Purpose of the Analysis:
To determine whether Homer and Marge Simpson have sufficient resources for Homer to retire at age 55 and support their desired retirement lifestyle in addition to their other financial goals.
Planning Assumptions:
Expenses inflate at a general inflation rate of 3% annually, unless otherwise specified.
Investment accounts are invested in a diversified portfolio and earn a pre-tax return of 6.5% (we estimate there is a 70% probability of achieving this pre-tax return or greater over long investment horizons), unless otherwise stated. 4.75% is the after-tax equivalent of this return.
Clients:
Name / DOB / AgeHomer Simpson / 5/23/1962 / 47
Marge Simpson / 1/16/1963 / 47
Lisa Simpson / 3/19/1995 / 15
Bart Simpson / 1/13/1998 / 12
Residence:
The Simpsons live in Alamo, California (right outside San Francisco, the city by the Bay).
Inception & Duration of the Analysis:
The analysis begins January 1, 2010 and continues until Marge's age 95 (12/31/2058). Homer lives to age 86 (12/31/2048).
Employment:
Homer is an executive for XYZ Corporation. Homer's annual compensation is $600,000 per year beginning 1/1/2010 ($300,000 base salary with $300,000 bonus). Homer's compensation increases by 4% per year until he retires at age 55, on December 31, 2017.
Marge runs the Simpson Family household. She has her hands full with her son Bart.
Living Expenses:
Living expenses are $155,000 per year (2010 dollars). Living expenses decrease by 25% at Homer's age 70 (2032), and then decrease by an additional 15% on 1/1/2048.
Living expenses are in addition to mortgage, income tax, and property tax payments.
Taxable Investments:
Cost Basis / FMVCash – checking / n/a / $50,000
Cash – tax reserve / n/a / $43,000
Brockerage Account / $350,000 / $474,000
Mo’s Ventures V, LP- [1] / $33,000 / $33,000
Total / $383,000 / $600,000
[1] $100,000 commitment over 2010 – 2012. 14% annual expected return. Annual distributions begin in January 1, 2015 and continue for 5 years.
Housing:
Cost Basis / FMVAlamo Home – purchased 3/2001 / $1,300,000 / $1,875,000
Lake Tahoe Home – purchased 3/2004 / $385,000 / $575,000
Total / $1,685,000 / $2,450,000
The Simpsons maintain their home in Alamo for the duration of this analysis. They sell their home in Lake Tahoe at Homer’s age 70 (2032). The Lake Tahoe home’s value appreciates by 3% per year.
The Alamo home’s value ultimately becomes part of Marge Simpson’s estate.
Retirement Plans:
FMVA / XYZ 401(k) Savings and Investment Plan / $181,000
B / XYZ Deferred Compensation / $454,000
C / Homer’s Rollover IRA / $520,000
D / Marge’s Rollover IRA / $35,000
E / Marge’s Non – Deductible IRA (Cost Basis - $8,000) / $8,000
F / Marge’s Roth IRA / $0
Total / $1,198,000
B. XYZ 401(k) Savings and Investment Plan
Homer contributes $16,500 per year and receives matching contributions from XYZ in the amount of $11,500 per year through his retirement. Contributions inflate by 3% per year. After retirement, Homer rolls the entire balance of this
plan to his Rollover IRA.
B. XYZ Deferred Compensation
Homer contributes 50% of his bonus each year until retirement. After retirement, the assets are distributed from this account over 5 years; distributions are taxed at a combined 35% rate.
C. Homer's Rollover IRA
On January 1, 2018, Homer rolls his XYZ 401(k) plan assets to this account. Homer takes required minimum distributions from this account beginning in 2032, and distributions are taxed at a combined average rate of 32%.
D. Marge's Rollover IRA
In 2011, Marge converts the balance to a Roth IRA.
E. Marge's Non-Deductible IRA
Marge contributes $5,000 per year in 2010 and 2011. In 2011, Marge converts the balance to a Roth IRA. This account currently has a tax-basis of $8,000.
F. Marge's Roth IRA
In 2011, Marge converts the balances of her Rollover IRA to a Roth IRA. Homer and Marge are not required to take distributions from this account, and these assets ultimately pass to Lisa and Bart.
Liabilities:
Alamo Mortgage
$800,000 original balance; 30-year fixed at 4.625%. Loan origination date is 4/2004.
Home Equity Line of Credit
$200,000; (3.25%); $75,000 balance as of 1/1/2010.
Lake Tahoe Mortgage
$200,000 original balance; 30-year fixed at 4.875%. Loan origination date is 6/2004.
Income Sources:
Homer's Wages
Homer's annual compensation is $600,000 per year beginning 1/1/2009 ($300,000 base salary with $300,000 bonus). Homer's compensation increases by 4% per year until he retires at age 55, on December 31, 2016. Homer's income (net of deferrals) is taxed at a combined 35% tax rate.
