assets and liabilities or extras allocation to
her choice. It is important to have it all planned out and execute it using a will to reduce the burden of
beneficiaries.

6.3 PROFESSIONAL PLANNING RECOMMENDATIONS

We recommend Abigail to inquire a professional tax advisor for better management and maximize her
tax returns. It will be important to get accurate amount to make the goals possible. A professional
financial planner is what she needs to efficiently meet her goals. She could also utilize financial services’
resources and data in selecting mutual funds. Any person with assets need an estate planning attorney
no matter their ages will be. We recommend Abigail to update her will whenever she is making financial
decision that will affect future execution of the will.

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7 NET WORTH SUMMARY

Current & Proposed Plan

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Net Worth Summary as of 12/31/2017

Current Proposed (Age 59) Proposed (Age 67)

Total Current Assets 35,000 128,250 128,250

Invested Assets:
401(k) 496,000 596,998 145,776
Company Stock 250,000 - -
Brokerage Account 450,000 695,863 550,424
Annuities 1,400,000

Personal Use Assets 1,018,000 1,018,000 1,018,000

Liabilities 246,964 187,327 Other Debts: ~20,000

Total $2,002,036 $2,251,784 $3,222,268

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 8 CURRENT YEAR CASH FLOW - ANALYZE
Strengths in Abigail’s Current Cash Flow

• Essentials Covered
• No Deficit Page | 9

Weaknesses in Abigail’s Current Cash Flow

• No savings for emergency fund

• Extremely high expenses
• No cash surplus

According to our resources, most of Abigail’s expenses (not include

mortgage, insurance premiums, benefits, and medical) is double, if not
more, than the average American spending. Due to unreasonably high
expenditure, we assume that Abigail may be involve in:

1. Poor budgeting of expenses.

2. Profession-affected expenditures.

3. Indulgent in impulsive spending habits.

4. Possible one-time-only expenditures (expensive items).

5. Unnecessary purchase.

To meet Abigail’s primary goals and objectives, we strongly recommend

her to start by reducing her expenses. All items except mortgage, insurance premiums, benefits, and
medical expenses will be adjusted to suit Abigail’s needs. Refer next page for proposed expenses.

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 9 PROPOSED CASH FLOW
9.1 50 PERCENT REDUCTION OF CURRENT EXPENDITURES
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Note: Expenses mentioned on this page does not include mortgage, insurance premiums, benefits, and
medical.

Abigail’s expenses (except insurance premiums, benefits, and medical) will be adjusted close to the
average amount found on various reliable website. Several factors that prevent us from reaching the
average amount for each item include:

1. Limited information on the size of her house.

2. Eau Claire area provide relatively lower cost of living

compared to other regions.

3. Limited information on her primary vehicle.

4. Limited information on her preference for clothing

brand.

5. Limited information on the differences between her

entertainment and hobbies expenditures.

6. Limited information on the recipients of her gifts.

7. Limited information on what is categorized as

“unknown” for her.

Due to above considerations, we made our best assumption to increase or decrease the average
expenditures by 50 percent to 100 percent.

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 10 OVERALL PROPOSED CASH FLOW

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What had been done (in spreadsheet):

- Prepared a comprehensive spreadsheet for Abigail’s cash flow.

- Performed a top-to-bottom analysis for this cash flow.

Top (Income and payroll taxes):

Due to economic fluctuations and conservative reasons, we will not inflate income.

Middle (Savings):

Abigail’s contribution to 401 (K) and taxable account will be fixed, we will not inflate her
contribution. We would recommend her to establish an emergency fund account. A stream of
income will be contributed to that account right away after she receives paycheck. A detailed
explanation will be provided (page 25 – travel goal).

Bottom (Expenses):

As mentioned above, we would recommend Abigail to budget a higher expenditure at age 58 to

cushion the shock in reducing expenditures. A detailed payment amount for her mortgage is
calculated using Dinkytown.

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Within Abigail’s statement of cash flow, we could not determine the source or goods that she spends on
“Unknown” expenditures. Therefore, we will not consider any funds for Abigail’s “unknown” expenses
since her expenditures has indicated a cover of her essentials. Abigail’s travel expenditures will be used
as an estimation of the expenses to cover one of her goals: annually travel to Europe before and after
retirement. The travel expenditure will include Lodging and airfare that are provided by Expedia. A
detailed discussion will be provided (page 15).

Bottom (Surplus):

After reducing Abigail’s annual expenditures about 50 percent, we would be able to get a total
surplus of $674,613.20. (This figure is factor in the 3 percent inflation of total expenses). This
surplus can be used to fulfill daughter’s wedding fund goal, education goal, old age care goal, and
major purchase goal.

Post Retirement (After age 67)

After Abigail’s retirement, she will no longer need to pay mortgages as it would be paid off. She is expected
to adjust her income accordingly to her new lifestyle. A total estimated expenses amount at age 68 will
be $52,942. While the allocation for each expense will differ, the total expense will balance out the effect,
resulting a constant estimated expense of $52,942 (before inflation) until age 100. If we factor in an annual
3 percent inflation, Abigail would need a total of $2,915,931.07 for her expenses alone from age 68 till
age 100. A detailed explanation on how we fund Abigail’s expenses will be stated (page 21).

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12 INCOME SOURCES
Social Security Benefits

401 (K)
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Inflation-Adjusted Annuities

Whole Life Insurance

Brokerage Account

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13 EMERGENCY FUND GOAL COVERAGE
Emergency Reserves Fund

$35,000
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Recommended Emergency Reserves Fund

$128,250**

Emergency Reserves Surplus

$40,000

**$171,000 (9/12) months = $128,250

$171,000 / 12 * 9 = $

We recommend Abigail to have a current asset

of $128,250 as an emergency reserve fund.

With $35,000 currently in Abigail’s savings,

Abigail will need to save an amount of $93,250
to be able to achieve the recommended
emergency fund goal. According to research
from credible sources such as BLS.gov, Abigail
will still be able to enjoy a comfortable upscale
lifestyle if she cuts down on her elastic
expenses and allocate $60,000 for her
emergency fund in 2018, and $33,250 in 2019.

Doing so Abigail will achieve her emergency

fund goal in 2019, which can protect her
expenses from sudden losses of income or
emergencies.

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 14 RETIREMENT GOAL FUND COVERAGE
14.1 401K RECOMMENDED ALLOCATION
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401k Asset Class Allocation Plan

U.S. Stock
30% 35% Non U.S. Stock

Bond
5%
30% Short-term
Treasury

Current Suggested Allocation

U.S. Stock 100 percent 35 percent $173,600
Non- U.S. Stock 0 percent 5 percent $24,800
Bond 0 percent 30 percent $148,800
Short-Term Treasury 0 percent 30 percent $148,800
100 percent 100 percent $496,000

In accordance with Abigail’s current 401k allocation, we recommend taking a conservative approach and
further diversification as she progress toward retirement. The recommended plan suggests a 100 percent
401k allocation on asset class which includes 35 percent U.S stock, 5 percent non- U.S. stock, 30 percent
bond, and 30 percent short-term treasuries. The overall portfolio consists of 40 percent equity (which will
be the riskier asset) and 60 percent of bond and treasuries.

Notably, the main objective is to reduce the risk by diversification by allocating assets to a variety of low
risk funds while maintaining sufficient returns to fund for her goals and essentials. In addition, the funds
selected are based on relatively good ratings, investment style, required minimum investment, and low
to moderate expenses and fee level. Notice 15 percent of the funds selected comprised of index funds,
which aligns closely with the S&P 500. Target retirement funds are selected mainly to diversify Abigail’s
asset and to exploit its actively managed and self-adjusting feature (portfolio allocation mix becomes
more conservative towards target-date) and hedge against index funds. Other funds are avoided because
of the potential risk they impose from their investment style and high turnover rates.

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The following table illustrates the recommended fund allocation.

Recomme
nded Page | 16
Allocation
Current for Abigail
Core Fund Line-Up Asset Class Category (percent) (percent)
EV LG CAP VALUE I (EILVX) Stock Investments Large Cap 20
FID 500 INDEX INST (FXSIX) Stock Investments Large Cap
FID GROWTH CO K (FGCKX) Stock Investments Large Cap
ARTISAN MID CAP INST (APHMX) Stock Investments Mid-Cap
FID MID CAP IDX PR (FSCKX) Stock Investments Mid-Cap 40 5
FI MID CAP VALUE (FSMVX) Stock Investments Mid-Cap
FID SM CAP IDX PR (FSSVX) Stock Investments Small Cap 40 5
FID SMALL CAP GROWTH (FCPGX) Stock Investments Small Cap
FID SMALL CAP VALUE (FCPVX) Stock Investments Small Cap
FID INTL INDEX PR (FSIVX) Stock Investments International 5
OAKMARK INTL INV (OAKIX) Stock Investments International
TRP INTL DISCOVERY (PRIDX) Stock Investments International
OAKMARK EQ & INC INV (OAKBX) Blended 10
METWEST TOT RTN BD I (MWTIX) Bond/Stable Value Income
VANG TOT BD MKT ADM (VBTLX) Bond/Stable Value Income 30
VANG PRIME MONEY MARKET
(VMMXX) Short-term 30