Homer's XYZ Equity [Current share price: $ 20.00]
Homer has the following equity grants from XYZ Corporation. For purposes of being conservative, we do not include any future equity grants from XYZ Corp. in the analysis in order to determine whether Homer and Marge require any additional assets in order to meet their financial independence goal by Homer's age 55. Homer sells the restricted shares as they vest, and exercises and sells the non-qualified stock options the year in which they expire. The share price of XYZ Corp. increases by 3% per year (note : the vested value of the stock options is calculated based on the expected FMV at the date of exercise). Equity transactions are taxed at the highest marginal combined rate, 44%.
Restricted Stock:
Grant / Vesting / Shares / FMV (at vesting) / Expected Value11/01/08 / 10/31/09 / 3,314 / $20.00 / $66,000
11/01/08 / 10/31/10 / 3,314 / $20.60 / $68,000
11/01/08 / 10/31/11 / 3,314 / $21.22 / $70,000
Total / 9,942 / $204,000
Non-Qualified Stock Options:
Vested / ValueGrant / Expire / Shares Granted / Remaining shares / Vested Shares / Exercise Price
7/18/2001 / 7/18/2011 / 45,000 / 45,000 / 45,000 / 15.020 / $308,000 / $308,000
9/24/2001 / 9/24/2011 / 11,000 / 11,000 / 11,000 / 10.200 / $128,000 / $128,000
2/27/2002 / 2/27/2012 / 7,500 / 7,500 / 7,500 / 13.110 / $71,000 / $71,000
11/8/2002 / 11/8/2012 / 5,000 / 5,000 / 5,000 / 9.710 / $64,000 / $64,000
9/30/2004 / 9/30/2014 / 90,000 / 90,000 / 90,000 / 9.190 / $1,260,000 / $1,260,000
9/7/2005 / 9/7/2015 / 110,000 / 110,000 / 110,000 / 15.299 / $944,000 / $944,000
9/7/2005 / 9/7/2016 / 125,000 / 125,000 / 125,000 / 17.075 / $851,000 / $851,000
11/1/2007 / 11/1/2017 / 45,000 / 45,000 / 33,750 / 19.190 / $243,000 / $18,225
Total / 438,500 / 438,500 / 393,500 / $3,869,000 / $3,626,000
Vesting details
[a] 11,250 shares vest on 11/1/10.
Homer's Social Security
In the interest of being conservative, we assume that, beginning at age 67, Homer recieves Social Security benefits equal to 50% of the currently legislated benefit, or $12,600 per year. Benefits increase by 1.5% annually, and Homer pays taxes on the benefits at a 25% rate.
Marge's Social Security
In the interest of being conservative, we assume that, beginning at age 67, Marge receives Social Security benefits equal to 50% of the Homer's legislated benefit, or $6,300 per year. Benefits increase by 1.5% annually, and Marge pays taxes on the benefits at a 25% rate. When Homer passes away, Marge receives Homer's Social Security Retirement benefits.
College Education:
Homer and Marge have established a 529 college savings plan for both Bart and Lisa – Bart’s 529 plan currently has an account balance of $7,000 and Lisa’s 529 plan has an account balance of $9,000.
In order to pay for 4 years at a public university, assuming that tuition is $7,000 per year (2010 dollars, inflating 6% per year), and room/board is $12,000 per year (2010 dollars, inflating 3% per year), Homer and Marge need to save the following amounts each year (in addition to what each account already has):
Lisa's 529 account $9,000 (annual savings inflates by 3% per year through 2016)
Bart's 529 account $7,000 (annual savings inflates by 3% per year through 2018)
Other Expenses (not included in living expenses above):
Home Equity Line of Credit
Homer and Marge pay off the $75,000 balance during 2011.
Alamo Property Taxes
Property taxes on the Alamo home are $21,000 per year. After the income tax deduction, the annual after-tax property tax payments are $14,300, assuming a combined 32% tax rate over the duration of the analysis. California property tax payments inflate by 2% per year.
Lake Tahoe Property Taxes
Property taxes on the Lake Tahoe home are $7,200 per year. After the income tax deduction, the annual after-tax property tax payments are $4,900, assuming a combined 32% tax rate over the duration of the analysis. California
property tax payments inflate by 2% per year.
Homer's Life Insurance Premiums
Homer has a $2 million 20-year term life insurance policy, and the term expires in 2020. Annual premium payments are $2,165.
Marge's Life Insurance Premiums
Marge has a $500,000 15-year term life insurance policy, and the term expires in 2015. Annual premium payments are $760.
Lisa's Wedding
Lisa marries a lovely fellow in 2021. Homer and Marge spend $20,000 (2010 dollars) on her wedding.
Contributions to the Simpson Family Charitable Fund
Homer and Marge contribute $100,000 to the Simpson Family Charitable Fund (a donor advised fund) using appreciated assets from their investment portfolio by 2018 ($12,500 per year, beginning in 2010).