Life Cycle Funds

VANG TARGET RET 2015 (VTXVX) Blended
VANG TARGET RET 2020 (VTWNX) Blended
VANG TARGET RET 2025 (VTTVX) Blended 15
VANG TARGET RET 2030 (VTHRX) Blended
VANG TARGET RET 2035 (VTTHX) Blended
VANG TARGET RET 2040 (VFORX) Blended
100 100

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𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 401𝑘 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜
= ( 𝑝𝑒𝑟𝑐𝑒𝑛𝑡 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘 𝑡𝑦𝑝𝑒 ℎ𝑜𝑙𝑑 𝑖𝑛 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜)
∗ (𝐴𝑛𝑛𝑢𝑎𝑙𝑖𝑧𝑒 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑓 𝑓𝑢𝑛𝑑 𝑡𝑦𝑝𝑒) + ⋯
10.35% + 9.46%
= 0.05 × ( ) + 0.05 × 9.4% + 0.05 × 4.7%
2
6% + 6.5%
+ 0.10 × ( ) + 0.30 × 7.4% + 0.30 × 1.5% + 0.15 × 10.9%
2
= 6.130250%

The estimated rate of return on investment on the suggested 401k portfolio is 6.130250 percent. The
estimated rate of return is calculated by taking the portion of asset class in the 401k portfolio and treat
them as an individual investment subjected to its own rate of return, then sum each asset classes rate of
return as one portfolio. The annualize rate of return on fund type are based on the most recent fifteen-
year rate of returns from the matrix book US (2016) and Vanguard’s bench mark returns**. For blended
funds rate of return, the calculation includes the average rate of return of growth stock and value stock
with respect to their category.

Note*: To verify the credibility of the estimated rate of return calculated above, the rate is cross-checked
with three different sources regarding what experts believe the realistic return should be. The results –
6.130250 percent is a relatively reasonable and modest expected annual rate of return for a conservative
401k portfolio. However, the rate does not include inflation adjustment and money management fees.
Due to market volatility, the expected annual rate of return is not guaranteed.

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Estimated 401k Worth at Retirement

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This result was calculated with Abigail’s current contribution of $12,000.00 per year and a current 401k
balance of $496,000. Abigail’s current plan has her contributing 4.8 percent of her annual salary up to the
IRS annual maximum of $24,500. Abigail’s 401k total also includes an employer match of 50 percent of
her contributions, up to 4.8 percent of her annual salary. Abigail’s current 401k plan has her employer
contributing $6,000.00 per year, which is the maximum 4.8 percent employer’s match of her annual
salary. Considering that Abigail’s income stays at $250,000 annually, the result for her ending 401k balance
at the age of 67 would be worth $1,145,776. Under the assumption she practices the suggested adjusted
spending, she is expected to yield a surplus in her cash flow starting age 57. Therefore, we strongly
recommend Abigail to refrain from withdrawing any money from 401k account before retirement to take
advantage of the pre-tax compounding effects.

Some Assumptions to consider: Taking into consideration of Abigail’s age and needs, by default, her 401k
plan would most likely be a traditional 401k, which means tax are deferred.

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Balance Without Balance With
Age Contributions Employer Match
Employer Match Employer Match
$496,000 $496,000 Page | 19
57 $12,000 $6,000 $538,800 $544,997
58 $12,000 $6,000 $584,223 $596,998
59 $12,000 $6,000 $632,431 $652,186
60 $12,000 $6,000 $683,593 $710,757
61 $12,000 $6,000 $737,892 $772,919
62 $12,000 $6,000 $795,520 $838,891
63 $12,000 $6,000 $856,680 $908,907
64 $12,000 $6,000 $921,590 $983,215
65 $12,000 $6,000 $990,478 $1,062,079
66 $12,000 $6,000 $1,063,589 $1,145,776

The year after Abigail retire, we recommend her to rollover $1,000,000 of her 401k funds into an inflation
adjusted immediate annuity. She would be protected by the pre-tax benefits of her 401k account.

Current 401k Rollover to Annuity Expected Remaining

Balance (Tax-free) 401k
$1,145,776 $1,000,000 $145,776

That would leave Abigail with an ending balance of $145,776 in her 401k account.

Social Security Retirement Benefits

One of the reasons we recommend Abigail to retire at age 67 is the entitlement of a full retirement benefit.
Assuming Abigail’s date of birth is 6/1/1960, age 57 in 2017. The estimated monthly benefit amount,
beginning at age 67 and 7 months in 2027, is $4,211.00. The value is predetermined under the assumption
that future prices or earnings increase (inflation). Value obtained from
https://www.ssa.gov/OACT/quickcalc/

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 19 Inflation-Adjusted Immediate Annuities
COVERING ESSENTIALS AFTER RETIREMENT
Page | 20

To cover Abigail’s upscale lifestyle expenses after retirement at age 67, we recommend that she invest in
annuities, so that she can establish a consistent flow of income without having to depend on her daughter.

Most of Abigail’s annuity funds will be rolled over from her 401k funds. As mentioned earlier, we
recommend Abigail to rollover $1,000,000 from her 401k funds into an inflation adjusted immediate
annuity. This is because 401k rollover to annuity is tax-free. We would recommend her to invest money
into annuities rather than keeping it in 401k because her 401k is exposed to a downside risk of losing
value. Since her employer will not be matching her 401k contribution after retirement, it is better that she
allocates her money into investing in a safer and more reliable instrument. In addition, annuities will
provide consistent money as her primary source of income after retirement.

We also recommend Abigail to withdraw $400,000 from her brokerage account which we forecasted to
be worth $950,423.95 when she is 67 years old. With $550,423.95 remaining in her brokerage account
and $145,776 in 401k account, Abigail will be able to invest in an annuity account with a huge capital of
$1,400,000, which under a 5 percent interest rate will yield $7,376.65 per month consistently.

We chose the amount of $1,400,000 because it will yield a lump sum of $2,921,153.4 in 33 years. If Abigail
live up to the age of 100 (33 years after retirement and starting annuity at the age of 67), she will need a
lump sum of $2,915,931.07 to cover 3 percent year over year inflated expenses. Buying an annuity at
$1,400,000 will not only sufficiently provide living expenses until the age of 100 but also leave some
remaining funds in the brokerage and 401k account for additional diversification.

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 20 INVESTMENT ACCOUNT
Additional assumption: Abigail owns $250,000 worth of company stocks for a while now (long-term),
$200,000 of which she initially used to buy the stock and $50,000 of which she receives as capital gain
from the purchase. Assuming of course, a modest performance and growth of the company.
Page | 21
Due to the insecurity of holding only on a discrete stock, in addition to that is the lack of information on
the company, we recommend that Abigail sell all of her company stock holdings as soon as possible to
avoid potential loses. Abigail’s taxable (15 percent) capital gains would be $7,500. By selling all 250k worth
of company stock, she will receive a total of $242,500 in cash. We recommend $242,500 of the cash be
transferred into her brokerage account, which would be using to add into the portfolio mix. Abigail would
have a total of $692,500 in her brokerage account including the $12,000 contribution. Abigail current asset
allocation illustrates an aggressive approach. Again, we suggest that she becomes more conservative as
she get closer to retirement.

Brokerage Account Suggested

Suggested Allocation Allocation
Category Mutual Funds Current Allocation (242,500 added) Percentage
US Bond MMHYX $0 $242,375 35 percent
US Treasuries $22,500 $207,750 30 percent
Large-Cap Fund FLGEX $56,250 $110,800 16 percent
Mid-Cap Fund PRDMX $135,000 $55,400 8 percent
Small-Cap Fund PRDSX $191,250 $41,550 6 percent
International Fund MGIAX $45,000 $34,625 5 percent
$450,000 $692,500 100 percent

Notice: Due to very low ratings from morning star, the original small-cap fund and international fund were
replaced. US bond was added to the portfolio as a safe investment asset to achieve good conservative mix.
The mutual funds in the table are updated to the change.

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜

= 0.35 ∗ 4.46% + 0.30 ∗ 4.24% + 0.16 ∗ 8.63% + 0.08 ∗ 10.35% + 0.06 ∗ 10.82%
+ 0.05 ∗ 1.95%
= 5.78850%

(Sources of calculation can be found at page 15)

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Annual Investment Returns

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Abigail original investment of $692,500 plus annual contribution of $12,000 could be worth $950,423.95
after 10 years. This assumes an annual rate of return of 5.78850 percent and all annual investments
occur at the beginning of this year 2018. An expected inflation of 3 percent and an assumed 15 percent
tax is included in the calculation.

Annual
Year Taxes Net Return Total
investment
0 $0.00 $0.00 $0.00 $692,500.00
1 $11,650.49 $5,939.35 $13,486.39 $717,636.87
2 $11,311.15 $6,148.32 $13,938.42 $742,886.44
3 $10,981.70 $6,358.33 $14,393.04 $768,261.18
4 $10,661.84 $6,569.47 $14,850.47 $793,773.49
5 $10,351.31 $6,781.86 $15,310.92 $819,435.71
6 $10,049.81 $6,995.59 $15,774.61 $845,260.13
7 $9,757.10 $7,210.76 $16,241.75 $871,258.98
8 $9,472.91 $7,427.48 $16,712.57 $897,444.46
9 $9,197.00 $7,645.84 $17,187.28 $923,828.74
10 $8,929.13 $7,865.95 $17,666.09 $950,423.95

The year after Abigail retires, we recommend transferring $400,000 of brokerage funds into an inflation
adjusted immediate annuity. The withdrawal of $400,000 from the brokerage account should be taxable,
however for this case, Mark authorize us to ignore tax.

Current Brokerage Expected Remaining

Balance Transfer to Annuity Brokerage
$950,423.95 $400,000.00 $550,423.95

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 22 DAUGHTER’S WEDDING FUND COVERAGE
22.1 SURPLUS FUND
If Abigail reduces her expenses by approximately 50
Page | 23
percent like what we recommended in the earlier
section in the proposed cash flow, she will have the cash
flow surplus within two years to fund for her daughter’s
wedding.

A typical wedding will cost $35,329 and the average cost

for a honeymoon will be $4,466. Considering most of
American bride’s parents will fund 44 percent of this
cost, an estimation of $17,509.80.

If we look at the cash flow spreadsheet we provide at

the beginning, Abigail will have a surplus of $57,248.31.
Although it is tempting to spend those surpluses
entirely, we would recommend her to stick with the
estimation of $17,509.80.

Besides, Abigail’s daughter is a graduate from UWEC

who upholds the moral values of being financially
independent and responsible. She would most likely not
demand or require Abigail to support her financially.

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 23 TRAVEL GOAL COVERAGE

Page | 24

To fund an annual trip to Europe after retirement, we would recommend reducing travel expenses now.
The assumptions we made on current travel expenses include:

1. Multiple overseas travel.

2. Multiple overseas travel ticket was purchase less than a month, which will result in much higher rates.

3. Visit someone overseas frequently for emergency, and it was considered a very rare occasion.

According to our research from Expedia, the average package to Europe costs range from $1,000 to $4,000
for a week’s trip. The factors influencing the costs include:

• Place: City, suburban, urban

• Time: Festive season, purchase time before flight
• Hotel ratings and the services provided
• Airfare Company
• Foreign Exchange rates

Due to various consideration above, we would recommend a $3,000 budget a year for travel expenditures.
This travel expenditure should only include lodging and airfares, other fees like food, entertainment, and
hobbies should be included in their respective category. The rationale behind this is that food,
entertainment and hobbies expenditures will be incurred if and only if Abigail uses it.

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 24 EDUCATION GOAL COVERAGE
One Year Four Years Forecast at 2041 (5 Abigail’s
percent inflation per Contribution (44
year) percent)
UWEC Cost $16,100.00 $64,400 $197,806.13 $87,035 Page | 25

Average Cost $21,728 $86,912 $266,952.27 $117,459

We provide a comparison between UW-Eau Claire and an average four-year college costs taken from
National Center for Education Statistics. The total cost for college at year 2041 (23 years later), for a four-
year college including a 5 percent inflation will equal to $197,806.13 (UWEC) and $266,952.27 (average).

In view of previous contribution estimation of 44 percent, we would recommend Abigail to maintain a 44

percent contribution to her grandchild or the scholarship holder, whichever she wants to prioritize. The
estimated contribution needed by 2041 will be $87,035 (UWEC) and $117,459 (average).

24.1 INVEST IN 529 COLLEGE SAVINGS PLAN

Investing in 529 college savings plan can provide the education funds needed for her grandchild.

Using a 529 college savings plan calculator provided by CalcXML, if we input $8,000 annually at a 4 percent
rate of return for 10 years, Abigail will be able to accumulate $111,733 by the end of 10 years. That amount
is enough to cover UWEC cost or 95 percent of $117,459 (average). Although we would recommend
investing at a 4 percent rate based on our conservative approach, a higher rate of return would be able
to accumulate more funds.

Considering if Abigail does not have a grandchild, she could also name a trust as her successor to donate
this education fund to UWEC upon death. She could also withdraw from the plan

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25

Page | 26

meet 85 percent of UWEC goal, @ 4 percent

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 26 CURRENT INSURANCE – COMPANY
Disability Insurance
Disability insurance will protect Abigail from excess expenses if she happened to be disable. To be qualified
Page | 27
as a disable, she must not be able to work or to create income from occupation. The amount of disability
insurance needed is determined by the deficit of the cash inflows minus cash outflows.

The approximate calculation might be different as the information given is limited and the calculation
format might be different.

Inflows vs. Current

Outflows (per Plan
year)
Total inflows $250,000
Total outflows $250,000
Total Deficit $0

The total inflows currently equal to the total outflows according to the statement of cash flows. It also
means that there is no additional fund if Abigail happened to be disable now. Assuming retiring at age 67
with no growth earnings, $250,000, Abigail will be able to get $2,935 monthly if she become disable.

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 27
With company’s Disability Insurance benefit, an employee is usually able to get 50 percent to 80 percent
of their monthly salary. Assume the company pays 60 percent, as is basic, of Abigail monthly salary for a
limited period, even with the Social Security benefits of $2,935, calculated according to her salary and age
Page | 28
of retirement, she still have a deficit after paying off her expenses.

Disability Benefit Needs

Name(s) Abigail Date 1/21/2018

1. Estimate current monthly take-home pay $20,833

2. Estimate existing monthly benefits
a. Social Security benefits $ 2,935
b. Other government program benefits $ -
c. Company disability benefits $ 12,499.80
d. Group disability policy benefits $ -
3. Total existing monthly disability benefits $15,434.80
4. Estimated monthly disability benefits needed $ 5,398.20

Abigail could choose to receive either Social Security disability benefits or Social Security Income, but not
both at once. If Abigail happened to be disable at some point in time, she will receive Short-Term Disability
benefits for up to 3 months and Long-Term Disability benefits after for 2 to 10 years or until the age of 67
(full retirement age for people born in 1961). Abigail will still be able to receive Social Security Income
afterwards.

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 28 CURRENT INSURANCE – PRIVATE
Term Insurance
Abigail have $400,000 term life insurance policy through age 70 as part of financial protection. We
recommend not to change or modified the current term insurance that she owns and not to extend or Page | 29
renew term insurance as it will costly. In this case, Abigail will have to forfeit the benefits if she is healthy
or passed before the age of 70. Since we had adjusted the value of the mortgage to be paid off by the age
of 67, Abigail does not need any other life insurance to cover the major monthly expenses.

Feature Term
Death protection High
Coverage period Temporary for set period
Costs Low fixed premiums, no fees
Return on investment None
Tax advantages No

Whole Life Insurance

Whole life insurance is to provide insurance coverage for entire life.

Information provided:

Policy face value : $250,000

Current cash value : $30,000
Years : 15 years, ongoing

According to the rule of thumb of life insurance, the recommended value of her whole life insurance
should be $250,000 multiply by 10. Assuming nothing special happen throughout her life, her daughter
will be the beneficiary to help pay off debts, fund grandchild’s college fees, and could also fund her own
funeral hence she could avoid incurring additional cost on her daughter. However, since Abigail do not
have any other family member living under her care (dependent) and just home mortgage to be paid off,
she could consider ignoring the rule of thumb.

Feature Whole life

Death protection Moderate
Coverage period Ongoing
Costs High fixed premiums; may also be
charged fees
Return on investment Yes, moderate (cash value)
Tax advantages Yes
https://www.nerdwallet.com/blog/insurance/how-much-life-insurance-do-i-need/

29 | P a g e
 29

Term Life + Whole Life Page | 30

The total benefits if Abigail were to die before the age of 70 is the sum of Term Life Insurance and Whole
Life Insurance. $400,000 from Term Life and $250,000 from Whole Life (assuming no withdrawals from
cash value benefits and no other special needs) will be able to pay off the mortgage value by her
beneficiaries and the remaining $293,226 will belong to beneficiaries after taxed.

30 | P a g e
 30 OTHER INSURANCE – COMPANY
Health insurance
Abigail’s company provide health insurance that would pay up to when Medicare would be applicable
only if were to retire early. If she receives Social Security benefits, she must be enrolled in Medicare when Page | 31
turning age 65.

Other Insurance Recommended

Long-Term Care
Long-Term Care involves the delivery of medical and personal care, other than hospitalization, to persons
with chronic medical conditions. Currently, Abigail has no long-term care insurance and no additional
savings. It would be riskier to go without a Long-Term Care insurance. By having a Long-Term Care
insurance and to receive a benefit if needed will help to reduce the burden of family members. We
recommend Abigail to have this insurance immediately and it will be cheaper than having it later because
as she gets older the price of long-term care will increase.

These estimates are based on the policy with 36-month benefit multiplier, 90-day elimination period.

Nursing Home (private Home Health Aide

room)
Monthly Benefit $8,874 $4,667
Amount
Monthly Estimated $547 $288
Premium
Rate per hour - $24.31
Rate per day $291.73 -

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 31 HOME INSURANCE
There are many types of homeowner’s insurance to protect real property. Currently Abigail has a HO-3
home insurance with the information:

Dwelling : $600,000 Page | 32

Contents : $150,000 ACV
Liability : $1,000,000

Real property original value of $750,000, HO-3 home insurance coverage is sufficient.

There is a different form of homeowner’s policy which is a Comprehensive Form (HO-5) that could cover
more. If Abigail is willing to replace her current homeowner’s policy, we would recommend HO-5 which
will give her more extensive coverage including her real and personal property.

Form Coverages Covered Perils

Special Form (HO-3) Minimum varies; other coverages Dwelling and other structures covered
in same percentages or amounts against risks of direct physical loss to
except property except losses specifically
D (Loss of use) – 20 percent of C excluded;

Covers all basic-form risks plus weight

of ice, snow, sleet; freezing; accidental
discharge of water or steam; falling
objects; accidental tearing, cracking,
or burning of
heating/cooling/sprinkler system or
appliance; damage from electrical
current

HO-3 HO-5
Dwelling Coverage Open Perils Open Perils
Type
Contents Coverage Named Perils Open Perils
Type

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 32
Form Coverages Covered Perils
Comprehensive Form Coverages Dwelling and Other Covers all basic-form risks plus weight
(HO-5) structures not applicable of ice, snow, sleet; freezing; accidental Page | 33
C (Personal property) – minimum discharge of water or steam; falling
varies by company objects; accidental tearing, cracking, or
D (Loss of use) – 40 percent of C burning of heating/cooling/sprinkler
E (Personal liability) - $100,000 system or appliance; damage from
F (Medical Payments to Others) - electrical current
$1,000 per person
But covered perils are dwelling, other
structures, and personal property
covered against risks of direct physical
loss except losses that are excluded
specifically.

Other Concern – If Abigail insist on buying a cabin (second house), an ARM is the best option. It is an
Adjusted Rate Mortgage for usual second house buyer, therefore the mortgage rate is not fixed and will
be easier for Abigail to pay off her loans at different period of payment.

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 33 AUTO INSURANCE
Current auto insurance covers;

Collision : $100,000
Comprehensive : $300,000 Page | 34
Liability : $50,000

Since Abigail is not planning to buy a new car and has finished paying off with car loans, we would
assume that her car is old but at decent state. Abigail has no kids to drive around and just using the car
to work. Assuming she had not used any auto insurance coverage, this insurance is good enough as a
protection until she retire and travel. Purchasing a new insurance for the old car is likely to incur more
cost.

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 34 MAJOR PURCHASE GOAL – LAKE CABIN IN NORTHERN WISCONSIN
34.1 PURCHASE WITH CASH FLOW SURPLUSES
Abigail will have enough fund to purchase a lake cabin after meeting her goals for emergency
Page | 35
fund, daughter’s wedding fund, travel fund, education fund, retirement fund, and LTC insurance
fund.
According to our research on Housing Statistics from Wisconsin Realtors Surplus Available to
Association in Northern Region of Wisconsin, the average cost of the house use after LTC costs:
would cost $146,929. We assumed that cabin would costs lower than that. $288,287.40
With the surplus available now, Abigail could purchase the lake cabin at the
age of 68. We would not recommend to buy the lake cabin earlier than that.

34.2 SAVE FOR NURSING SERVICES’ COSTS

After meeting all goals except retiring at age 64, we would recommend Abigail to save her
surpluses for future Assisted Living Costs. Every assisted living packages might differ. The typical
services offered in assisted living include:
• 24-hour supervision and security
• Daily meals Surplus Available to
• Basic housekeeping use after Lake Cabin
Costs:
• Laundry
• Health and exercise programs $141,358.40

• Social programs
• Transportation
• Access to medical services
According to our research from Wisconsin Public Radio, an average of $3,089 per month is
needed for assisted living in Wisconsin. The annual cost adjusted to 3% inflation at age 80
would be $82,345,92. In the case where Abigail will need assisted living for 10 years from age
80 to age 90, the total cost needed is $1,054,669.77.

34.2.1 Sources Available to Fund Assisted Living Cost

Social Brokerage Surplus Jewelry Vehicle

Security Account •$141,358.40 •$75,000 •After
Benefits •$550,423.95 Depreciation
$10,000
•Total $527,604
after 15% tax
at Year 2037

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 35 HUMAN LIFE VALUE ANALYSIS

The human life value analysis is to calculate

the total life insurance needed to protect Page | 36
Abigail’s current and future life value. The
human life value deals with human capital,
which includes income potential. By
deducting the possible total expenses, the
surplus is what Abigail should protect if she
has dependent.

2018 Value 2051 Gross Value 2051 Present Value

Gross Human Life Value
Earned Income $250,000 $2,910,597 $1,538,875
Employer-Paid Benefits Unknown Unknown Unknown
Personal Services Provided $0 $0 $0
Other Additions $0 $0 $0
Gross Human Life Value $250,000 $2,910,597 $1,538,875
Human Life Value Offsets
Income Tax on Earned Income $87,500 $436,590 $230,831
Insurance Premiums $12,500 $386,760 $204,486
Lifestyle & Medical Expenses $141,742 $1,316,700 $696,159
Other Offsets $0 $0 $0
Social Security benefits $138,963
Human Life Value Offsets $1,270,439
Net Human Life Value $286,436
Less: Existing Life Insurance $650,000
Additional Life Insurance Needed $0
*Assumption: Inflation Rate: 3 percent
Tax Rate: 35 percent
Years to Project: 33

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 36 ESTATE PLANNING
Considering Abigail passed away at the age of 100 (year 2051).

This will be the recommendation of how she could utilize estate planning to benefit her beneficiary.
Page | 37
Assuming no growth : -
Whole life insurance $650,000
Home $750,000
Car $0
Other assumption(s) : -
Remaining 401k $550,424
(32years, $147,776, 6.13 percent)
Remaining emergency fund $128,250
*If Abigail buys a cabin (second home) – sell / to immediate family
*Excluded funeral fees (average $10,000)

Plan $ to Liabilities and $ to Grandkid’s $ to Heirs Total

Fees Education or
(assuming funeral Charity
fees)
Possible $10,000 $87,035 1,678,674 $1,775,709
Plan

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 37 REFERENCES
Bureau of Labor Statistics. (2017). CONSUMER EXPENDITURES--2016. Washington D.C.: Bureau of Labor
Statistics. Retrieved from https://www.bls.gov/news.release/cesan.nr0.htm
Page | 38
French, S. (2017). What the average American wedding looks like -- and costs. MarketWatch, 1.
Retrieved from https://www.marketwatch.com/story/what-the-average-american-wedding-
looks-like----and-costs-2017-02-10

N.d. (2017). Cost of Living in Eau Claire. NUMBEO, 1. Retrieved from https://www.numbeo.com/cost-of-
living/in/Eau-Claire

National Center for Education Statistics. (2016). Tuition costs of colleges and universities. Digest of
Education Statistics, 1. Retrieved from https://nces.ed.gov/fastfacts/display.asp?id=76

Tuttle, B. (2012). How Much You Spend Each Year on Coffee, Gas, Christmas, Pets, Beer, and More.
Time, 1. Retrieved from http://business.time.com/2012/01/23/how-much-you-spend-each-
year-on-coffee-gas-christmas-pets-beer-and-more/

Wisconsin Assisted Living Association. (2017). What is Assisted Living? Madison: WALA. Retrieved from
http://ewala.org/page/WhatIsAssistedLiving

Wisconsin Public Radio. (2011). The Cost of Elder Care. Wisconsin Public Radio, 1. Retrieved from
https://www.npr.org/2012/04/27/151303609/the-cost-of-elder-care

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